1. By an order dated April 7, 1931, the Manockjee Petit ., was ordered to be compulsorily wound up by and under the directions of the Court, and the official liquidator, after his appointment, duly investigated the claims of the different creditors of the company. One of the creditors, Messrs. Shantidas Vithaldas & Co., claimed to rank as a preferential creditor for Rs. 3,06,750 with further interest from May 16, 1931, at the rate of six per cent. per annum with six monthly rests. The claim to rank as a preferential creditor was disputed by the liquidator, and by an order dated August 17, 1931, the claim was ordered to be proved before roe in chambers. The said company owned three milk for spinning and manufacturing yarn and cloth, called the Manockjee Petit Mills, theBomanjee Petit Mills, and the Dinshaw Petit Mills. It had appointed Messrs. Devidas Madhowji Thakersey & Co. as selling agents on the terms and conditions contained in an agreement dated November10, 1925. On July 7, 1930, the company appointed Messrs. Shantidas Vithaldas & Co., the present claimants, as their selling agents in place of the previous selling agents. No fresh agreement containing all the terms and conditions of the appointment of the new firm was specially made out, but it was agreed that certain terms under the old agreement should be accepted by the new firm of selling agents and certain other terms were modified so as to suit the circumstances of the case.
2. Under Clause 31 of the old agreement of 1925 the firm of Devidas Madhowji Thakersey & Co. were, upon execution of theagreement, to deposit with the company a sura of Rs. 4,00,000 in cash. This sum was to be held by the company as security for the due discharge by the said firm of the terms of the agreement, and the company were on certain conditions to apply the said sum or any portion thereof in or towards the payment and satisfaction of any sum or sums which may at any time be due and owing to the company by the firm under the agreement. It was further agreed by and under the same clause that the company should pay interest on the said sum at the rate of six per cent per annum from the date of deposit until the same should have been appropriated by the company or should be repaid by the company to the firm. This sum of Rs. 4,00,000 was reduced to Rs. 3,00,000 in the case of the new selling agents, and out of this sum Rs. 2,00,000 were to be deemed to be appropriated as security for the due performance of their engagement in respect of the goods of the Manockjee Petit Mills and Rs. 1,00,000 similarly in respect of the goods of the Bomanjee Petit Mills. In all other respects the original Clause 31 applied without modification in the case of the present claimants. A new term was added as clause No. 28 (a) to the agreement between the parties, The clause provided inSubstance that in the event of the company resolving to raise and raising any loan secured by any one or more debentures of the Company or by the mortgage of the company's immoveable property, the company was to forthwith 'invest the moneys deposited by the firm with the company under Clause 31 of the agreement' in Government of India Securities, and upon such investment the Securities were to remain with the company, but were to be earmarked in some manner satisfactory to the new selling agents, and were to be held by the company as security for the due performance of the agreement between the company and the new selling agents. In pursuance of the said agreementMessrs. Shantidas Vithaldas & Co. deposited Rs. 3,00,000 with the company on July 8, 1930, and the company passed its receipt to them on that date, which ran as follows:-
Received from Messrs. Shantidas Vithaldas & Co. the sum of rupees three lacs only as deposit for the due fulfilment by you of the terms of the cloth sale agency agreement between you and the company for the Maneckjee Petit Mills and Bomanji Dinshaw Petit Mills.
Sd/ D.M. Petit Sons & Co.
3. Messrs. Shantidas Vithaldas & Co. thereupon commenced to act as the selling agents of the said two mills in pursuance of the agreement, but within a few weeks of their appointment the company closed the said two mills, and on March 14, 1931, gave notice that the agreement would be determined on May 14, 1931. The said notice was given under the terms of Clause 1 of the agreement. The company was ordered to be wound up on April 7, 1931, and on May 5, 1931,Messrs. Shantidas Vithaldas & Co. gave notice to the liquidator that they would claim the sum of Rs. 3,00,000 with the interest due thereon as a preferential claim in priority to the claims of the ordinary creditors of the company. The liquidator refused to admit the claim, and the firm applied to have their claim entered as a preferential claim, The order was made on August 17 last, and the matter was argued before me in chambers on August 31.
4. The said sum of Rs. 3,00,000 has evidently been mixed up by the company with its other funds, but counsel for the claimants contends that those moneys were paid to the company and were to be held by them on trust, and that the claimants are entitled to follow the trust funda in the hands of the company and to receive the sum as a preferential payment. It is only if this fiduciary relationship is established that the question of preference can arise. In support of his contention counsel for the claimants relied on Clause 31 and the newClause No. 28(a), and he argued that because the sum of Rs. 3,00,000 was to be deposited in cash and to be held as security for the due discharge by the claimants of the terms of the agreement, and that because inClause No. 28(a) it is provided that the company shall in a contingency, which I shall hereinafter discuss, forthwith 'invest the moneys ' deposited by the firm under Clause 31 of the agreement, there was a fiduciary relationship between the company and the claimants in respect of the said sum. In the course of the argument I was referred to Malvankar v. Credit Bank : AIR1914Bom118 . In that case a manager of the Ahmedabad branch of the Banking Company paid Rs. 4,500 to the bank as security for the faithful discharge of his duty. The amount was entered in the Security Deposit Account of the bank and bore interest at six per cent. Subsequently the bank went into liquidation, and the claimant urged that he was entitled to recover the full amount in preference to the creditors of the bank, and took out a chamber summons for the purpose. It was held by Macleod J. that the claimant could rank only as an ordinary creditor of the bank, as he had agreed that the bank should receive and hold the money and pay him interest at six per cent. for its use. In appeal the judgment of Macleod J. was confirmed, and the appeal Court held that in the case of a going bank the bank is entitled to treat the security deposit as earmarked for a particular purpose, but in liquidation the question is whether the security fund can be identified and followed by the giver if the occasion for realising the security has not arisen. Counsel for the claimants argued that that case had no application, and he particularly relied on a passage in the judgment of Scott C.J. at p. 737 which runs as follows:-
If the money has, with the consent of the giver of the security, been received by the Bank and mixed with its funds in consideration of an agreement to pay interest on it, the Bank is only a debtor and not a trustee.
5. Counsel argued that a company in liquidation would be in the position of a debtor and not that of a trustee, only if, with the consent of the giver of the security, the money had both been received by the company and also mixed with its funds in consideration of an agreement to pay interest upon it. In other words, the company is not a trustee, only when the giver is a consenting party to the mixing up of the money with the other funds of the company. It was, therefore, urged on behalf of Shantidas Vithaldas & Co. that they bad not consented to the sum of Rs. 3,00,000 being mixed up with the funds of the company, and that when the company went into liquidation it stood in the position of a trustee to the claimants in respect of the amount of the deposit. In my opinion this is not a correct interpretation of the judgment of the appeal Court. According to the facts of that case the claimant was called upon by the bank ' to give security of Rs. 5,000 cash to be deposited with the bank'. The claimant paid Rs. 4,500 which the manager of the bank at first placed in the fixed deposit account, and which was subsequently transferred to the security deposit account and bore interest at the rate of six per cent. per annum. The claimant had never consented that his money should be mixed up with the other funds of the bank, and all that the appeal Court held was that if money was by consent of the giver received by the bank and the bank agreed to pay interest for its use, the giver also thereby consented to the money being mixed up; and that is what happened, irrespective of the consent of the claimant, in that case.
6. The question before me, therefore, for consideration is whether the fiduciary relationship urged by the claimants has been established. The mere fact of the deposit of Rs. 3,00,000 does not create a trust. The further fact that it was to be held as asecurity by the company for the due discharge by the claimants of the terms of their agreement does not create a trust. On the other hand the fact that interest was agreed to be paid upon the sum shows that the money was to be used by the company for its general purposes, Clause 28(a) in fact proceeds on the assumption that the moneys were to be mixed up, because it is only in the event of the company resolving to raise any loan secured by any one or more debentures of the company or by the mortgage of the company's immoveable property, that the company was to forthwith invest the moneys deposited by the claimants in Government securities, and the said securities were to be earmarked in the manner indicated in the clause. It was only on that contingency happening that the moneys were to be invested, and on investment the securities in which the moneys were invested were to be earmarked. That contingency never arose, and the moneys were not, therefore, earmarked. So that on the agreement, as I read it, there was no direction that the money handed over by the claimants to the company was to be kept aside in trust for them, and was not to be utilised by the company for any purpose at all. Clause 14 of the agreement provides that the claimants were to have a lien on the goods of the company in their possession to the extent of the amount from time to time due to them by the company, but for the purpose of ascertaining what was due to them by the company the deposit ofRs. 3,00,000 was not to be taken into calculation. This again assumes that the money was not to be earmarked, but could be used by the company for its purposes. There was, therefore, no fiduciary relationship between the company and the claimants in respect of the sum of Rs. 3,00,000. The relationship was only that of debtor and creditor.
7. Counsel for the claimants also drew my attention to the form of the receipt in this case and the form of the receipt set out at p. 734 in the case of Mavlankar v. Credit Bank. The receipt in the case before me is silent as to interest, whereas the receipt in Mavlankar v. Credit Bank says that the money bore interest at the rate of six per cent. per annum. In my opinion that makes no difference. There was an agreement under Clause 31 for payment of interest, and it is by reason of that agreement that the claimants have put forward a preferential claim not merely in respect of the principal sum of Rs. 3,00,000, but also the interest due thereon. If the claimants merely relied on the receipt irrespective of that agreement, they could not put forward a preferential claim both in respect of the principal and the interest.
8. I, therefore, hold that the claimants are not entitled to preferential payment. It is common ground that the claimants are not entitled to preferential treatment under Section 230 of the Indian Companies Act. They are, therefore, as much in the position of a creditor as any one else, and they can only come in with the other creditors, and are entitled to be paid pro rata along with the other creditors on a declaration of the dividend.
9. The application must, therefore, be dismissed. I make no order as to the costs of the claimants. Costa of the liquidator will come out of the assets of the company when taxed as between attorney and client. Counsel certified.