Achhru Ram, J.
1. The petitioners in this case are four concerns which, before the partition of the Punjab, carried on sports business in the city of Sialkot. A joint petition has been made on their behalf presumably because it was in fact one and the same party, who did business under four different names.
2. While they were carrying on business at Sialkot, the petitioners used to hand over, for collection, to the Sialkot Branch of the New Bank of India Ltd., their bills drawn on their several customers, quite a number of whom were foreign business concerns. The Bank suspended payment on 26th September 1947. On 15th March 1948, I sanctioned a scheme of management for the Bank. By Clause 4 of that scheme the amount of deposits or any other claims or dues to the credit of each creditor as on 26th September 1947 or on such later date on which the liability may have arisen in favour of such creditor has been reduced by 20 per cent, and the balance of 80 per cent, has been made payable by instalments. Clause 3 provides for payment in full of certain claims against the Bank and reserves to this Court the power to give directions, on being moved by any creditor, any shareholder, any claimant, or the Bank, relating to questions of priorities or preferential payments, arising out of the scheme but not specifically provided for therein. The present petition has been made under the aforesaid clause of the scheme. The petitioners ask for directions being given to the Bank for payment to them in full of the amount realised by it by clearing some bills handed over by them to its Sialkot Branch for collection.
3. Directions are also sought in respect of the bills so handed over but not so far known to have been cleared.
4. The allegation of the petitioners is that the Bank acted as their agent in all these transactions, and must be deemed to hold the bills till collection and the monies received on collection as a trustee on their behalf. The petition is resisted by the Bank on the plea that qua the sums realised or to be realised by it on clearing the aforesaid bills it occupies the position merely of an ordinary debtor and that the petitioners cannot claim in respect of such sums any preferential right of payment but must rank equally with the other creditors.
5. The sole question that arises for decision in this petition is what was the precise nature of the jural relationship that came into existence between the parties:
1. when the bills were handed over by the petitioners to the respondents' Sialkot Branch for collection; and
2. when the respondents received the amounts of the bills on collection.
6. It is not disputed that if the Bank can be held to occupy the position of an agent of the petitioners at both these points of time, the latter must be held entitled to the directions sought for by them. It is settled law that on the bankruptcy of an agent the principal is entitled, as against the trustee in bankruptcy and creditors of the bankrupt, to all monies and property held by the bankrupt, and all outstanding debts duo to the bankrupt, as his agent, subject to any lien of the bankrupt thereon (vide William Bowstead's Digest of the Law of Agency, Edn. 7, page 875). In Ringwood's Principles of Bankruptcy, Edn. 18, the following passage is to be found at page 79:
The property held by the bankrupt on trust for any other person is not so divisible and does not pass to the trustee.
General trusts may, as has been pointed out in a well known book on Bankruptcy (William's Bankruptcy Practice, page 254) be divided into the following classes:
(d) Where a man holds property as a mere agent or factor he will be considered to hold it as a trustee.
7. It, of course, goes without saying that the principles which govern the administration of the estate of a bankrupt are applicable to proceedings for the winding up of limited companies including Banks. The Indian Companies Act has expressly provided for the application of these principles to such proceedings.
9. It is equally well-settled that where a cheque or a bill or any other document is entrusted by a customer to a banker for collection, the latter receives the cheque or the bill or the other document, and collects its amount, as an agent for the former. Katiar in his Treatise on the Law of Agency says as follows in dealing with the question of the nature of relation between a banker and his customer:
The relation between a banker and customer is either that of creditor and debtor or of the agent and the principal. Where the bankers advance money to their customers as a loan the relation is that of creditor and debtor; when they receive money as loan on a fixed deposit the relation is vice versa, but where money or bills or valuables are taken by the bankers for safe custody or for collection and safe custody of the proceeds for their customers, the relation is essentially that of agent and principal. The bankers hold the money in trust for their customers in the same way as an agent does for his principal and their respective rights and liability to each other are similar.
The principal functions of a banker in which ha stands in a fiduciary relation as agent to his customers may be enumerated as below:
Collection of cheques, bills o exchange and other documents for customers.
Collection, strictly speaking, is the conduct of a banker who acts as a mere agent or conduit pipe to receive payment of a cheque, bill of exchange, or other document, from the banker or the other person on whom it is drawn and hold the proceeds at the disposal of his customer.
9. The question as to the nature of the jural relationship existing between the banker and the customer while the money received by the former on collection of the cheque, the bill or the other document remains in his possession is not so easy to answer and seems to be one of considerable difficulty. Howeyer after giving the matter my most anxious thought and after a careful perusal of all the relevant authorities, I have reached the conclusion that the law on the subject may be Bummed up as follows:
1. Where the banker has, pursuant to the instructions, express or implied, of the customer, credited the proceeds of the cheque or the bill or the. other document entrusted to him for collection to the account of such customer, the parties stand, as from the time of his doing so, to each other in the relation of a debtor and a creditor.
2. The above rule, however, does not apply where the banker had suspended his business before the receipt by him of the amount of such cheque or bill or other document. In such a case the banker holds the money as a trustee for the customer, irrespective altogether of the consideration whether or not the latter had an account with him on the date of the receipt of the money and whether or not the money has been credited in that account.
3. Unless and until the proceeds of such cheque, bill, or other document, have actually been credited to the customer's account under the latter's express or implied authority, the relationship of debtor and creditor does not come into existence between the banker and the customer and the former holds such proceeds as the latter's agent. The mere circumstance that the customer was the banker's constituent at the relevant time and had an account with him to which the proceeds could properly have been credited is not enough to create such a relationship.
10. The above propositions seem to me to follow logically from the general principles which admittedly govern the relations between principals and agents. As soon as a banker has disbursed the money received by him as the collecting agent of his customer in accordance with the latter's instructions, whether express or implied, the business of the agency must be deemed to have been concluded and the agency to have been terminated (vide 3. 201, Contract Act). If there is another account between the agent and the principal in which the two stand to each other in the relation of a debtor and a creditor, and, under the principal's instructions, the money received by the agent has been credited in that account, that is obviously a disbursement of the money by the latter in accordance with the former's instructions.
11. On such disbursement the contract of agency qua that money is necessarily terminated and such money can no longer be regarded as held under that contract. It becomes, as all monies deposited with him are, the banker's property and is absolutely at his disposal, the customer having no right to claim it independently of the account into which it has been credited under his authority.
12. However before such a result can follow, there must be an actual and effective disbursement of the money by its having been credited in such an account. Till this is done the money cannot be said to have been disbursed by the agent in accordance with the instructions of the principal; the business of the agency cannot be deemed to have been concluded, and the agency cannot be considered to have terminated but must be regarded as still subsisting, the money being still the principal's money held by the agent as such. Where the banker closes his doors and suspends his business before disbursing the money received by him as an agent for his customer he ceases to have any power to disburse it and by any attempted disbursement thereafter cannot alter the capacity in which he was holding the money immediately before closing his doors and suspending his business.
13. Judicial precedents on the subject are not many. However the few that have come to my notice appear to support the propositions formulated by me.
14. The question was incidentally dealt with in the judgment of Court of Appeal in N. Joachimson v. Swiss Bank Corporation (1921) 90 L.J.K.B. 973. The question that directly arose in that case was whether a customer who has monies standing to his credit on a current account at his bankers, can, in the absence of a special agreement, maintain an action for the recovery of such money without first making a demand for payment. The Court held that such a demand was an essential part of the cause of action for such a suit and that in the absence of a demand the customer could not be deemed to have any cause of action against his banker and could not maintain an action for the recovery of the balance standing to his credit in the account. In dealing with this question Atkin L.J. dis. cussed the question of the jural relationship that should be deemed to exist between a banker and a customer in the ordinary course of business when a current account has been opened by the customer with the banker. In discussing this matter he made the following observations which are to be found on pages 981 and 982 of the report:
The question seems to turn upon the terms of the contract made between banker and customer in the ordinary course of business when a current account is opened by the bank. It is said on the one hand that it is a simple contract of loan; it is admitted that there is added, or super-added, an obligation of the bank to honour the customer's drafts to any amount not exceeding the credit balance at any material time; but it is contended that this added obligation does not affect the main contract; The bank has borrowed the money and is under the ordinary obligation of a borrower to repay. The lender can sue for his debt whenever he pleases. I am unable to accept this contention. I think that there is only one contract made between the bank and its customer. The terms of that contract involve obligations on both sides and require careful statement. They appear upon consideration to include the following provisions. The bank undertakes to receive money and to collect bills for its customers account. The proceeds so received are not to be held in trust for the customer, but the bank borrows the proceeds and undertakes to repay them. The promise to repay is to repay at the branch of the Bank where the account is kept and during banking hours.15. The rest of the paragraph is not material for the purposes of the present case. It will appear from the above quotation that the view taken by the learned Judge was that when bills are paid by a customer into his current account with a bank for collection the proceeds of such bills, on receipt by the bank, go into that account and are not held by the bank in trust for the customer, but are to be deemed to have been borrowed by the bank, repayable like other debts.
16. The question directly arose in the case 'In re Farrow's Bank Ltd.' decided by the Court of Appeal in 1923 reported as 92 L.J. Ch. 153. In that case one Mr. H.J. Voyee, paid on 16th December 1920, into the Birmingham branch of Farrow's Bank a cheque for 149315-2 drawn in his favour on the West Bromwhich branch of the London Joint City and Midland Bank. The cheque, together with some other cheques, was sent the same day to Barclays Bank, Fenchurch street, who were the clearing agents of the Farrow's Bank. The next day Barclays Bank received these cheques and credited the head office of Farrow's Bank with the amount subject to recourse in case of non-payment, and on the same day they passed the cheques through the clearing house. Voyee's cheque was taken up the same day by the head office of the London Joint City and Midland Bank who posted it to their West Bromwhich branch the same evening. On 18th December the cheque in question was received by the aforesaid branch which debited the drawee's account and credited the head office with the amount, and wrote to the head office advising them that the cheque had been cleared. This advice was received by the London office of the London Joint City and Midland Bank on 20th December 1920 and settled with Barclay's Bank through the clearing house. Later in the day the Barclays Bank advised the head office of Farrow's Bank that all the cheques remitted by the Birmingham branch on 16th December 1920 had been cleared. The same day the Farrow's Bank suspended payment and an order for the winding up of the bank was made on nth January 1921 on a petition presented on 20th December 1920. During the liquidation proceedings the question arose whother Voyee was entitled to recover the whole amount of the cheque or must rank equally with the other creditors of the bank. It was held that he was entitled to recover the full amount from the liquidator as the relationship of principal and agent still continued at the time of suspension and the cheque never became cash held by the banker on a debtor and creditor account. It may be mentioned that the Birmingham branch of the Farrow's Bank had in heir books credited the customer with the amount of the cheque on the day that it was received.
17. There was, however, on the pay slip, a note to the effect that the bank reserved to themselves the right not to allow any drawing against the cheque and not to allow it to be treated as cash until it was cleared. The Court of Appeal were of the opinion that in the circumstances the credit entry in the account books of the bank was wholly immaterial and that the matter in controversy had to be decided not with reference to the date of that entry but with reference to the date on which the cheque was cleared, that being the date on which the Farrow's Bank could rightly be deemed to have received the amount of the cheque. Lord Sterndale, M.R. in delivering the judgment of the Court observed that if the Farrow's Bank had received the money before they suspended payment they would have held the money simply in the relation of debtor to their customer, but if they did not receive it until after the suspension they had then given up all their functions as a bank and had no right left to receive the money and retain it and that the customer was entitled to recover it.
18. The question whether a party who had entrusted certain bills to a bank for collection was entitled to receive payment of the full amount of those bills where the bank had received such amount before going into liquidation arose in the case of Shaw Wallace and Co. v. Amritsar National Bank A.I.R. 1926 Lah. 423. The party which had handed over the bills to the bank for collection were not the latter's constituents and the bills apparently had not been handed over with any express or implied instructions for their proceeds being credited to any account of the customer. It was held that the customer had employed the bank as a whole in a fiduciary capacity and was therefore entitled to a prior charge on the balances held by the bank as a whole on the date of the suspension of payment, and all monies advanced by the bank after the date when it recovered the monies due on the customer's bills.
19. I have not been able to lay my hands on any direct authority for the last proposition formulated by me. It, however, does seem to find some support from some judgments of the High Court of Madras. In the case New Field and Co. v. Messrs James Voce Pirrie Cyril Gill and Stanley Goodwin A.I.R. 1940 Mad. 139 a certain sum of money had been handed over to a bank for remitting it by telegraphic transfer to another place by a party who had a current account with the said bank. The bank did not credit the said sum to this account but debited only the charges for the intended transfer. The money was never transferred because on that very day the bank suspended payment. On the question arising whether the party handing over the sum was entitled to its repayment in full or that sum was to be treated as a part of the general current account which he had with the bank in respect of which he was to rank equally with the other creditors, it was held by Venkataramana Rao, J. that the money, having never been credited to the party's account, must be deemed to have been held apart by the bank as the property of that party, and having been received by the bank in the capacity of a mere agent the party was entitled to preferential payment.
20. In Indian Humepipe Co. Ltd. v. Travaneore National and Quilon Bank Ltd. A.I.R. 1942 Mad. 616 the appellant company carried on business at two places, namely, at Nagarcoil in the State of Travancore and at Bombay. The Nagarcoil office had a current account with the Travanoore National and Quilon Bank Ltd., which suspended business on 20th June 1938 and an order for whose winding up was made by the Court in due course. The bank had a branch at Bombay, but the company had no account there. On 14th June 1938 the company handed over to the Bombay branch of the bank a cheque for Rs. 5000 for collection. The cheque was drawn in favour of the company on the Indian Bank at Bombay. At the time of entrusting the cheque to the Bombay branch of the bank for collection the company instructed the aforesaid branch to remit the proceeds of the cheque to the Nagarcoil branch of the bank to the credit of the company's account. The Bombay branch of the bank collected the amount of the cheque the next day, but did not carry out instructions of the company in the matter of remitting the money to Nagarcoil. The money remained with the Bombay branch up to the time the bank went into liquidation and was never sent to Nagarcoil. On a question arising whether the company was entitled to preferential payment of the proceeds of the cheque a Division Bench held that if the money had got into the company's account at Nagarcoil, the bank's position would no longer have been that of an agent holding his principal's money, because in that case it would have been entitled to the control and the use of money; but that as the money never got to Nagarcoil and was never credited to the company's account with the branch of the bank at that place the position of the bank remained that of an agent holding his principal's money for a special purpose. It was further held that no property in the monies passed to the bank and that the monies therefore belonged to the company which was entitled to payment in full of such monies in preference to the other creditors of the bank.
21. Applying the above principles to the present case I have no reasonable doubt in my mind that the petitioners are entitled to the directions sought by them.
22. The parties have filed an agreed written statement giving full details of the bills that had been handed over by the petitioners to the Sialkot branch of the respondent bank for collection. This statement shows that, excepting a sum of 25/10/1 due under a bill drawn on Octova Rodgers Ltd. the amounts of the other bills cleared were received by the respondent bank subsequent to the date on which it suspended payment i.e' subsequent to 26th September 1947. This sum of 25/10/1 is said to have been realised by the bank before the aforesaid date in the sense of the same having been credited to its accounts by its bankers, the National City Bank New York, Bombay. Intimation regarding this bill having been cleared, and the amount having been credited to its account, was also received by the bank subsequent to suspension of business by it.
22. So far as sums admittedly realised by the bank other than the aforesaid sum of 3 25/10/1 are concerned, the case is clearly covered by the judgment of the Court of Appeal in case of In re Farrow's Bank Ltd. (1923) 92 L.J. Ch. 153, referred to above. The amounts of the relevant bills having been collected by the respondent bank subsequent to suspension of business, the petitioners are clearly entitled to payment in full of the said amounts.
24. It is no doubt true that the petitioners had a current account with the Sialkot branch of the respondent bank and it is true that the bills were being paid by the petitioners into that branch with instructions for the amounts of those bills being credited to their said account on collections, This seems clearly to follow from paragraph 5 of the affidavit of Rala Ram petitioner dated 28th May 1948, in which he has deposed that somewhere in the middle of September he had handed over a letter to the manager of the Sialkot branch of the respondent bank to the effect that as their account was running on the credit balance side no amount realised by collection of any of their bills after 12th August 1917 should be credited to their account and that all such realisations should be paid to them direct. The correctness of the statement a3 to the instructions said to have been given by the aforesaid Rala Ram to the manager in writing for not crediting to the petitioners' current account the proceeds of their bills received after 12th August 1947 has been denied in the affidavit of Mr. Pyare Lal the accountant of Sialkot branch of the respondent bank at the relevant time. Rala Ram having deposed that the written instructions were handed over by him to the manager, that manager was the proper person to make a statement as to whetfier Rala Ram had in fact given him any such written instructions, and I cannot regard the affidavit of the accountant as sufficient rebuttal of the statements contained in Rala Ram's affidavit.
25. However it is to be noted that the petitioners never served the respondent bank with any notice for the production of the letter alleged to have been handed over by Rala Ram to the manager of its Sialkot branch in the middle of September 1947, nor did they make any other attempt to secure the production of that letter. The affidavit containing a statement about such a letter having been handed over to the manager was filed at quite a late stage of the proceedings, and in the petition as well as in the affidavit accompanying that petition, there was no reference to any such letter. It is true that the affidavit which accompanied the petition had been sworn to by Jagjit Singh son of Rala Ram and not by Rala Ram himself. It may, however, reasonably be presumed that Jagjit Singh had the petition and the affidavit drawn up after the consultation with his father, and the omission in them of all reference to the alleged written instructions throws a good deal of doubt on the father's present deposition. Be that as it may, in the absence of any corroborative evidence I am not prepared to hold, merely on the affidavit of Rala Ram, that any written instructions countermanding the previous instructions about the proceeds of the bills were given by the aforesaid Rala Ram to the manager of the Sialkot branch as alleged.
26. The fact, however, remains that the sum of 25/10/1 was never credited to the petitioners account with the respondent bank but has admittedly been kept in the sundries account. It cannot in the circumstances be held that when the respondents bankers, namely, the National City Bank of New York, Bombay, received this sum on the respondent's behalf and credited it to its account with them the respondent became a debtor of the petitioners in respect thereof. The sum having been received by the respondent in the capacity of an agent must be deemed to have been retained by it in that capacity. Even now the amount is kept by it admittedly in the sundries account. A sundries account and a suspense account in banking phraseology are interchangeable terms. A Division Bench of the High Court of Madras in The Official Assignee of Madras v. D. Bangam Aiyar 33 Mad. 299 described the implications of an amount being kept in suspense account in the following terms:
The person whose money is held in suspense, is entitled to withdraw it any moment he likes, he neither gets a pass book nor is entitled to draw any cheques or to be paid interest in respect 01 the amount. In short that money is not held either in current or deposit account. The inference, therefore, clearly is that a banker holding money of a person in suspense does not treat it like an ordinary csutomer's money and the general rule that a banker is entitled to use his customer's money because it is money really advanced to him cannot apply to such money.It is obvious therefore that the title to this sum of 25/10/1 never passed to the respondent bank and has throughout remained in the petitioners. I am, therefore, of the opinion that the petitioners are entitled to the payment in full of this sum also.
29. Before closing this subject I may mention that Mr. Ved Vyas, the learned Counsel for the respondent bank has also contended that in view of the terms of Clause 4 of the scheme which provide for a reduction of 20% being made in all sums becoming payable by the bank whether before or subsequent to 26th September 1947, the petitioners cannot claim full payment of the amounts of their bills, in whatever capacity those amounts be held to have been realized or retained by the bank. I, however, see no force in this contention and repel the same. In the first place, Clause 3 of the scheme, under which the directions are sought in the present petition opens, with the words 'notwithstanding any other provision in the scheme.' Clause 4, therefore, has expressly been made subject to any directions that may be given by this Court on proceedings taken under Clause 3. In the nest place, Clause 4 provides for a reduction of 20% on the amount of deposit or any other claim or claims or dues to the credit of each creditor as on the 26th September 1947 or on any later date. It can obviously apply only to claims in respect of which the claimant can be regarded as a creditor of the bank. The question whether in respect of any particular claim the jural relationship between the claimant and the bank is or is not that of a creditor and a debtor must be decided by the Court before Clause 4 can be held to be applicable to such a claim.
28. For the reasons given above, I direct the respondent to pay to the petitioners in full the amounts received by it on account of the bills handed over by them to its Sialkot branch for collection after deducting collection charges and such other expenses as can legally be charged to them. I further direct the respondent to pay in full to the petitioners any sums that may hereafter be realised by it on account of the bills that still remain outstanding. The petitioners can, if they so choose, make direct arrangements for the collection of the bills that still remain uncollected. There shall be no order as to the costs of these proceedings.