1. The appellants in the Court below are the appellants. This appeal arises from a claim preferred by the appellants in the winding up by Court of the Seetharam Spinning and Weaving Mills Ltd,, Trichur (in liquidation). The claim was for Rs. 42,209/- and interest amounting to Es. 2,699-8-0. The Seetharam Spinning and Weaving Mills Ltd., hereinafter called the Mills, had entered into a contract with Messrs, Mohammed Sheriff and K. A. Palaniswamy and Co., Tiruppur for the purchase of 152 bales of certified Uganda-cotton at Rs. 1,200/- per candy, f.o.r. Trichur. The terms of the contract can be gathered from the correspondence between the parties. Ext. P-2 is a letter sent by the Mills to Messrs. Mohammed Sheriff and K. A. Palaniswamy and Co. and that is dated 2nd May 1953. In their reply dated the 4th May 1953 to the Mills M/s. Mohammed Sherif and K. A. Palaniswamy and Co., have stated that Messrs. Sri Krishna Ginning Factory, Sattur, will be despatching the 152 bales of cotton on their behalf and that 65 per cent of the value of the goods will be drawn through the Bank against the R.R. and the balance of 35 per cent by Hundi. In pursuance to the contract, two consignments of cotton were despatched and the Mills took delivery of them on payment of 65 per cent of the value and giving Hundies for the balance. The last consignment of 50 bales was also despatched by Messrs. Sri Krishna Ginning Factory and a bill was drawn for 65% of the price of the goods as agreed to and sent through the Central Bank of India Ltd. The bill was not retired by the Mills. The Mills, however got delivery of the 50 bales of cotton from the railway administration by giving a letter of indemnity Ext. P-3 and the price thereof was entered in the accounts of the Mills to the credit of Messrs. Sri Krishna Ginning Factory. Thereafter the Mills pledged 32 bales of cotton with the State Bank of Mysore Ltd., the 2nd respondent and the remaining 18 bales were used by the Mills in the course of their business.
Messrs. Sri Krishna Ginning Factory came to know of the non-payment of the bill and the taking possession by the Mills of the goods. They therefore demanded payment of the full value of the 50 bales. The Mills, however, did not pay the amount. Hence Messrs. Sri Krishna Ginning Factory issued a lawyer's notice to the Mills demanding payment and stating that if the payment were not made they would be constrained to institute both civil and criminal proceedings. As there was no response to this notice, a criminal complaint was filed in the Second Class Magistrate's Court, Trichur, against the Managing Director of the Mills and another. The case was subsequently compounded with the permission of the Court and Ext. p-11 is the order of the Magistrate granting permission to compound the offence in C.C. 1401/1 1953, and leaving the matter to be decided in appropriate civil proceedings. The Sri Krishna Ginning Factory were able to pursue the 32 bales of cotton pledged with the and respondent and these bales were seized and produced before the Magistrate's Court and sold in auction, fetching an amount of Rs. 12,504-12-0. As the Mills went into liquidation, a claim was preferred by the appellants before the liquidator for payment of the amount due to them. They claimed preferential payment in respect of the value of the 50 bales of cotton on the ground, that the property in the goods had not passed to the Mills and that the possession of the 50 bales were obtained by them by fraud from the railway administration. The appellants contended before the liquidator that the property in the goods namely, 50 bales of cotton had not passed to the Mills as there was no unconditional appropriation of the goods to the buyer, and that although the railway receipt was taken in the name of the Mills, it was sent to the Central Bank of India, and that the payment of the bill was a condition precedent to the Mills getting delivery of the goods from the railway administration. The appellants therefore contended that the Mills got possession of the 50 bales of cotton through fraud and that they were trustees in respect of the goods or the, value thereof. The liquidator disallowed the preferential claim of the appellants for the full value of the 50 bales viz., Rs. 28,868-15-0. The liquidator also rejected the claim of the appellants to rank as ordinary creditors in respect of the value of 32 bales of cotton on the ground that they were able to pursue and get the 32 bales of cotton from the godown of the 2nd respondent, the State Bank of Mysore. As regards the rest of the bales, the liquidator held that the property in the goods had passed to the Mills and that the appellants were entitled to rank only as ordinary creditors.
2. There was an appeal to the District Court and that Court allowed appellants to rank as ordinary creditors in respect of the value of 50 bales of cotton, but the preferential claim for the amount of Rs. 28,868-15-0 representing the value of 50 bales of cotton was disallowed. That Court also allowed the 2nd respondent to draw the amount realised in Court sale for the 32 bales seized from 2nd respondent's custody. It is against this order that the appeal has been preferred.
3. For the appellants it was contended that the property in the 50 bales of cotton had not passed to the Mills and that they were in the position of trustees and that the lower Court should have allowed their claim for preferential payment.
4. We think the property in the goods had not passed to the Mills on the date when they obtained delivery of possession of the 50 bales from the railway administration. There was no unconditional appropriation of the goods to the Mills. Section 23 of the Indian Sale of Goods Act makes it clear that if under a contract for sale of unascertained goods, goods have been unconditionally appropriated by the seller with the assent of the buyer the property in the goods will pass to the buyer, and where in pursuance to the contract the seller delivers the goods to a carrier and does not reserve the right of disposal, he is deemed to have unconditionally appropriated the goods to the contract. Section 25(1) would indicate that if under a contract of sale, goods are appropriated to the contract, the seller may by the terms of the contract or appropriation reserve the right of disposal of the goods and in such a case, notwithstanding the delivery of the goods to a carrier the property in the goods will not pass to the buyer. Prim a facie delivery of the goods to a carrier is delivery to the buyer. But where a seller reserves a right of disposal, the delivery of the goods to the carrier is only as bailee for the seller.
5. According to the terms of the contract as evidenced by Exts. P-2 and P-5, 65 per cent of the value of the goods had to be paid on the arrival of the goods at Trichur and a bill was drawn for that purpose. Though the railway receipts were taken in the name of the consignee it was not sent to the Mills. It was sent to the Central Bank of India Ltd., with the bill for 65% of the price and it cannot therefore be said that the seller intended the property in the goods to pass until payment of the 65 per cent of the price. The Mills obtained possession of the goods without honouring the bill. A letter of indemnity was given to the railway administration by the managing agents of the mills stating that the railway receipts will be produced within two or three days and that in the meanwhile the goods may be delivered to the Mills. In pursuance to Ext. P.3, the goods were delivered to the Mills by the railway authorities without the production of the railway receipt which the Mills could not have produced as they had not retired the bills drawn by the appellants on them. As a matter of fact the Mills-had no authority to take delivery without honouring the bill. Therefore it is clear that the property in the 50 bales of cotton had not passed to them. It was really by a tortious act, that the Mills came into possession of these bales.
6. It was urged on behalf of the liquidator that since the railway receipt was taken in the name of the consignee that was an indication to show that the property in the goods passed as soon as the goods were appropriated and handed over to the railway. We do not think, that that was the intention of the parties. That the seller never intended to part with the property in the goody until after payment of the 65 per cent of the price, is clear from the contract between the parties and also from the conduct of the seller in sending the R.R. to the Central Bank of India with the bill of exchange. The fact that it was not sent to the consignee coupled with the fact that under the contract they were not entitled to get delivery of the goods without payment of the 65 per cent of the value thereof would show that the sellers did not intend to part with the property in the goods until payment of the amount stipulated for.
7. In Gandhi Sons Ltd. v. State of Madras. (8) AIR 1955 Mad 722 the question when the property in the goods will pass in such cases was considered by Mr. Justice Rajagopala Ayyangar, as he then was, and it was observed at p. 726:
'Did the sellers in the present case by the terms of the contract or appropriation reserve the right of the disposal in the goods until certain conditions were fulfilled In dealing with this point made on behalf of the State might be noticed viz., that the bills of lading were taken in the name of the buyers making the goods deliverable to then order. This feature would undoubtedly render Sub-section (2) of Section 25 unavailable to the assessee but there is abundant authority for the view that the taking of a bill of lading in the name of a buyer does not ipso jure negative a conditional appropriation or the reservation of a right of disposal.
If authority is needed reference may be made to the decision in -- 'Moakes v. Nicolson'., (1865) 19 CB (NS) 290, and the Kronprinessan Margareta; 'the Parana, 1921-1 AC 486 at p. 514. In the latter case the bills of lading were taken in the consignee's name and these were sent with an invoice and a sight draft for its amount through collecting agents of the consignors to be presented to the bank. The question was whether the property in the goods passed to the neutral sellers on shipment, or whether this occurred only on payment of the draft. Lord Sumner delivering the opinion of the Privy Council said: 'In these circumstances what can be inferred as to the passing of the general property? What is there to show an intention to pass that property for anything less than payment, and what motive is there for such an intention? The appellants, Messrs. Lundgren and Pollven, have to show that it passed to them and passed, too, before the beginning of the Voyages. If it did, then the consignors no longer owned the goods and had nothing to show against them except a draft of their own, which could not be enforced and a bill of lading, which would not entitle them to delivery of the goods, though its retention might seriously inconvenience the new owners, the consignees''.
8. The other cases cited at the Bar which would establish the same proposition are Liptons Ltd., Calcutta v. Municipal Sales Tax Officer, Ernakulam, 1958 Ker LJ 1228 : 1959 Ker LT 311. We therefore hold that the property in the 50 bales of cotton did not pass to the Mills when they obtained delivery of possession of them.
9. It was argued by counsel for the liquidator that the claim in this case was incompetent as the claim really sounded in unliquidated damages and until the amount of damage was quantified by a decree in an action, the liquidator was really incompetent to entertain and adjudicate the claim. Counsel has not brought to our notice any specific authority that in a case like this, the liquidator is incompetent to go into the question and decide it. We do not think that the liquidator was incompetent to go into the question and adjudicate upon it. (See Section 528 of the Companies Act).
10. It was argued that the appellants were entitled to get only the value which the 32 bales fetched in the auction sale conducted by the Magistrate's Court and the value of 18 bales as on the date on which the 18 bales were taken delivery of by the Mills. We are unable to come to that conclusion. We think that the appellants were entitled to get damages on account of the conversion of their goods by the Mills and the damage in such a case should normally be the value of the property as on the date of conversion. But in this case there is the further fact that the Mills must be deemed to have knowledge of the contract under which the goods were sold to them and therefore when they converted the goods, they were answerable for all the consequences reasonably flowing from their act with notice of the subsisting contract under which the goods were sold. The Mills were therefore liable for damages for the price of the goods under the contract, irrespective of the market value of the goods on the date of the conversion.
There is no difference in the rule as to remoteness of damage whether the damages are claimed in actions of contract or tort. Evans P. in H. M. S. London, (1914) P. 72 at p. 77 called it settled law. No doubt there is a body of authority which disputes the truth of so general a statement. It is submitted that in spite of a body of authority to the contrary the statement of Evans P. that there is no substantial difference between the rules as to remoteness of damages in tort or contract is correct. Moreover, the Mills themselves had credited Messrs. Sri Krishna Ginning Factory with Rs. 28,868-15-0 in their accounts. For these reasons we are unable to accept the argument of counsel that the amount recoverable by the appellant is the amount fetched in the auction sale for 32 bales and the market price of the 18 bales as on the date of the conversion.
11. It was further urged by counsel for the liquidator that the appellants have waived the tort by their letter Ext. P-3 dated 7th July 1963 and by their notice Ext. P-1 dated 5th August, 1963. By their letter the appellants demanded the amount due to them on the basis of the contract of sale. By Ext. P-1 notice they reiterated that demand. The fact that the appellants demanded the price of the goods cannot be considered to be either a waiver of their right to claim damages for tort or an assent to the appropriation of the goods to the contract. The argument of counsel was that if the tort had been waived then the appellants could recover only the price of the goods and can rank only as ordinary creditors in the winding up. We feel unable to agree to that argument. The doctrine of waiver of tort has, after several vicissitudes, been placed on a reasonable basis in the speech of Lord Atkin in United Australia Ltd. v. Barclays Bank Ltd., 1941 AC 1. Until there is an election which is final it is open to the plaintiff to base his cause of action either on tort or on a quasi contract.
''If I find that a thief has stolen my securities and is in possession of the proceeds, when I sue him for them I am not excusing him indeed he may be in prison upon my prosecution said Lord Atkin. A man does not in any true sense waive a wrong unless he has a real intention to waive it or such an intention can be fairly imputed to him. The waiver is as fictitious as the contract. The phrase waive the tort is a picturesque one and has a pleasing sound and (..................) was regarded by the old common lawyers with affection, but it is inaccurate. What is waived is not the tort but the right to recover damages for it. It is clear that there are torts to which the doctrine of waiver cannot be applied ......... but it is not clear how far the doctrine does extend'.
(See Salmond on Torts, 13th Edn,, page 796).
At any rate even assuming that it can be waived, short of a judgment recovered on the basis of a quasi-contract there can be no waiver of a claim for damages. A judgment in quasi contract may be a bar, but the question whether its satisfaction is also a further requirement is not beyond doubt. For reasons so lucidly given in Salmond on Torts we hold that the appellants had not waived their claim to recover damages for the tort.
11a. This takes us to the question whether the Mills are trustees, or stood in a fiduciary relationship to the appellants so far as their possession of 50 bales of cotton were concerned. Counsel for the liquidator contended that ex hypothesi the mills were tort-feasors and that they could under no known process of law be converted into trustees or fiduciaries so as to enable the appellants claim preferential payment of the value of the 50 bales of cotton. The question whether the Mills can be considered to be trustees, in this case where the property in the goods has not passed to them is not free from difficulty. The Mills obtained possession of the goods from the railway authorities but they never got any title to the goods. In such circumstances how can they become trustees, even if they could pass a title to the goods to a person purchasing the same bona fide and without notice of the absence of title by virtue of Section 30(2) of Indian Sale of Goods Act, 1930? Section 30(2) runs as follows:
'Where a person, having bought or agreed to buy goods, obtains, with the consent of the seller, possession of the goods or the documents of title to the goods, the delivery or transfer by that person or by a mercantile agent acting for him, of the goods or documents of title under any sale, pledge or other disposition thereof to any person receiving the same in good faith and without notice of any lien to other right of the original seller in respect of the goods, shall have effect as if such lien or right did not exist.'
The Mills obtained possession of the goods by fraud but they never obtained title to the goods. The question whether a conscious wrong-doer can be considered to be constructive trustee for the purpose of following the property or its product into his hands was considered by Austin W. Scott in his Law of Trust, Vol. IV, Page 32-56. This is what he says: -
'In other words, the owner of the converged property is entitled to enforce a constructive trust of the product. In a few early decisions the Courts refused to impose a constructive trust upon the product of stolen property. These decisions seem to have been the result of a confusion of ideas. The Courts overlooked the fact that a constructive trust rests upon an entirely different basis from that which underlies an express trust. Thus a Judge as learned and acute as Chief Justice Ruffin of North Carolina held that where a clerk in a shop stole money from his employer and bought land with it a bill in equity by the employer to impose a constructive trust upon the land would not lie. He said: 'This person was in truth guilty of a felony in possessing himself of the plaintiff's effects for the purpose of laying them out for his own lucre; and that fully rebuts the idea of converting him into a trustee ......... We do not see how a felon is to be turned into a trustee of property merely by showing that he bought it with stolen money.' The notion that a thief cannot be charged as a constructive trustee because he is not in a fiduciary relation to his victim was repudiated in a New York case. Andrews, J., said: 'It is insisted by the counsel for the defendants that the doctrine which subjects property acquired by the fraudulent misuse of trust moneys by a trustee to the influence of the trust, and converts it into trust properly and the wrongdoer into a trustee at the election of the beneficiary, has no application to a case where money or property acquired by felony has been converted into other property. There is, it is said, in such cases, no trust relation between the owner of the stolen property and the thief, and the law will not imply one for the purpose of subjecting the avails of the stolen property to the claim of the owner. It would seem to be an anomaly in the law, if the owner who has been deprived of his property by a larceny should be less favourably situated in a Court of equity, in respect to his remedy to recover it, or the property into which it had been converted, than one who, by an abuse of trust, has been injured by the wrongful act of a trustee to whom the possession of trust property has been confided. The law in such a case will raise a trust in invitum out of the transaction, for the very purpose of subjecting the substituted property to the purposes of indemnity and re-compense.'
12. In American Restatement of the Law on Restitution, page 649 the principle is stated as follows : -
'Where a person does not acquire the title to property but merely obtains possession of the subject-matter, he is not chargeable as constructive trustee. Thus, if a person wrongfully takes possession of the chattel of another, he is liable in an action at law for conversion, or if the remedy at law is inadequate, as for example, where the chattel is unique or where the converter is insolvent, a bill in equity for specific restitution can be maintained against him. The owner of the property can also use self-help in retaking possession within the limits permitted by law (See Restatement of Torts, Sections 100, III, 198). The result is the same where a person by fraud or duress obtains possession of but not title to a chattel (compare Restatement of Contracts, Sections 475, 494). Since the wrongdoer has no title to the chattel he cannot transfer the title to a third person, and the third person even though he pays value without notice of the conversion becomes himself a converter. If the wrongdoer exchanges the property for other property, however, and obtains title to the other property, he is chargeable as constructive trustee of the other property under the rules stated in Sections 202-215 (Chapter 13).'
13. With respect, we agree with the statement of the principles made above. In the case in hand, the fact that the mills could have passed a title to the goods to a bona fide purchaser for value under Section 30(2) of the Sale of Goods Act, will not make any difference in the conclusion that the Mills were constructive trustees of the money obtained by sale and the pledge of the goods.
14. The next question is how to enforce the constructive trust. At page 3259 of Scott's Book, it is stated: -
'Another difficulty once felt by the English Court was in following misappropriated property into money. It was thought that where the misappropriated property was sold for money the owner of the property was not entitled to follow it into the proceeds, because as it was said, 'money has no earmark'. It was held in several very early cases that where a factor died insolvent or became bankrupt hjs principal could reach the goods remaining in his hands, but could not reach the proceeds of goods which he had sold, because money has no earmark, although it was held that if with the proceeds he had purchased other goods the principal could claim the other goods. In these cases it did not appear that the money was no longer in the possession of the factor or even that he had mingled it with money of his own. Early in the nineteenth century, however, Lord Ellen-borough in Taylor v. Plumer, (1815) 3 M and S 562, at p. 575 said that it was only when the money of the claimant was mingled with the wrongdoer's own money in one general mass that the claimant's right to follow it ceased. Subsequently, as we shall see, it was held that such mingling does not terminate the claimant's interest. It is clear law to-day that misappropriated property can be followed into money as well as into any other form of property, as long as it is traceable'.
At page 3287 he ob serves:-
'Although in In re, Hallett's Estate; Knatchbull v. Hallett, (1880) 13 Ch D 696 and in Central National Bank of Baltimore v. Connecticut Mutual Life Insurance Co., (1881) 104 U. S. 184 : 26 Law Ed 693 it was held that the right of the claimant to follow his money into a mingled fund is not limited to the case where the wrongdoer is a trustee, but extends to all cases where the wrongdoer is a fiduciary, it was assumed that the right was available only where the wrongdoer was in some kind of fiduciary relation to the claimant. It would seem to be clear enough, however, that it is immaterial whether the wrongdoer is a fiduciary or not. There is no reason why any person whose money has been wrongfully taken by another and mingled with his own should not be entitled to a charge upon the mingled fund. There is no reason why the general creditors of the wrongdoer should be entitled to profit where he has obtained money by fraud or has misappropriated money, even though he was not in a fiduciary relation to the person whose money he took. The fact that money has no earmark is a good reason why the claimant cannot insist that any particular part of the mingled fund is his; but it is no reason why he should be denied an interest in the fund, no reason why he should be relegated to a mere personal claim against the wrongdoer. The wrongdoer owes a duty to the claimant to restore to him the money wrongfully taken from him. It is the wrongdoer's own fault that he cannot identify his own contribution. Therefore, to make reparation he should use, and a Court of equity will compel him to use, so far as necessary, the fund which is made up in part of the money of the claimant. In other words, the claimant has an equitable lien or charge on the whole fund. The creditors of the wrongdoer cannot object to this. Since they are not purchasers for value, they stand no better than their debtor. The claimant's lien is therefore available against the general creditors of the wrongdoer.'
In American Restatement of the Law on Restitution, it is observed at page 822:
'The claimant can reach the product of his property even though the wrongdoer is insolvent. This is true whether the claimant seeks to enforce a constructive trust upon the product or to impose an equitable lien upon it. The claimant has an equitable interest in the product, and his equitable interest is not cut off by the insolvency of the wrongdoer, since the creditors of the wrongdoer are not in the position of, bona fide purchasers (See Section 173, Comment J.) The creditors whose rights are no better than those of their debtor are not entitled to profit because of the wrongful acquisition of property by their debtor through the use of the claimant's property.'
15. We therefore come to the conclusion that the Mills were constructive trustees of the proceeds of the sale of the 18 bags of cotton and of the amount got by them by pledging the 32 bales of cotton to the 2nd respondent viz., to the State Bank of Mysore Ltd., and to the extent of these amounts, on the principle stated above, the appellants are entitled to be paid in preference to the ordinary creditors of the Mills.
16. As regards the State Bank of Mysore Ltd., they claim the price fetched by the sale of the 32 bales of cotton by the criminal court on the ground that they were bona fide pledgees of those bales from the Mills and that the amount fetched in auction would not be even sufficient to meet their claims. We think that so far as the 2nd respondent is concerned it was bona fide transferee for value and that under Section 30(2) of the Sale of Goods Act it had obtained an indefeasible title to the property although the Mills themselves had no title to the property. In Central National Bank Ltd. v. United Industrial Bank Ltd., AIR 1954 SC 181 it was held that even if a buyer in whose favour there was a contract of sale, obtains delivery of possession of the goods from the seller or his agent by practising fraud upon the seller or his agent, he is entitled to pass a good title to a bona fide purchaser for value even though the buyer himself got no title to the property. Therefore in this case even assuming that the Mills got possession of the goods by fraud or misrepresentation practised upon the agent of the seller namely, the railway administration, the Mills could pass an indefeasible title to the Bank, a bona fide purchaser for value and 2nd respondent therefore is entitled to recover the whole sale proceeds of the 32 bales of cotton gold in auction by the criminal Court. The order of the lower Court to this extent is upheld. While we hold that the appellants ate entitled to preferential payment in respect of the price of the 50 bales of cotton, no materials have been placed before us to show what was the amount for which the 32 bales of cotton were pledged and what was the amount realised by the Mills by the sale of the 18 bales of cotton. We have already seated that the preferential payment can only be to the extent of the amount realised by pledge and sale of the goods converted. Without knowing the extent of the amount realised by the Mills, it is not possible to say to what extent the appellants are entitled to preferential payment.
17. We therefore remand the case to thelower Court for a fresh decision after entering afinding on the question as to the amount realisedby sale of 18 bales of cotton and by pledge of the32 bales to the 2nd respondent and give the appellants preference to the extent of that amount.The costs here including Advocate's fee of Rs.250/- as well as costs incurred hereafter in thelower Court will be provided for in the final orderto be passed by that Court.