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Baroda Spg. and Wvg. Mills Co Ltd. (In Liquidation) Vs. Baroda Spg. and Wvg. Mills Co-operative Credit Society Ltd. and anr. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtGujarat High Court
Decided On
Case NumberCompany Application No. 15 of 1974 in Company Petition No. 6 of 1967
Judge
Reported in[1976]46CompCas1(Guj); (1976)1GLR555
ActsCompanies Act - Sections 456, 511 and 530; Payment of Wages Act, 1936 - Sections 2, 3, 7, 7(2), 24-A and 24A(1)
AppellantBaroda Spg. and Wvg. Mills Co Ltd. (In Liquidation)
RespondentBaroda Spg. and Wvg. Mills Co-operative Credit Society Ltd. and anr. ; (Rajratna Sheth Zaverchand
Cases ReferredSeth Jessa Ram Fatehchand v. Om Narain Tankha.
Excerpt:
company - trust money - sections 456, 511 and 530 of companies act and payment of wages act, 1936 - whether amount standing to credit of respondent in books of account of appellant impressed with character of trust - company had neither legal nor beneficial ownership in property - company merely custodian till remission of amount to society - company not entitled to mix amount with its own funds - no liability to pay interest - amount in hands of company impressed with trust - amount does not form part of assets of company - liquidator bound to pay same in priority before any distribution of assets of company made by him - question answered in affirmative. - - when the amending act of xxix of 1942 and amending act xxviii of 1948 were being enacted by the legislature of the erstwhile.....d.a. desai, j.1. this summons is taken out by the official liquidator of the baroda spinning and weaving mills ltd. (in liquidation) for deciding the following question : 'whether the amount standing as credit balance in the account of credit society (the baroda spinning and weaving mills - rajratna sheth jhaverchand laxmichand - co-operative credit society ltd.) is trust money, not forming part of the assets of the company and that the society ranks outside winding up or whether the amount is part of the assets of the company and distributable as such in the course of winding up ?' 2. on a petition filed by western india dye-stuff corporation being company petition no. 6 of 1967 presented on 8th march, 1967, the baroda spinning and weaving mills ltd. (hereinafter referred to as 'the.....
Judgment:

D.A. Desai, J.

1. This summons is taken out by the official liquidator of the Baroda Spinning and Weaving Mills Ltd. (In liquidation) for deciding the following question :

'Whether the amount standing as credit balance in the account of credit society (The Baroda Spinning and Weaving Mills - Rajratna Sheth Jhaverchand Laxmichand - Co-operative Credit Society Ltd.) is trust money, not forming part of the assets of the company and that the society ranks outside winding up

or

Whether the amount is part of the assets of the company and distributable as such in the course of winding up ?'

2. On a petition filed by Western India Dye-stuff Corporation being Company Petition No. 6 of 1967 presented on 8th March, 1967, the Baroda Spinning and Weaving Mills Ltd. (hereinafter referred to as 'the company') was ordered to be wound up by an order dated 17th April, 1968, and the official liquidator was appointed as the liquidator of the company. The liquidator proceeded to take into its custody all the property, effects and actionable claims to which the company was entitled. The liquidator also took into his custody the books of accounts and other documents of the company. After the statement of affairs was filed, the liquidator in the course of examination of the books of accounts of the company, came across an entry showing a credit balance to the extent of Rs. 86,166.86 in the account of the Baroda Spinning and Weaving Mills (Rajratna Sheth Jhaverchand Laxmichand) Co-operative Credit Society Ltd., hereinafter referred to as 'the society'. In response to the advertisement inviting the creditors of the company to prove their debts or claims and establish any title they may have to priority under section 530 of the Companies Act, the society approached the liquidator with a request that the amount standing to their credit in the books of accounts of the company was held in trust by the company and must be paid to the society before any amount is paid to anyone in his capacity as creditor of the company. It appears that before approaching the liquidator, the society moved the court in Company Application No. 43 of 1973, for a direction that the liquidator should be directed to pay the aforementioned amount from the assets of the company before making payment to anyone as creditor of the company. The court directed that the society should first approach the liquidator with its request. Accordingly, the society approached the liquidator with an affidavit claiming the amount to be paid in priority to anyone else or set it apart for paying in full before making payment to any creditor in distribution of the assets of the company. It is at this stage that the liquidator felt handicapped in deciding the claim of the society and moved this court with the present application for decision of the question herein above set out.

3. In order to appreciate the contention raised in this application, it is necessary to set out the relevant facts which would show the circumstances in which the company came into possession of the amount now claimed by the society. The company was incorporated prior to 1943. Some of the employees of the company formed a co-operative credit society which came to be incorporated on 7th June, 1943, under what is styled as 'Baroda Co-operative Societies Nibandh, 1926' and this becomes evident from the certificate of registration issued by the co-operative officer on 12th June, 1943, which is annexure 'A' to the affidavit of B. L. Javde, vice-president of the society. The object for which the society was formed as set out in bye-law 3 of the bye-laws of the society is to encourage thrift and saving and to extend credit on easy terms to the members and to find ways and means to assist the children of the members in prosecuting their studies and to be helpful in the welfare of the members of the society. Membership of the society was open only to the employees of the company or to the employees of the co-operative credit society or the canteen of the company. Bye-law 15 provided that every member will have to make a compulsory saving as set out therein. Provision was made in bye-laws 44 to 53 for extending credit and loans to the members repayable in easy instalments at moderate rates of interest. These bye-laws were approved by the Registrar and registered by him. Any member desirous of taking a loan had to make an application in the prescribed form and the prescribed form which is annexed to the affidavit shows that the members taking the loan agreed to repay in the manner set out in the form, it being that the member who is the employee of the company would permit deduction of the monthly instalments, as also the amount of compulsory saving and the interest payable by him on the loan taken by him from the salary or wages which he is to receive from the company month to month. The tripartite arrangement worked out between the company, the society and the members of the society appears to be that on an application being made by the member, the society would advance a loan and the member, in turn, would agree to repay the loan by equal monthly instalments by the company deducting the amount of instalments from the wages payable to him month to month and the company paying over the money to the society. There appears to be a tripartite arrangement which has been in vogue since the incorporation of the society. The society accordingly claimed that the amount so deducted by the company from the wages of its employees who were members of the society on the requisition for deduction being made by the society, the company was only a collecting agent and the amount so collected by the company by making the necessary deductions was impressed with a trust and, therefore, the amount did not form part of the assets of the company and the liquidator cannot take charge of the same and that as the liquidator has taken charge of the amount of the company, he should be directed to hand over the amount to the society. It appears from the record that the amount thus collected by the company till 30th June, 1966, was remitted and paid over to the society and the amount that remained to be paid over consisted of the deductions made between July, 1966, to October, 1966. The company closed down its business somewhere on 9th October, 1966. The society accordingly claimed that the company being a collecting agent under a tripartite agreement, any amount that came into its hands by way of deduction from the wages of its employees was impressed with the trust because the company collected it for and on behalf of the society and it is obligatory for the company to pay over the amount to the society. Alternatively, it was contended on behalf of the society that as the collections were made by making deductions from the specific wages already earned by the employees for transmission to the society, the company had neither the legal nor the beneficial interest in the money and was merely holding it in trust for the society till such time the amount is handed over to the society before the liquidator proceeds to distribute the assets of the company among the persons having interest in the company.

4. As the present summons was taken out by the liquidator himself in order to given an opportunity to all the creditors of the company to contest the claim of the society, a direction was given that individual notice be given to preferential creditors and a public notice be issued inviting anyone to appear and support or contest the summons. In response to the public advertisement, the Baroda Municipal Corporation through its Ward Officer, Shri K. M. Dave, appeared and filed an affidavit contesting the claim of the society.

5. Mr. G. G. Mehta of M/s. Bhaishanker Kanga & Girdharlal, attorneys for the original petitioner, Western India Bombay Dye-stuff Corporation, appeared but did not file any affidavit but made only oral submission. Mr. V. B. Patel, learned advocate, appeared for the liquidator and assisted the court in arriving at a correct decision on this thorny question.

6. Section 456 of the Companies Act provides that on a winding-up order being made and the liquidator being appointed, he shall take into his custody or control all the property, effects and actionable claims to which the company is or appears to be entitled. He should also take into his custody the books of accounts and other documents of the company. The object of the winding-up proceedings of a company is to collect all the assets, properties and choses-in-action belonging to a company under liquidation and to distribute them to various persons having claim against the company keeping in view priorities fixed by various provisions of the Companies Act. Ordinarily, a liquidator after collecting all the assets, properties and claims in favour of the company would first pay up any secured creditor if he has not chosen to remain outside the winding up and then a preferential creditor and thereafter unsecured creditors and balance amongst the contributories. While collecting the assets of the company it will be the duty of the liquidator to realize all claims subsisting in favour of the company. It must be his endeavour to collect all the assets of the company which have been unauthorisedly, dishonestly, fraudulently or illegally taken away from the company. In order to prevent a scramble for the assets of the company, the liquidator has to step in and take possession of and protect the assets of the company (vide Rajratna Naranbhai Mills v. New Quality Bobbin Works 1). As observed by Lindley L.J. in In re Oak Colliery Co. :

'The object of the winding-up provisions of the Companies Act, 1862, is to put all unsecured creditors upon an equality, and to pay them pari passu.'

7. This observation has found statutory recognition in section 511 of the Companies Act. Section 529 provides for application of insolvency rules. It reads as under :

'529. (1) In the winding-up of an insolvent company, the same rules shall prevail and be observed with regard to -

(a) debts provable;

(b) the valuation of annuities and future and contingent liabilities; and

(c) the respective rights of secured and unsecured creditors; as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent.'

8. One of the principal duties of the liquidator is to realise the assets of the company and to apply the proceeds in payment of the company's debts and liabilities, in due course of administration and, having done that, to divide the surplus among the contributories and to adjust their rights. Emphasis is on distribution of the assets of the company in the manner prescribed by law. Therefore, the liquidator must take charge of all the assets of the company. If the company has in its possession some property, which is not the asset of the company, immediately a question would arise whether the liquidator can take over the same as being the asset of the company. If any property or asset of the company is impressed with the trust showing that the beneficial interest in the property is in some one other than the company, a question would immediately arise as to whether the liquidator can take it over as forming part of the asset of the company. Before the liquidator can step in and take charge of any property as the asset of the company, it must be shown that both the legal and beneficial ownership of the property is in the company. If the company had merely a custody of the property without either a beneficial or legal ownership in the property, it would not form part of the asset of the company and the liquidator cannot take it over for the purpose of distributing it amongst the creditors of the company. The question, therefore, is what is the title of the company to the amount found standing to the credit of the society in the books of accounts of the company on the date on which the company was ordered to be wound up.

9. The facts as set out earlier from the affidavit of the vice-president of the society are not in dispute. The society was incorporated for the avowed object of promoting and encouraging thrift and saving amongst its members, as also to advance loans on easy terms at moderate interest. The membership of the society was exclusively open to the employees of the company. A tripartite arrangement appears to have been worked out between the society, the members and the company by which it was agreed that the society would advance loans and make it obligatory upon the members to save a certain amount depending upon the amount of his wages every month and that the loan will be repayable by the monthly instalments and the amount of instalments and the interest accrued due till that date, as also the quota of compulsory saving of each member shall be deducted by the company from the wages that become payable to the employee. There is a specific written agreement between those who have taken loans from the society and the society because the agreement is incorporated in the application for loan itself. The society every month used to send a requisition to the company showing what amount it claims from each of its members who is an employee of the company and pursuant to this requisition the company would deduct the requisite amount from the wages payable to the employee and remit that amount to the society. As this arrangement has worked over a number of years, say nearly a quarter of a century, it would be reasonable to infer that it was pursuant to a tripartite arrangement accepted by all the three parties.

10. A question was raised as to the legality or validity of such an arrangement even if it was brought about by the willing consent of all the three parties. The contention was that deduction from the wages of an employee would be unauthorized and illegal unless they fall within any of the clauses of the Payment of Wages Act, 1936. It is not in dispute that the Payment of Wages Act applies to the employees of the company. Section 3 of the Act casts a responsibility on every employer to pay the wages in the manner prescribed therein. Under section 4, it is made obligatory upon the employer to fix wage periods and section 5 prescribes the time for payment of wages. Section 7 provides that the wages of an employed person shall be paid to him, without deductions of any kind except those authorised by or under the Act, and sub-section (2) recounts permissible deductions.

11. Sub-section (2) (ii) of section 7 reads as under :

'(ii) deductions made with the written authorisation of -

(i) the employed person; or

(ii) the president or secretary of the registered trade union of which the employed person is a member on such conditions as may be prescribed, for contribution to the National Defence Fund or to any Defence Savings Scheme approved by the State Government.'

12. Sub-section 2(j) reads as under :

'(j) deductions for payments to co-operative societies approved by the State Government or any officer specified by it in this behalf or to a scheme of insurance maintained by the Indian Post Office.'

13. It was attempted to be urged that the deduction was made by the company on the requisition of the society, which requisition was pursuant to an agreement set out in every application for loan and the bye-laws of the society, and, therefore, it can be said with confidence that the deduction would be governed by clause (ii) because it is made with the written authorisation of the employed person. Even if the deduction could be said to have been made with the written authorisation of the employed person it would still not be covered by clause (2) (ii) because the clause by its language is limited go deduction made with the written authorisation of the employed person for a particular purpose, such as contribution to the National Defence Fund or to any Defence Savings Scheme approved by the State Government. Not each and every deduction made with the written authorisation of the employed person would be permissible under clause (ii) because that would throw open the flood gates for unauthorised deduction under the pretext that it was made with the written authorisation of the employed person. Clause (ii) is limited in its application to the deduction made with the written authorisation of the employed person or the president or secretary of the registered union of which the employed person is a member for contribution to the National Defence Fund or to any Defence Savings Scheme approved by the State Government. Such is not the case. Clause (ii) (i) cannot be read divorced from clause (ii) (ii). It must be read as a whole. Any dichotomy introduced between the two sub-clauses by a process of interpretation would render the whole scheme of section 7 infructuous. In order to attract clause (ii) not only the deduction must be with the written authorisation of the employed person or union officers but the deduction must be for the specific and avowed objects set out therein. Hence, clause (ii) could not assist in deciding the point raised herein.

14. Clause (j) applies to a case where deduction is made for payment to co-operative societies approved by the State Government or any officer specified by it in this behalf or to a scheme of insurance made by the Indian Post Office. It was in terms contended that deduction from the wages was made for payment to the society which is a co-operative society. That of course if true. But the argument ran that it is not every deduction for payment to any co-operative society that would become authorised under clause (j) unless the co-operative society for whom deduction is made is one which is approved by the State Government or any office authorised by it in this behalf. No material was placed on record to show that the co-operative society before the court was one approved by the State Government. In fact, the language of clause (j) brings to the forefront a situation which often arises when a State legislation attempts to meet with a requirement of a Central legislation and both are not made in conformity with each other. Clause (j) appears to be the statute book since the enactment of the Payment of Wages Act, 1936. Section 24-A was introduced in the Bombay Co-operative Societies Act, 1925, by section 2 of Amending Act being Bombay Act XXIX of 1942 read with section 2 of the subsequent Amending Act being Bombay Act XXVIII of 1948. Section 24A(1) permitted the employer of a member of a co-operative society to deduct from the salary or wages payable to such an employee much amount as may be specified in the agreement and to pay the amount so deducted to the society is satisfaction of any debt or other demand owing by the member to the society. If, therefore, a conclusion could be reached that the company made deductions from the wages of such of the employees of the company, who were members of the society, pursuant to a requisition served by the society, such deductions would be legal and valid under section 24-A. But before any deduction from the wages of an employed person could be validly made, it must squarely fall within any of the sub clauses of section 7 and the only sub-clause relevant for a situation which is under discussion would be clause (j), and in order to meet with the requirement of clause (j), the employer can make a deduction from the salary or wages of his employees for payment to the co-operative society approved by the State Government and there is nothing to show that the society herein concerned is approved by the State Government. Clause (j) postulates deduction for payment to the co-operative society, which must be a co-operative society approved by the State-Government, while section 24-A permits a deduction to be made pursuant to an agreement executed by a member of the society in favour of the society irrespective of the fact whether such society is a society approved by the State Government or not. When the Amending Act of XXIX of 1942 and Amending Act XXVIII of 1948 were being enacted by the legislature of the erstwhile Bombay State, it has before it the language employed by Parliament or the Central legislature, as the case may be, in clause (j). The State Government did not think it fit to circumscribe or limit the application of the provisions contained in section 24-A to those societies only which may be approved by the State Government, while the Central legislature clearly manifested its intention by providing that deductions for payment to a co-operative society to be valid, under section 7 must be deduction for payment to such co-operative society approved by the State Government. Unless it can be said that the State legislature wanted to enlarge the scope of clause (j) by section 24-A to the extent that all the co-operative societies covered by the Bombay Co-operative Societies Act, 1925, shall be deemed to be co-operative societies approved by the State Government for the purpose of clause (j), it would be difficult to give effect to the provisions contained in clause (j) until the State Government publishes a list of co-operative societies approved for the purpose of clause (j) or a generals all-inclusive notification granting approval to all co-operative societies in this State for they purpose of clause (j). Conflict between clause (j) and section 24-A is more apparent than real and in such a situation, well-known canon of construction would be attracted. Harmonising two provisions without doing violence to the language of the state is quiet well-known. Central enactment, namely, the Payment of Wages Act, postulated that clause (j) would apply only in respect of those co-operative societies which are approved by the State Government; but the State legislature presumably was quite aware of this specific provision while enacting section 24-A and clearly manifested its intention by not employing therein any words of limitation or qualification such as approval of the society by the State Government which would unmistakably indicate that the State legislature wanted to clothe every society with the approval as contemplated by section 7(j) of the Payment of Wages Act. This construction of section 24-A would reconcile the apparent conflict between section 24A of the Co-operative Societies Act and section 7(j) of the Payment of Wages Act, because it was open to the State Government to approve all co-operative societies for the purpose of section 7(j) of the Payment of Wages Act. Instead of the executive Government approving all the co-operative societies in the State by a notification the legislature of the them Bombay State, by introducing section 24-A, gave concrete form and shape to the provisions contained in section 7(j) of the Payment of Wages Act by giving statutory recognition to the requirements of section 7(j) by enacting section 24-A in the Co-operative Societies Act enabling a member of any co-operative society to execute an agreement in favour of the society providing that the society would be in a position to recover dues of the member from the employer of the member by making appropriate deductions from the wages or salary of such member by his employer and that such deduction would be permissible deduction within section 7(j) of the Payment of Wages Act. When the Bombay Co-operative Societies Act, 1925, was repealed by section 169 of the Gujarat Co-operative Societies Act, 1961, which came into force from 1st March, 1962, section 50(1) of the Gujarat Co-operative Societies Act, 1961, in terms re-enacted section 24-A(1) and while enacting section 50(1) in its present form, the State legislature took note of the provisions of the Payment of Wages Act, 1936, by providing sub-section (2) thereto as under :

'(2) On the execution of such agreement, the employer shall, if by a requisition in writing so required by the society and so long as the society does not intimate that the whole of such debt or demand has been paid, make the deduction in accordance with the agreement notwithstanding anything to the contrary contained in the Payment of Wages Act, 1936, and pay the amount so deducted to the society, as if it were a part of the wages payable by him as required under the said Act on the day on which he makes payment. In making such deduction and payment, it shall not be open to the employer to question the validity or otherwise of such debt or demand.'

15. It will be immediately clear that any deduction made by the employer under section 50(1) would be a permissible deduction notwithstanding anything to the contrary contained in the Payment of Wages Act, 1936, and further obligation is cast upon the employer to pay the amount so deducted to the society as if it were a part of the wages payable by him as required under the said Act on the date on which he makes payment. Sub-section (2) thus enacts a fiction for the limited purpose of meeting with the requirement of the provisions of the Payment of Wages Act, 1936, in that not only deduction made by the employer from the wages or salary of his employee who is a member of the co-operative society and who has entered into an agreement with the society, would be permissible deduction but his employer shall be competent to deduct from his salary or wages payable to him such amount as may be specified in the agreement, fiction being that the payment to the society of the amount deducted by the employer in the aforementioned circumstances would be payment made to the employee not directly to him but to the society to whom the employer has to pay that much amount. In other words, fiction would be that the payment to the society of the amount so deducted would be deemed to be payment of the wages made to the workmen. Whatever little conflict that comes to surface while reading section 7(j) of the Payment of Wages Act with section 24-A of the Bombay Co-operative Societies Act vanished into thin air once the Bombay Co-operative societies Act, 1925, is repealed and replaced by the relevant provisions contained in section 50(1) of the Gujarat Co-operative Societies Act. Therefore, viewed from either angle, the deduction from the wages of an employee who is a member of a co-operative society at the instance of the co-operative society for satisfying the debt or demand of the society from the member by the employer of such member pursuant to the requisition made by the society would by wholly covered by the provisions of the Payment of Wages Act and would be legal and valid. Undoubtedly, such deduction must be pursuant to an agreement between the co-operative society and its member and the law does not require that there should be a tripartite agreement between employer, an employee and the co-operative society of which such employee is a member. In fact, an agreement between the society and its member as envisaged by section 50(1) would impose a statutory liability on the employer of such member to make deduction from the wages or salary payable to such person pursuant to a requisition made by the co-operative society of which such employee is a member. Right and obligation of the society and the employer originate in an agreement between a co-operative society and its member but resulted into a statutory liability of the employer of such member of a co-operative society.

16. An extreme argument on the applicability of section 50 may be disposed of here. After referring to sub-section (3) of section 50 it was contended that section 50 can only be invoked at the time of distribution of assets of a society in liquidation. It was urged that sub-section (3) provides for priority in payment of the amount deducted by the employer and not remitted to the society to be treated as wages in arrears. Winding-up provisions in respect of co-operative societies are contained in chapter X. Sub-section (3) postulates an employer who is other than a co-operative society and that employer has to remit the amount deducted from the wages or salary of his employee who is a member of a co-operative society on the requisition of such co-operative society. Such an employer may be a person, association of persons, namely, firm or a company. Sub-section (3) provides that in the event of bankruptcy proceeding or winding-up proceedings against an employer, as the case may be, the amount by way of deduction remaining in the hands of such employer shall be paid in priority in respect of such liability of the employer as wages in arrears. But it must be remembered that sub-section (3) makes the employer who has made deductions personally liable for the amount remaining in his hands and provides for priority in payment for such amount if such employer is declared an insolvent, or if it is a company, it is ordered to be wound up. Argument that because sub-section (3) provides for priority in payment would unmistakably indicate that the legislature did not contemplate that the amount in the hands of such employer would be impressed with the character of trust, otherwise priority becomes redundant, cannot be entertained because, irrespective of the provisions contained in sub-section (3), it will have to be determined what is the character of the amount collected by way of deduction pursuant to a requisition of the co-operative society and remaining in the hands of the employer for having failed to remit it to the society. In determining this question, sub-section (3) cannot come in the way nor can it be said that the whole of section 50 provides the procedure for determining priority in payment to creditors of a co-operative society. In fact unless such extreme case comes up where a member of one co-operative society is an employee of another co-operative society and the employer co-operative society is ordered to be wound up, sub-section (1) of section 50 would not come into play for determining the priority in payment of debts of such co-operative society in liquidation. Sub-section (3) only provides for a contingency where in the case of insolvency of the individual or liquidation of a company priority in payment is accorded to wages for a specified period and an argument may be advanced that once deduction from wages is made the amount so deducted has ceased to be wages and no priority in payment can be claimed. To avoid such a contention it is provided that even after deduction the amount retains the character of wages till it is paid over to the society.

17. It was incidentally contended that section 50 cannot come into play in respect of any demand made by a society from the employer of its member unless the demand is adjudicated upon. It was urged that a combined regarding of sections 50(1) and 50(2) would indicate that the society cannot issue requisition in respect of any debt or demand due to it from its member from the employer of such a member unless and until the debt or demand is adjudicated upon; and in the present case, the requisition submitted by the society to the company pursuant to which deductions were made were not in respect of a debt or demand which was adjudicated upon. Reliance was placed on Majoor Sahkari Bank Ltd. v. Jasmat Gopal and Dabhoi Municipality v. V. R. Nayak. There is absolutely no merit in this contention because the question of adjudication of a debt or demand may only arise in case where the debt or demand is not admitted, or to be specific, where it is disputed. In both the aforementioned cases where the employer attempted to deduct certain amount from the wages or salary of its employees who were members of the society on the requisition of the society, the employees disputed the demand contained in the requisition submitted by the society and it is in this context is was held that a mere requisition by the society for the purpose of deduction from the wages or salary of its member by the employer of such member is not sufficient because there must at the time of the requisition, be an outstanding debt or demand and payments are to be made only in satisfaction of such outstanding debt or demand; and once that is disputed, section 24-A of the 1925 Act or section 50 of the 1962 Act cannot be invoked, unless the dispute in respect of the debt or demand is adjudicated upon. It is undoubtedly true that where a debt or demand is disputed, liability to pay and recovery in respect of it could never be pursued until the dispute is decided by a process of adjudication. But where debt or demand itself is admitted, there can never arise a question of adjudication of an admitted liability. In the present case there is no dispute between the parties that the requisition sent in by the society to the employer was in respect of a debt or demand from its members and members never disputed their liability to pay that amount and still do not dispute that deductions were rightly made. There is no dispute between the company, the society and the employees both about the right to deduct, the actual deduction and the liability to remit the amount so deducted. The ratio of the aforementioned two decisions, therefore, would not come in the way of the court deciding the principal question as to what is the character of the amount deducted by the company and remained with it at the time of winding-up.

18. It is at this stage necessary to examine one contention, namely, that it may be that the society may have invested its surplus funds with the company and the company was not under any disability to receive such deposits and pay interest thereon. Proceedings from this basic formulation, it was contended that if over a period it is found that the society was deposition its surplus funds by not insisting on prompt remittance of the amount deducted by the employer from the wages and salaries of the employees who were members of the co-operative society and that amount was so allowed to remain with the employer to be demanded as and when necessary, the amount would have the characteristic of a deposit in the hands of the employer and the relationship between the society and the company would be that of creditor and debtor and, in that event, the society will have to prove its claim as a creditor before the liquidator in winding-up proceedings. Before this argument can be disposed of on its own merits, it would be necessary to examine the books of account of the society as well as of the company to find out whether at any time in the past from 1942 to 1966, when the company went on making deductions from the wages and salaries of its employees who were members of the society on the requisition of the society at any time there was any entry in the books of account indicating that the society kept its surplus fund in deposit with the company and that the company ever paid interest to the society. Payment of interest is not necessarily decisive of relationship though it would ordinarily indicate relationship of creditor and debtor. After examining the books of accounts of the company, which were brought in the court by the liquidator, no one could point out that the company ever paid any interest to the society on the amount which it could not remit to the society. In fact over a long period it transpired that by and large the company went on remitting the amount as and when deducted to the society and deductions were made according to the requisition given by the society. The company has paid off all amounts which it deducted up to the period 30th June 1966. Not a paisa was outstanding in respect of the deductions made till 30th June, 1966. Not a paisa was outstanding in respect of the deductions made till 30th June, 1966. It may be recalled that the company closed down its business some where on 9th October, 1966. Therefore, the amount now claimed by the society was in respect of the deductions made between July, 1966, and October, 1966, and it is quite well-known that the company was in straitened financial circumstances during this period. But another aspect which shed light on the whole question transpiring from the books is that during no time spread over two and a half decades the company ever paid any interest on the outstanding amount to the society. Now, if the company was thus only a collecting agent and went on remitting the amount which it collected for and on behalf of the society to the society, it can never be held that the society used to deposit its surplus funds with the company and the relationship was that of a creditor and debtor. It is at this stage necessary to point out that the co-operative society governed by the provisions of the Co-operative Societies Act has certain statutory limitations on the investments of its surplus funds. It is not necessary to examine the relevant provisions under the Baroda Sahakari Societiona Nibandh, but section 37 of the Bombay Co-operative Societies Act provides for investment of funds. A bare perusal of it would show that the co-operative society governed by the provisions of the Bombay Co-operative Societies Act, 1925, is not entitled to deposit or invest its surplus fund with the company. Similar is the provision contained in section 71 of the Gujarat Co-operative Societies Act. Undoubtedly, there is an addition of sub-clause (g) which provides that the society may invest its funds in any other mode permitted by the rules, or by general or special order of the Stage Government; but It was informed that there are no such rules, nor are there any general or special orders which would enable the society to deposit its surplus funds with the company. Therefore, both on the factual appraisal of the situation as well as on the statutory provisions a firm conclusion could be reached that the amount which remained in the hands of the company was not by way of any deposit made by the society of its surplus funds nor was it investment of any amount that remained to be remitted to the society. The amount remained with the company, because the company after making deductions failed immediately to remit the whole amount. It is in these circumstances that the amount now claimed remained in the hands of the company at the time of its winding-up.

19. On the date of winding-up the company had with it Rs. 87,166.86 being the amount collected by it by way of deductions from wages and salary payable by the company to its employees pursuant to a requisition received from the society. Analysing the position as it emerges from the facts which are not in dispute, on every pay day the employee of the company had earned his wages. He became legally entitled to the wages earned by him. But the employee was a member of the society and pursuant to the provisions of the bye-laws governing the relations between the society and its members which would constitute contract between the society and its members (vide Co-operative Central Bank Ltd. v. Additional Industrial Tribunal, as also the agreement between such employee in his capacity as member of the society and the society, certain amount was payable by each such employee to the society and the society in turn sent in its requisition to deduct certain amount from the wages and salary payable to each such employee and on making deduction the amount came into the hands of the company. In other words, it would mean that those employees of the company who were members of the society received their full pay-packet and handed over a part of the wages to the company to pay the same on their behalf to the society and the company undertook to do that work. The company, accordingly, would acquire the character of an agent of the society to effect recovery on behalf of the society and pay the amount to the society. If the amount thus came into the hands of the company, it would be crystal clear that the company would have no legal title to the money so collected by it nor any beneficial interest therein. The company would merely be a custodian with an obligation to hand it over to the society. The amount would retain the character of wages already earned and merely because the company deducted the amount as it was permissible, it did not change the character qua the company. But in view of the tripartite arrangement and statutory liability of the company as employer to remit the amount to the society, the society had legal title to the amount so deducted. The society would thus acquire the character of a principal. In purely legal parlance the moment deduction was made by the company from the wages and salary for the sole purpose of remittance of the amount to the society, the society would be the principal and the company would be the agent. 'Agent' is defined in section 182 of the Indian Contract Act to mean a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done or is so represented is called the 'principal'. Section 218 defines 'agent's duty' in respect of sums received by him for and on behalf of the principal. It provides that subject to such deductions, the agent is bound to pay to his principal all sums received on his account. Viewed from this angle, the company held the money as mere custodian, without any title to it, for and on behalf of the society and if that be so, the company was bound to hand over the amount collected by it by way of deductions from wages and salary of its employees to the society as and when collected or within reasonable time thereafter. But even if the amount remained with the company who would be an agent of the society, the amount would not be the property of the company and the company would be bound to hand over the amount to the society before any distribution of the assets of the company could be made.

20. It was, however, contended that the amount in question in the hands of the company would be impressed with trust and if the company is a sort of a trustee or a quasi-trustee in respect of the amount held by it, the liquidator would be bound to pay it over to the beneficiary before the liquidator could undertake distribution of the assets of the company. Thus runs the argument. Once the wages became due and payable and were actually paid, the amount in the hands of the employees was of their ownership as earned by them. They paid back a part of the amount by way of deductions which they were bound to pay to the society in satisfaction of their debt or demand. They could have as well carried the pay packet to the society's office and paid over the amount claimed by the society. Instead, they permitted the company to deduct the amount with specific implied instruction that the same shall be handed over to the society. The resultant situation was a trust in respect of the amount retained by the company, in the sense that the employees had legal ownership in the amount, the company had legal custody of the amount, as the amount was formed by deductions from the wages and salary payable to the employees and the beneficial ownership of the amount on the deduction being made for the specific purpose of payment to the society was acquired by the society for and on whose behalf deductions were made. In the absence of a specific trust by a trust deed the situation boils down to a resultant trust in the hands of the company and the amount in the hands of the company would acquire the character of a quasi-trust. If a man holds property not on his own account but on account of someone else, retention being initially legal or even occasionally through an illegal transaction, he would be in the nature of a trustee accountable to the person for and on whose behalf the property is held. The person retaining the property in these circumstances has a fiduciary duty to the person for and on whose behalf the property is held account for the same and such person would not be allowed to retain the property or refuse to account for moneys received even if it be on the ground that the property or money have come into his hands as proceeds of illegal transaction (See Sita Ram v. Radha Bai. In the absence of an indenture of trust, the court will have to consider the facts and circumstances of each case whether the person in whose hands the property was found is a quasi-trustee or not. Proceedings from this angle, there is a consistent line of cases in which it is held that where the property or money is given to a person for a specific purpose and if the purpose fails, the property or money in the hands of the person would acquire the character of quasi-trust. In Quistclose Investments Ltd. v. Rolls Razor Ltd. (In liquidation) Sachs L.J. observed :

'There is a consistent line of cases over the last 140 years according to which money advanced by A to B for a definite purpose can be impressed with a trust.'

21. In this connection, three cases may be worthy of note. In Toovey v. Milne the debtor was put in prison which gave rise to an act of bankruptcy. The bankrupt's brother-in-law gave Pounds 120 to the bankrupt for settling the creditors. However, it could not be achieved and the bankrupt returned Pounds 95 to the brother-in-law. The assignee, in insolvency, claimed back this Pounds 95 from the brother-in-law on the ground that it formed part of Pounds 120 money lent to the bankrupt. The claim was rejected holding that Pounds 95 did not form part of the assets of the bankrupt and while rejecting, Abbot C.J. held that this money was advanced for a special purpose, and that being so, clothed with a specific trust and no property in it passed to the assignee of the bankrupt and that when the purpose failed, there was an implied stipulation that the money shall be repaid. Edwards v. Glyn in terms followed the principle. Further illustrative case may be noted. In In re Rogers the debtor committed an act of bankruptcy and thereafter the solicitors advanced a loan to the bankrupt by way of payment to the pressing creditors. Ultimately, the debtor was adjudged a bankrupt and the assignee claimed the moneys paid to the creditors by the debtor's solicitors as moneys lent to the debtor and the latter paying the creditor and forming part of the bankrupt's assets. Negativing the claim Lindley L.J. observed that the moneys paid by the solicitors to the pressing creditors of the bankrupt was never of the bankrupt in any proper sense to as to vest in his trustee as part of his general assets. But the concurring judgment of Bowen L.J. makes the position distinctly clear wherein it is observed :

'I think the true inference is that the money came to the bankrupt's hands impressed with a trust, and until it was paid over it remained impressed with that trust. It did not become the property of the bankrupt divisible amongst his creditors.'

22. Even where there is no specific trust but the person having possession of property has not the whole beneficial interest therein, he must hold the property for the benefit of the persons having such interest or the residue thereof (as the case may be) to the extent necessary to satisfy their just demands for then we have constructive trust (see Ambalal v. Bai Rewa). Distinction has to be made between loan and money held in trust. Where money is paid merely on condition of repayment and payment of interest till then, there is only a loan; but where the main condition on which the money is paid shows that the corpus of the fund is being handed over in confidence to be half for the benefit of some person or object, the provision for payment of interest is only a provision for an increase of improvement of the fund and there is no loan but a trust, despite such provision which does not in any way negative a trust. (See Ganesh Export & Import Co. v. Mahadeolal Nathmal). The Madras High Court after an exhaustive discussion of all the Indian and English cases bearing on the subject in Official Liquidator v. N. Chandranarayanan held that where money was paid for a specific purpose and the purpose failed money had to be returned as being impressed with the character of trust. In the case before the Madras High Court, Manasuba & Co. (Pvt.) Ltd., the company in liquidation, obtained from Chandranarayanan a sum of Rs. 40,000 under an agreement to enable it to deposit the sum with a paper mill for being appointed as one of its stockists. The agreement showed that this amount was not to be used by the company for any other purpose and the same was to be returned to him on termination of the agency. The company deposited only Rs. 30,000 with the mills. Subsequently, the company went into liquidation and thereafter the official liquidator obtained the return of the amount of Rs. 30,000 from the paper mill. Application for preferential payment of the sum of Rs. 30,000 was upheld by the court observing that the agreement between the company and Chandranarayanan clearly created a trust and hence Chandranarayanan was entitled to preferential payment of the amount. Reference at this stage may be made to Seth Jessa Ram Fatehchand v. Om Narain Tankha. A few facts may be stated to fully gauge the ratio of the judgment. The appellant before the court entered into an agreement in December, 1948 with Vijay Laxmi Sugar Mills Ltd. and was appointed a sole selling agent of the mills. According to the terms of the agreement, the appellant deposited a sum of Rs. 50,000 as security deposit for due performance of the contract and this amount was to carry interest at the rate of 6 per cent. per annum to be paid by the mills. In November, 1949, an order was passed winding up the mills and this happened before the period of agency came to an end. Consequent on the winding up of the mills, the appellant made application in September, 1950, by which it prayed for refund of security deposit along with interest. It was also prayed that the mills held deposit as trust and in consequence the appellant was entitled to priority with respect to the amount of Rs. 50,000. After referring to the English and American decisions relevant to the topic, it was observed as under :

'A consideration of these English and American cases also, in our opinion, shows that the first question in each case where the court is dealing with a security deposit is to ask whether, on the agreement in writing, if any, and on the facts and circumstances of the case and conduct of the parties, it can be said that the security deposit was impressed with some kind of a trust. If that can be said then the question whether interest was provided for and whether the trustee could mix the deposit money with his own money would not be of importance and would not take away the character of the deposit being impressed with a trust. The mere fact that money was deposited as security is not sufficient to come to the conclusion that it must be treated as trust money. The court will have to look to all the terms of the agreement if in writing and to the facts and circumstances of the case and to the conduct of the parties before coming to the conclusion whether a security deposit was impressed with a trust. If a trust can clearly be spelled out from the terms of the agreement that ends the matter. But if the trust cannot be spelled out clearly, the fact that there was no segregation provided for and the fact that interest was to be paid would go a long way to show that the deposit was not impressed with the character of a trust particularly where the person with whom the deposit was made could mix it with his own money and could use it for himself. In such a case the inference would be that the relationship between the parties was that of a debtor and creditor. Further, besides these circumstances, if there is any other terms which suggests one kind of relationship rather than the other, that will also have to be taken into account.'

23. The test would, therefore, be : whether, on the facts and circumstances of the case and conduct of the parties, it could be said that the amount in the hands of the company was impressed with some kind of a trust.

24. If, as stated earlier, the company had neither legal nor the beneficial ownership in the property and it was merely a custodian till it remitted the amount to the society, and could not mix the amount with its own funds and had no liability to pay interest, undoubtedly, the amount in the hands of the company was impressed with a trust. No other conclusion in the facts and circumstances of this case is even possible.

25. If the amount in the hands of a company is impressed with trust, undoubtedly, it did not form part of the assets of the company, and the liquidator has to pay it out over any other claim before he undertakes distribution of the assets of the company. Where property in the hands of the company is impressed with a trust, it is unquestionable that it can be followed and recovered from the liquidator. Palmer's Company Law, 21st edition, at page 775, has the following observation :

'Property which can be identified as belonging to or held by a company in trust, for other persons, may be followed and recovered from the liquidator.'

26. Applying the principles to which reference has been made in this judgment, it is crystal clear that the amount, in the hands of the company, which came to it by way of deductions from the wages and salary payable to its employees, on the requisition of the society, of which the employees were the members, for satisfying the demand or debt which they owed to the society, was impressed with the character of a trust in the hands of the company, and the same can be recovered by the society from the liquidator before the liquidator proceeds to distribute the assets of the company. It must be paid over in full before any distribution of the assets of the company takes place.

27. The question posed by the liquidator may be reframed as under :

'Whether the amount standing to the credit of the Baroda Spinning and Weaving Mills (Rajrathna Sheth Jhaverchand Laxmichand) Co-operative Credit Society Ltd. in the books of account of the Baroda Spinning and Weaving Company Ltd. (in liquidation) is impressed with the character of a trust and hence it does not form part of the assets of the company and that the liquidator is bound to pay the same in priority before any distribution of the assets of the company is made by him.'

28. The question so reframed is answered in the affirmative. The alternative question posed by the liquidator does not arise and even if it does arise, it is answered in the negative. Order accordingly. Parties to bear their respective costs.


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