1. This appeal is preferred by the official liquidator representing Manasuba & Co. (P.) Ltd. in liquidation, against the order of the learned judge, Veeraswami J. (as he then was), upholding the claim ofN. Chandranarayanan (the applicant before the learned judge) to preferential payment of a sum of Rs. 30,000 in the hands of the official liquidator.
2. The brief facts of the case are:
Manasuba and Co. (P.) Ltd. which was carrying on business as engineers, contractors, etc. (hereinafter referred to as 'the company') applied, on December 5, 1960, to the Mandya National Paper Mills Ltd. (hereinafter referred to as 'the mills') through South India Corporation Agencies (P.) Ltd. for Manasuba Company being appointed one of the stockists for distribution of paper in the city of Madras for a total quantity of 250 tons per annum. The mills appeared to have accepted this proposal on February 13, 1961, subject to certain important terms and conditions which have been embodied in writing. The important conditions, viz., conditions 4, 4-A, 5 and 6, are extracted hereunder;
'4. Stockists shall pay us a sum of Rs. 35,000 as minimum deposit or such deposit commensurate with the quantity of paper to be supplied at the rate of Rs. 350 per ton.
4-A. Of this amount, 50% shall be paid immediately at the time of appointment, and the balance at such time as we may call for it.
5. The amount of deposit will carry interest at the rate of 4 1/4% per annum. We agree to refund the deposit amount of the stockists in the event of the stockistship being cancelled, and upon settlement of all accounts.
6. We will endeavour to allot to the stockists a quota of 250 tons of paper and paper products per annum. The quality and description of each class or classes of paper and paper products within the said quota shall be in accordance with the manufacturing programme of the manufacturers, Messrs. Mandya National Paper Mills Ltd.'
3. It is common ground that with a view to ensure the quota of supply of 250 tons, the company would have to deposit with the mills a sum of Rs. 87,500 and, in order to find a substantial portion of the money to make up the deposit, the company approached one Chandranarayanan, son of Narasimhan (the applicant), who agreed to give a sum of Rs. 40,000 to the company on the basis of a financing agreement entered into between theparties on December 12, 1960, on the following terms :
We (the company) have taken up the agency for Madras City for 250 tons of quality paper from Mandya National Paper Mills Ltd. through the South India Corporation Agencies Private Ltd., No. 6, Armenian Street, Madras-1, and this 250 tons shall be supplied from October, 1961, every year as long as we are the stockists for the Madras City.
We are to deposit a sum of Rs. 87,500 and we would offer you a share of financing to the extent of Rs. 40,000 for which we give the following benefits:--
'1. Interest at 6% which will work out to a sum of Rs. 200 per month shall be paid to you every month till the production starts and we start getting supplied of our quota which is not later than 1st January, 1962.
2. From 1st January, 1962, or from the date of commencement of supply of paper from Mandya National Paper Mills Ltd., whichever is earlier, we shall pay you a fixed sum of Rs. 1,000 per month as long as we have the agency from Mandya National Paper Mills Ltd., through Messrs. South India Corporation Agencies Private Ltd., Madras-1.
3. We shall return the full amount paid by you when the agency ceases or with a notice of three months from your side.
4. The return of the sum of Rs. 40,000 given by you shall be assured by Messrs. South India Corporation Agencies Private Ltd. if the agency ceases.
5. Any other alterations of this agreement shall occur only on mutual consent......''
4. The agreement was signed by the parties on December 14, 1960, and on the same day a sum of Rs. 22,500 was paid by the applicant. Another sum of Rs. 6,000 was paid to the company on December 30, 1960, and the balance of Rs. 11,500 was paid on January 16, 1961, thus making in all a sum of Rs. 40,000. This agreement was entered into in the form of a letter addressed by the company to the applicant. From this agreement entered into between the company and the applicant, it will be seen that the allotment of quota of paper to the company was expected from 1st January, 1962, and that up to that time the applicant was to be paid a sum of Rs. 200 by way of interest at 6 per cent. for Rs. 40,000 and thereafter, when the supply of paper by the mills to the company commenced, a lump sum payment at the rate of Rs. 1,000 per month. The agreement also shows that the sum of Rs. 40,000 was not to be used by the company for any other purpose, that the entirety of the sum must be paid to the mills through South India Corporation Agencies Private Ltd. and the company would also get an assurance from the mills that the return of the sum of Rs. 40,000 to the applicant shall be assured by South India Corporation Agencies Private Ltd., when the agency ceased. On February 13, 1961, the company was appointed as stockists for the city of Madras by South India Corporation Agencies Private Ltd. and a sum of Rs. 30,000 alone was paid by the company to the mills as security deposit. The entire sum of Rs. 40,000 paid by the applicant was not paid to the mills. In Company Petition No. 21 of 1961, Manasuba and Co. was wound up on August 11, 1961. Some time thereafter, the liquidator obtained a return of the sum of Rs. 30,000 deposited with the mills by the company. The applicant filed Company Application No. 351 of 1962 for a direction that theliquidator should pay the sum of Rs. 40,000 deposited with the company (treating the said sum of Rs. 40,000 as preferential claim) and later on, the claim was restricted to a sum of Rs. 30,000 which was deposited by the company with the mills and later returned by the mills to the liquidator. This claim was upheld by the learned judge, and the official liquidator has preferred this appeal.
5. Section 529 of the Companies Act, amongst other things, provides that in the winding-up of an insolvent company, the same rules shall prevail and be observed with regard to 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 assets of persons adjudged insolvent. (Section 529, Sub-section (1), Clause (c)). It is not in dispute that while exercising jurisdiction under Section 529 of the Companies Act, the company court would observe the well-established rules which regulate the affairs in insolvency proceedings, and the tests which would apply for deciding whether a particular asset has vested in the official assignee for distribution among the general body of creditors would equally apply for determining whether the assets would vest in the official liquidator for distribution and payment of dividend pro rata without any claim for preferential payment. Normally, in the winding-up of an insolvent company, just as in insolvency, a secured creditor will be out of the scope of liquidation and he will be entitled to enforce the security and realise the same to obtain full satisfaction of the secured debt and it is only the surplus which will go into the hands of the official liquidator. It is settled law that where a fiduciary relationship is established between the company and a third party and moneys are paid by the third party to the company in a situation in which the company occupies a fiduciary relationship, with an obligation to either use the money for a specified purpose or to retain and keep it with the company to meet certain contingencies, the said sum would be impressed with a fiduciary character and would not form part of the general assets of the company. Property thus held by an insolvent company in a fiduciary capacity, burdened with certain fiduciary- obligations, is treated as property held in trust, for the purposes of insolvency laws and property held for a specific purpose. Such property or money held for a specific purpose is by law treated as clothed with a species of trust governed by the same principles and rules which apply to property held in express trust. Section 529 of the Companies Act of 1956, which has taken the place of Section 229 of the old Act of 1913, corresponds to Section 317 of the English Act. In the matter of preferential payments and claims for priority resting upon a fiduciary relationship, the Companies Act merely provides that the provisions of the bankruptcy law would be observed. Section 52(1)(a) of the Presidency Towns Insolvency Act(corresponding to Section 38(1)(a) of the English Bankruptcy Act of 1914)provides as follows :
(1) The property of the insolvent divisible amongst his creditors, and in this Act referred to as the property of the insolvent, shall not comprise the following particulars, namely :--
(a) property held by the insolvent on trust for any other person ......' (Other portion omitted as not relevant). In Williams on Bankruptcy, latest 18th edition, the learned authorhas broadly classified, at page 289, under the following three heads, whenproperty could be deemed to be held by the bankrupt in trust:
'(a) express trusts and trusts virtute officii ;
(b) trusts created by the bankrupt over what was his own absolute property ; and
(c) trusts of agency in the subject-matter of which the bankrupt had not the general, but only a special, property. '
6. Cases in England and in India have taken the uniform view that property deposited with the bankrupt for a specific purpose would come under the category of trust property and would not vest in the official assignee as bankrupt's property either because there is a specific trust with regard to the same or the property was entrusted to the bankrupt, the latter being clothed with a fiduciary obligation with regard to the property. A survey of the cases also shows that in order that the property may be exempted from vesting under the aforesaid provision, it is not necessary that an express trust should have been constituted and that it is sufficient if the entrustment involves obligations on the bankrupt in the nature of a quasi or constructive trust. Learned counsel on both sides invited our attention to relevant decisions in England and in India, in which the question came up for consideration in bankruptcy law and in liquidation proceedings of companies, in the context of the question whether an entrustment of property or money with a person would amount to a trust or merely create the relationship of creditor and debtor. A survey of the case law shows that courts had attached great significance or conclusive importance to the following aspects, when the money is entrusted to the company: (i) whether the company had a right to embark and utilise the money in its business activities without any restriction or whether the terms of the entrustment stipulate for a segregation compelling the company to earmark or set apart the fund for a specific purpose ; (ii) whether there is a stipulation on the part of the company to pay interest or give some return for the investment; (iii) whether there is a clear negative obligation on the part of the company not only not to mix up or absorb the fund with the general assets of the company, but to use it for certain specific purposes, coupled with an obligationto return the same in certain contingencies ; (iv) whether the person who had deposited the fund has an unconditional right to withdraw the amount at his option, etc., etc. There was a divergence of opinion between the decisions of the High Courts of Bombay, Allahabad and Lahore on the one side and the High Courts of Madras and Calcutta on the other. They are all cases of moneys deposits d in pursuance of sole selling agencies or by employees as security deposits or contributions of provident fund or moneys deposited by distributors of films with the producer for the exhibition of pictures. It may not be necessary to examine in great detail these decisions in view of the recent decision of the Supreme Court in Seth Jessa Ram Fatehchand v. Om Narain : 2SCR429 and the latest decision, in England, of the House of Lords in Barclays Bank v. Quistclose Investments Ltd.,  3 W.L.R. 1097 ;  3 All E.R. 651 ;  39 Comp. Cas. 105 affirming the decision of the Court of Appeal in Quistclose Investments Ltd. v. Rolls Razor Ltd. (In Liquidation),  2 W.L.R. 478 ;  1 All E R. 613 ;  38 Comp. Cas. 810 (C.A.)Both the aforesaid decisions have examined the relevant case law and enunciated certain basic rules and principles which are to be applied in determining the question whether the property should be exempted from vesting in the official assignee or in the official liquidator as property held on trust for a specific purpose, or property held, clothed with a fiduciary obligation even as a quasi or constructive trustee. Mr. V.K. Thiruvenkatachari, learned counsel, submitted that the agreement entered into between the applicant and the company is a simple business agreement, purely in the realm of ordinary contracts, actuated by a profit motive and in a spirit of speculation having regard to the very attractive terms of the return. He urged that there is no provision for any segregation of this amount, but on the other hand, there is provision to the contrary effect, which entitled the mills to adjust and appropriate the amount deposited with the mills in respect of any claim which the mills may have against the company by way of arrears of amounts due from the company, or amounts by way of misappropriation or any defalcation on the part of the company or any damage sustained by the mills on account of any wrongful conduct of the company while functioning as the selling agents in the matter of sale and distribution of the paper allotted. Learned counsel urged that this provision itself is a negation of any segregation and that, coupled with the provision for payment of interest and profits at a highly speculative rate of Rs. 1,000 per mensem on a capital of Rs. 40,000, the arrangement has to be held merely an ordinary contract; there is nothing to take the case out of the general rule. He also relied upon the fact that though the applicant stipulated that privity should be established between the applicant and the mills in the form of securing an assurance from the mills with regard to the return of the deposit, the mills never agreed to such a course, with the result that the transaction has to be reviewed as a simple business transaction entered into by the applicant purely actuated by a profit motive and there is not the slightest basis for importing any notion of a trust, either express or a quasi or constructive trust. He placed considerable reliance on the decision of the Supreme Court in Seth Jessa Ram Fatehchand v. Om Narain : 2SCR429 as completely supporting his contention. Mr. M.S. Venkatarama Iyer, learned counsel for the applicant, contended that the terms of the agreement and the surrounding circumstances and the conduct of the parties clearly show that the entrustment of the money of Rs. 40,000 by the applicant with the company was for a specific purpose, specifically earmarked as to be deposited with the mills, on the distinct understanding that the sum of Rs. 40,000 furnished by the applicant should be simply passed on to the mills and that the company should have no kind of dominion or control over that fund, had no authority to use the fund for any other purpose and that there was also an express obligation on the part of the company to return the security deposit when returned or refunded by the mills. The prohibition against the company exercising any dominion or authority over the fund continued throughout and the trust character of the entrustment is emphasized in the stipulation that when the mills returned or refunded the money, the company should simply pass it on to the applicant, the company having no power whatever to deal with the fund in any other manner. Learned counsel, Mr. Venkatarama Iyer, also urged that, on the facts of the particular case, the law of trusts came into operation in a two-fold character with regard to the fund : (i) the very entrustment itself clearly created a trust for a specific purpose so as to impress upon the money a trust, express or constructive, in favour of the applicant; (ii) the very agreement between the company and the mills (which is the foundation for the applicant to advance the sum of Rs. 40,000) was not implemented, the company did not make the deposit of Rs. 87,500 as stipulated by the mills, that the agency agreement never took effect as there was no supply of paper and the company went into liquidation before any steps were taken to implement or work out the agreement, and that as the very purpose for which the money was paid, totally failed, a secondary trust for the benefit of the applicant came into being. Learned counsel also urged that it is a familiar conception of law that, in the particular circumstances of a case, an entrustment of money may combine the concept of a loan and a trust enforceable in equity and that legal and equitable rights and remedies can co-exist in one transaction so as to uphold the claim of priority or the preferential claim put forward by the applicant. Learned counsel urged that thisprinciple in no way runs contrary to the principle enunciated in the decision of the Supreme Court. Mr. Venkatarama Iyer placed considerable reliance upon the decision of the House of Lords in Barclays Bank v. Quistclose Investments Ltd.,  3 W.L.R. 1097 :  3 All E.R. 651 ;  39 Comp. Cas. 105 (H.L.) as fully supporting his contention.
7. Before examining other cases, it is necessary to determine the guidelinesand the principles enunciated in the decision of the Supreme Court. Beforedoing so, we may dispose of a point on which a controversy was raised.The contention of learned counsel for the appellant is that the agreementbetween the company and the mills had taken effect and that it is notnecessary for the company to have deposited Rs. 87,500 and that it issufficient if a deposit of Rs. 35,000 was made to the mills at the rateof Rs. 350 per ton for hundred tons, and that, as and when the companyrequired more supplies, it can make further deposits at the rate ofRs. 350 per ton. Learned counsel for the appellant referred us to the termsand conditions imposed by the mills for the stockists, in particular to theprovisions in which the particular clause specifies that, while the mills willmake every effort to supply to stockists their annual quota, the millswould not incur any legal liability if the supply is deficient and that, whensuch a unilateral power is reserved with the mills, it is meaningless toexpect the stockist to deposit the entire sum of Rs. 87,500. In substance,the contention is that the sum of Rs. 30,000 deposited is sufficient compliancewith the agreement and the agreement has taken effect between thecompany and the mills and there is no question of the failure of the purposeof the agreement. We are not impressed with this argument. The replywhich South India Corporation Agencies Private Ltd. (representing themills) wrote to the company on 6th July, 1961, clearly proceeds on thefooting that the company is bound to deposit the entire sum of Rs. 87,500for 250 tons of paper and paper products at the rate of Rs. 350 per ton andthat the mills have treated the company as in default inasmuch as only asum of Rs. 30,000 had been deposited. In the report submitted by theofficial liquidator, the stand has been taken that the contract is that thecompany should deposit Rs. 87,500 representing deposit at the rate ofRs. 350 per ton for 250 tons. Even before the learned judge, both sidesaccepted the position that 'it was common ground' that the company hadto furnish a sum of Rs. 87,500 as deposit, that only Rs. 30,000 had beendeposited with the mills and chat there is also the 'further commonground' that the agency did not take any effect. In view of this, it has tobe held that on account of the default on the part of the company todeposit the entire sum and for other reasons, i.e., supervening liquidationproceedings, the agreement became a dead letter and never took effect. Thatapart, even before the mills went into production and before the supply ofpaper commenced, the company went into liquidation and a business agreement of this description involving so many obligations, financial and otherwise, would not vest in the liquidator. In other words, the liquidation itself has rendered the agreement completely inoperative and useless. Thus, factually and legally, the agreement between the company and the mills never took effect. The fact that interest of Rs. 200 per mensem was paid for some months does not alter the situation. Mr. Venkatarama Iyer is, therefore, right in his submission that the very agreement in pursuance of which moneys were entrusted by the applicant with the company totally failed and never took effect. We may also add that, in the ultimate decision of the question, it does not make any difference whether the agreement even from its inception never took effect or the agreement came into operation some time, and later on became inoperative and came to an end, because the question still remains as to the character in which the liquidator obtained a refund from the mills and the right in which the liquidator held or retained the money. If a trust had already been created in respect of Rs. 30,000 the moment the money was entrusted to the company, the trust character would throughout continue and when the refund is obtained the same cannot form the general assets of the company but should be handed over to the applicant, the real beneficiary of the fund. In the decision in Seth Jessa Ram Fatehchand v. Om Narain : 2SCR429 a firm entered into a sales and commission agency agreement with Lakshmi Sugar Mills in Dehra Dun for appointment as sole selling agents. According to the terms of the agreement, the applicant had to deposit a sum of Rs. 50,000 as security for the due performance of the contract and the said sum was to be retained by the mills carrying interest at 6 per cent. per annum to be paid by the mills, and the selling agent was also entitled to certain commission. The agreement further provided that, on the termination of the agreement, the mills shall refund the sum of Rs. 50,000 with interest and if the same is not refunded, the firm (the sole selling agent) shall be entitled to the commission at the rate specified in the agreement as if the agreement had been terminated. Within a period of one year of this agreement the mills went into liquidation and the other party (the sole selling agent) put forward a claim of priority for the return of the fund as a preferential claim. The Supreme Court, after referring to the divergent views of the Bombay, Allahabad and Lahore High Courts on the one side, and the Madras and Calcutta High Courts on the other, observed that this divergence of opinion was more apparent than real, that the decision in each of the cases actually turned upon the particular facts of the case and the terms of the agreement involved therein. After having observed thus, the Supreme Court enunciated certain principles inparagraphs 13 and 14 of the judgment. The principles which emerge from the decision of the Supreme Court are :
(i) The question whether a deposit in a particular case can be said to be impressed with a trust will have to be decided on the basis of the terms of the agreement and the facts and circumstances of each case without any leaning one way or the other on the fact that the money was given as security deposit.
(ii) If the terms of the agreement clearly indicate that the deposit was in the nature of a trust, the court will give effect to the trust in spite of the fact that interest is provided for in the agreement, or there is no provision for segregation and the recipient of the money is empowered or authorised to utilise the same in his business. In other words, if the terms of the agreement, if in writing, clearly indicate that the deposit was in the nature of a trust, the trust will have to be given effect to regardless of the question that there is a provision for the payment of interest on the deposit and the other party is also at liberty to utilise the money as it likes and is not bound to keep it earmarked or set apart, because a trustee can, if the deed of trust provides, use the property as he likes and mingle the trust fund with the trustee's own moneys,
(iii) If the agreement does not clearly indicate a trust, the provision for the payment of interest and the absence of any provision compelling the trustee to segregate and earmark the fund separately would tend to the inference that no trust was created.
(iv) Any other provision in the agreement and any other circumstancesas to the manner in which the deposit is dealt with should also be takeninto account in coming to the conclusion whether the security deposit wasimpressed with a trust or not. The position was summed up in. theseterms : '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 a 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 term which suggests one kind of relationship rather than the other, that will also have to be taken into account.'
8. On the terms of the agreement and the broad facts of that case, the Supreme Court held that no trust was created. The relevant portions of the agreement have been set out in the decision and the written terms do not clearly create a trust. Therefore, the provision for payment of interest and the absence of an obligation or segregation or earmarking are circumstances which tended to the inference that no trust was created in that case. One important provision to which the Supreme Court appears to have attached great significance was that the agreement provided that if the sum of Rs. 50,000 was not refunded on the termination, the agent would be entitled to the sum of Rs. 50,000 as well as commission as provided in the agreement up to the date of payment. This stipulation, according to the Supreme Court, negatived any conception of a trust because the return of Rs. 50,000 along with the commission are dealt with on a par and if, with regard to the payment of commission, there was no obligation of a trust, there could be no such obligation either with regard to the refund of the sum of Rs. 50,000. The crux of the matter, therefore, is to ascertain whether a clear trust has been created under the terms of the agreement between the applicant and the company and whether the other circumstances in the case and the conduct of the parties support the inference that a trust has been created.
9. The agreement between the applicant and the company in this case, in our opinion, clearly creates a trust. The sum of Rs. 40,000 is entrusted to the company for the specific purpose of payment to the mills. There is a clear segregation and the company cannot use it for any other purpose. Clause 3 of the agreement provides that when the main agency ceases or when the business agreement is terminated by the applicant by giving three months' notice, the sum of Rs. 40,000 paid by the applicant shall be returned to him. The return of the amount on the agency ceasing is a clear pointer to the inference of segregation and that the money is entrusted for a specific purpose, clearly implying a trust. Otherwise, there is no need to connect the contingency of the agency ceasing and the return of Rs. 40,000. The other provision giving the option to the applicant to terminatethe financing agreement and claim back Rs. 40,000 does not detract from the trust; on the other hand, it emphasizes the trust obligation. Clause 4 puts the matter beyond any doubt that the agreement clearly implies a trust. Under that clause, the company undertakes that an assurance will be obtained from the mills for the return of Rs. 40,000 to the applicant when the agency ceases. Clauses 3 and 4 will have to be read together. The very fact that such an assurance from the mills is specifically stipulated shows that even at the stage when the money is returned by the mills it should not be returned to the company but it should be only paid into the hands of the applicant. It is true that the company did not get such assurance from the mills, but that does not affect the question, because what is necessary is to determine: whether or not a trust was created at the time when the financing agreement was entered into between the company and the applicant. If a trust is created by reason of the provision in Clause 4, the fact that the trustee did not fulfil the obligation of getting the assurance from the mills or committed default would not make the arrangement any the less a trust. Reading the agreement as a whole, we have no doubt that the agreement clearly created a trust, the sum of Rs. 40,000 was entrusted to the company for a specific purpose, to be used only for a specific purpose, with the stipulation that when the money is returned by the mills the money should not be used for any purpose by the company and that the company should return the amount as specifically earmarked; indeed, the segregation is emphasized by the special stipulation that the mills should assure the refund of the amount in the event of the agency ceasing. The matter does not stop there and there is a secondary trust arising by reason of the special circumstances in the case. In the decision of the Supreme Court referred to above, the arrangement was between two parties and the sole agency agreement took effect and was in operation for about one year till the winding-up of the company intervened. It cannot be said that the purpose of the agreement was not achieved. It was merely a question of determining whether the return of the amount was burdened with a fiduciary obligation or purely contractual. In the instant case, the position, however, is different; it is a combination of two bilateral agreements, each interdependent and inseparably connected. One agreement is between the company and the mills and the other agreement is between the applicant and the company. The company acts only as a post office as it were to receive the sum of Rs. 40,000, transmit or simply pass it on to the mills and again, when the agency terminated and when the deposit was returned, the company is to receive it and simply pass it on to the applicant. The agreement itself did not take effect, the very purpose which is the foundation of the agreement for the advance of the money was never achieved, with the result that on the failure of the purpose, it is the obvious duty of the company to return the money without mixing it with its assets. Such an obligation on the part of the company, negative in character, not to use the money for any other purpose of the company and positive in character to return the same in entirety to the applicant, is necessarily implicit in this agreement, to give any business efficacy and commonsense to such arrangement. It is clearly implicit in this agreement that, if the purpose failed, the company is bound to refund the entire Rs. 40,000 and cannot appropriate or adjust or use any portion of it for any other purpose. It is the coalescence of these stipulations, both negative and positive, involving such duty on the part of the company, which gave rise to the secondary trust. It is this principle which emerges from the decision of the House of Lords in Barclays Bank Ltd. v. Quistclose Investments Ltd.,  3 W.L.R 1097 ;  3 All E.R. 651 ;  39 Comp. Cas. 105 (H.L.) We are, therefore, clearly of the view that the agreement in this case clearly created a trust and that the trust throughout continued to subsist and, in any event, when the agency ceased, the secondary trust came into existence in favour of the applicant.
10. We shall now examine the leading decisions in England, in which, on similar facts and circumstances, the property was held to be entrusted with the bankrupt or the insolvent company for a specific purpose so as not to constitute the general assets of the bankrupt or the insolvent company so as to be distributed amongst the general body of creditors. There are three leading English decisions : Toovey v. Milne,  2 B & Ald. 683 ; 116 E.R. 514 Edwards v. Glyn,  2 E & E. 29 ; 121 E.R. 12 and In re Rogers,  8 Morrel Bank Rep 243 which enunciate the law as to when the entrustment of property or money can be said to amount to a trust as entrustment for specific purpose under the bankruptcy law. All the later decisions in England have followed the principle of these decisions and, as observed by the Court of Appeal in Quistclose Investments Ltd. v. Rolls Razor Ltd.,  2 W.L.R. 478 ;  1 All E.R. 613 ;  38 Comp. Cas. 810 by Sachs L. J.:
'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.'
11. When the matter went on appeal to the House of Lords, Lord Wilber-force, referring to these ancient decisions, observed that these cases 'have the support of longevity, authority, consistency and good sense'. In India too, these cases have been followed. For example, vide the observations in a Bench judgment of this court in Indian Hume Pipe Co, Ltd. v. Official Liquidators, Travancore National and Quilon Bank Ltd. : AIR1942Mad646 In the first case, Toovey v. Milne, the debtor was arrested and was in prison giving rise to an act of bankruptcy. The bankrupt's brother-in-law gave 120 to the bankrupt for settling the creditors. But the purpose failed and 95 was afterwards repaid to the brother-in-law by the bankrupt who still remained in prison. The assignee, in insolvency, claimed back this 95 from the brother-in-law on the ground that it formed part of 120 money lent to the bankrupt and, therefore, the general assets of the bankrupt in the hands of the assignee. Abbot C.J. rejected this claim of the assignee and held that 95 did not form part of the assets of the bankrupt. Abbott 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. This principle in Toovey v. Milne was applied in the next case in Edwards v. Glyn, where the facts were these : A run was expected on a firm of bankers who carried on business at Blandford in Dorsetshire under the style of Oak and Snow. Certain friends came to the rescue of the bankers by signing guarantees on the distinct understanding that it should not be used unless the bankers could clearly see to it that the crisis or the run was got over. The defendants carried on the business as bankers in London and, in that capacity, acted as the London agents of Oak and Snow. They advanced to Oak and Snow on the security of the guarantee 3,000 in gold and notes which were placed in a box and handed to Snow, The scheme to tide over the crisis did not materialise as there was great run and so. Oak and Snow returned the box containing the 3,000 to the defendants, and the firm suspended the payment and became bankrupt. The court decided two questions : (1) the return of the 3,000 to the defendants was not a fraudulent preference, and (2) the money was obtained by the firm of bankers (Oak and Snow) for a specific purpose and that purpose having failed, the sureties (the defendants) had equitable right to the return of the money. Earle J. observed as follows at page 48 :
'But, I also think that this was a specific advance for a specific purpose, on the understanding between the bankrupts and their sureties through whom it was procured for them, that the money, if not used for that purpose, should be returned. The money was required to meet a run upon the bankrupts' bank on a particular day; and the giving of the guarantee by the sureties, the promise to them by the bankrupts that they would use the money only if it would enable them to meet the run; and the ultimate advance by the defendants of the money, on the strength of the guarantee, form, in my opinion, one transaction. It is very much as if,before the bank opened on the day on which the run was expected, the sureties had brought 3,000 to the bank, and said : 'There is 3,000 use it, if it will carry you through the run; if it will not, do not touch it, whether it will or not, we leave to your judgment.' If, as soon as the bank opened, the run was obviously to an extent which the 3,000 would not meet, would the bankrupts have been entitled to retain this 3,000 for the benefit of their general creditors ?'
12. In the instant case, we can well visualise the applicant telling the company 'use this Rs. 40,000 if it will carry you through the selling agency ; if it will not, do not touch it, but return the money'. Crompton J., seeing that the principle involved is of great commercial importance, stated the law in these terms:
'The machinery by which the advance was obtained in the present case is somewhat different; but this fact is common to both cases, that the advance was made for a specific purpose only, and on the understanding that it should be used only for that purpose. As soon as that purpose failed, the sureties had a right to say, ' we gave our guarantee on the understanding that it should be used for a specific purpose; and that purpose having failed, you are bound to return the money advanced upon that guarantee'. The advance being, to use the expression of Abbott C.J. in Toovey v. Milne, clothed with a specific trust, the bankrupts, though they might have a legal, had not an equitable right to use the money for any other purpose ; and equity would, I think, have interfered to prevent them from doing so. Therefore, on the principle that the assignees of a bankrupt take only property to which the bankrupt has both a legal and an equitable right, the plaintiffs have no ground of action.'
13. Reference may next be made to Gibert v. Gonard,  52 L.T. 54. In that case money was advanced by the plaintiff to the defendant for the purpose of purchasing a certain business and on the distinct undertaking of the defendant so to apply the money. The defendant did not apply it for that purpose, but spent some of it in paying debts of his own and then became a bankrupt. The plaintiff filed an action to trace the remainder of the moneys advanced by him and it was held by North J. that a clear duty had been imposed upon the defendant of applying the money in a particular way and a fiduciary relationship created, so that the money not having been applied in the specified way, the plaintiff could recover so much as remained or in full notwithstanding the bankruptcy. North J. observed :
'Those being the facts, I have no doubt as to the principle of law to be applied to them. It is very well-known law that, if a person makes a payment to another for a certain purpose, and that person takes the money, knowing that it is for that purpose, he must apply it to the purpose forwhich, it was given. He may decline to take it if he likes, but if he chooses to accept the money tendered for a particular purpose, it is his duty, and there is a legal obligation on him, to apply it for that purpose. Again, if a man gives an undertaking or makes a representation, it is his duty to give effect to that representation and to carry out that undertaking. These are legal duties which the undertaking casts upon him. As a matter of fact, what I find here is this, that the money was paid for the purpose of being applied by the defendant, in a particular way, and I hold that, under those circumstances, those being the facts, it was his duty to apply it in that way. I hold, further, that he, having asked for it for that purpose and receiving it for that purpose received it upon an undertaking and a representation that he would apply it for that purpose. Under these circumstances, in my opinion it was his duty so to apply it, and not to apply it to any other purpose. That being so, it appears to me that although the money was lent by way of loan, and was to be repaid, it was a sum not intended to go back in specie in any way to the person who lent it; yet still it was a sum advanced in respect of which there was a duty cast upon, and undertaken by, the person who received the money, and he, as a matter of law, was bound to carry out that duty and give effect to the undertaking and representation which his receipt of the money under those circumstances had imposed upon him. That seems to be ample to create such a fiduciary relation as is necessary (if that is the correct way of defining what is necessary) to enable the person who advanced that money to follow the money and get it back, in the same way as if it had been trust money, the obligation of the person, receiving which is well-defined.'
14. In our view, the principle of this decision clearly governs the instant case. The principle of these cases was applied and followed in the case, In re Rogers. In that case, after an act of bankruptcy committed by the debtor, the debtor's solicitors advanced a loan to the bankrupt, not as direct payment to the debtor, but by way of payment to the pressing creditors. The bankruptcy could not be averted and the debtor was adjudged. 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. But this claim was negatived in the view that the moneys were given for a specific purpose and would not form part of the general assets of the bankrupt. Lindley L.J. observed at page 248 as follows :
'The trustee is endeavouring to affirm the transaction in part and to repudiate it in part. He wants to claim the money as the bankrupt's because it came to his hands and at the same time to reject the terms and conditions on which alone the bankrupt procured it. This is manifestlyunjust and contrary to principle. If authority be wanted in support of this view, it will be found in Toovey v. Milne and Edwards v. Glyn and other cases of the same class. I entertain no doubt that Mosley (i.e., the lender) could have obtained an injunction to restrain the bankrupt from using that money for any purpose except that of paying his pressing creditors. If this be so, the money never was the bankrupt's in any proper sense so as to vest in his trustee as part of his general assets.'
15. Bowen L.J. put the matter thus :
'I am of the same opinion. 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.'
16. Kay L.J. stated as follows :
'The true result of the evidence seems to me to be that the advance by Mosley was for this special purpose, and that the money was impressed with a trust, so that Mosley could have prevented its being otherwise used. The facts seem to me to bring the case within the decision of Toovey v. Milne, where it was held that money advanced for a like purpose was impressed with a trust and could not be claimed by the assignees in bankruptcy of the person to whom it was lent. This decision was adopted and followed in Edwards v. Glyn,  2KB. 55 where the purpose of the loan having failed, the money was returned, and it was held that the assignee could not recover it because it was trust money and not really the property of the bankrupt.
The trustee in bankruptcy is seeking in this case to recover the amount paid to Bromely. His claim is that the money belonged to Rogers and that by the doctrine of relation it was the property of the trustee in bankruptcy at the time it was paid over because the bankruptcy which took place shortly afterwards dates back to the previous act of bankruptcy of which ' Bromely had notice. If, however, the money was impressed with a trust, the trustee in bankruptcy cannot maintain his claim to it. I cannot distinguish this case from the authorities to which I have referred, and on this ground, I think, the claim of the trustee must fail.'
17. The next case in the line of authorities is the decision of Wright J. in In re Drucker (No. 1) affirmed by the Court of Appeal in the same volume at page 237. There, while a bankruptcy petition was pending against the debtor, the solicitors of the debtor found a sum of 300 to help the debtor for the specific purpose of paying it to the solicitor for the petitioning creditor. On receipt of the said money, the petition was dismissed. But, shortly afterwards, the debtor was adjudged bankrupt. The assignee claimed to recover the 300 from the creditor on the ground that it formedpart of the general assets of the debtor and as the advance of 300 by the debtor's solicitors was in pursuance of a security given by the debtor. This claim was negatived. The main ground on which Wright J. dismissed the claim of the assignee is that the 300 never became the debtor's money, that he had no right to spend it or do whatever he liked with it, or, in other words, the money was free and he had no right to apply it to any purpose other than paying to the petitioning-creditor, and therefore, the sum was impressed with a quasi-trust. Wright J. observed thus at page 57 :
'Now it is not a very easy matter, either in point of law or in point of fact, to decide; but if the 300 ever became the debtor's money, it is plain that he had the right to spend it, or to speculate with it, or do whatever he pleased with it. Bat what I find is, that it never came into the debtor's hands at all; and I am of opinion that it never was intended to come into his hands. It is quite clear that Messrs. Beyfus & Beyfus would never have consented to that money going out of their hands into the debtor's hands, or being applied for any purpose whatever other than the dismissal of the petition by the bank. Beyfus & Beyfus themselves could not have applied it to any other purpose after the arrangement which they had made with Mr. Salaman on the one hand and the debtor on the other; nor, as I have said, could the debtor have applied it to any other purpose. The charge is contemporaneous with the arrangement that is made with Mr. Salaman, and, although the charge, on the face of it, treats this as a loan by Messrs. Beyfus & Beyfus to the debtor, that cannot alter the real character of the transaction if the real character was inconsistent with the way in which it is described in the charge. I cannot help thinking that this money was never free, and never became part of the general assets of the debtor at all. He never had any right to receive it, or use it, or apply it to any purpose except this one particular purpose. Under these circumstances, it seems to me it was impressed with a trust--not in the strict sense of the word--but in substance with a quasi-trust that it should be applied by Beyfus & Beyfus out of their own money for the discharge pro tanto of the claim of the bank.'
18. This decision was affirmed. Vaughan Williams L.J. took the view that the money was impressed with a trust. Romer L.J. observed that there never was a moment of time at which this money could have been used for any other purpose than that of paying the creditors.
19. Reference may next be made to the decision in In re Watson: Ex parte Schipper,  107 L.T. 783 (C.A.) in which In re Rogers and In re Drucker (No. 1) were referred to with approval and followed. In the Law Times case, the Sheriff, inexecution, had seized certain scenery and theatrical costumes lying at a railway station in the name of the judgment debtor, one Watson, but not being, in fact, his property but in his possession in pursuance of a hire agreement. The debtor was' adjudged a few days previously thereto, of which the Sheriff had no notice. A third party was interested in the release of the scenery and the theatrical costumes (so that the bankrupt could complete the theatrical performances) and paid the judgment debt to the Sheriff who took a receipt from the bankrupt and released the goods. There was an agreement between the third party and the bankrupt that the amount so paid could be adjusted from the collections at the theatre, to which the bankrupt became entitled under the specific contract. By an inter-pleader action, the assignee claimed the money paid on behalf of Watson, the bankrupt, to release the goods, as assets of the bankrupt. But this claim was negatived by the Court of Appeal, Cozens Hardy M.R. and Hamilton L.J., Farwell L.J., dissenting on the ground that the money was paid for a specific purpose and cannot form part of the general assets of the bankrupt. Cozens Hardy M. R. observed that the money was advanced solely for the purpose of releasing the goods and applied the test that if Watson had attempted to intercept the money and apply it to his own purposes, it would have been a breach of faith, and the theatre manager might have restrained him by injunction. Hamilton L.J. observed :
'Whatever else the parties by the transaction meant, they did not mean that the money found by the third party should be money divisible among the bankrupt's creditors, nor did anybody think that the money was going to the bankrupt. It was provided for one purpose only, and care was taken that it should be applied to that purpose and no other, and I can attach no meaning to the principle in In re Rogers and In re Drucker (No. 7)l that would not cover this case and I can see nothing in the facts of this case to distinguish it'
20. We are clearly of the view that the test laid down in the above case is clearly satisfied in the instant case. If the Manasuba Company, after having received the money from the applicant, sought to apply it to any other purpose in breach of faith, the applicant would have restrained the company from doing so, and Clauses 3 and 4 in the agreement in the instant case are the provisions which Hamilton L.J. referred to, as implying a trust and constituting entrustment for a specific purpose involving the duty of applying for that purpose only and the correlative obligation not to apply or use it for any other purpose. The positive duty aforesaid inseparably connected with the negative obligation is sufficient to make the amount not a free asset of the insolvent company, over which it has no dominion or authority. This is sufficient to hold thatit is not part of the assets of the company. It is unnecessary to refer to other cases in England as the matter has been settled beyond any shadow of doubt after the clear pronouncement of the latest decision of the House of Lords in Barclays Bank case which confirmed the decision of the Court of Appeal. In that case, the company, R. Ltd., which had made huge profits, contemplated paying a dividend amounting to a large sum of 2,00,000. In view of the sudden change in fortunes, the company could not pay the dividend as proposed and the defendant bank refused to help the company as the account of the company with the defendant-bank had been considerably overdrawn. The plaintiff-company, 'Quistclose Investments Ltd.', agreed to lend the requisite amount of 2,09,719 odd to R. Ltd. subject to the important condition that the loan should be used only to pay the proposed dividend and R. Ltd. accepted that condition. Shorn of other details of the case, the plaintiff-bank sent the necessary amount to the defendant-bank on the express understanding that the defendant-bank should allow the fund to be operated upon only for the special purpose of paying the dividend proposed by R. Ltd. and a separate account was also accordingly opened in the name of R. Ltd. into which the moneys advanced by the plaintiff-bank were put. Before payment of the dividend, the company, R. Ltd., went into voluntary liquidation. The plaintiff-company, Quistclose Investments, claimed repayment of the entire sum of 2,09,719 odd as a preferential payment on the ground that a trust was created in respect of that fund. The Court of Appeal (reversing the decision of Plowman J.) held that the money was lent for a specific purpose and that as the primary purpose of the entrustment could not be fulfilled, the entrustment throughout continued to be in the nature of a trust and that there was nothing in law against a transaction to combine in itself the notions of a loan or a contract and a trust and that both the features may co-exist in any single transaction, in the sense that the existence of the notion of contract does not rule out the existence of a trust also being involved in the arrangement. Harman L.J. explained the legal position in these terms, at page 618 :
'That a loan of money on a specific condition does create a trust attaching to the money in the hands of the borrower, and that that trust subsists in favour of the lender if the condition fails, seems to me to be settled by authority binding on this court, contained in a series of bankruptcy cases. This is a branch of the law of trusts created by the common lawyers, but it is, after all, none the worse for that. The first case is thatof Toovey v. Milne which I will read : .. . .' (omitted as already extracted above).
21. Harman L.J. went on to observe that it did not make any difference whether the money had been repaid to the lender or still was with the bankrupt or with the insolvent company, in the view that when the purpose of paying the creditors failed, the trust was held not to fail, but to continue in favour of the lender and that the money was never the beneficial property of the bankrupt or the insolvent company. In the rest of the judgment, the learned Lord Justice referred to Edwards v. Glyn, In re Rogers, 'In re Drucker (No. 1) etc. and in particular, the observations of Lindley L.J. in In re Rogers case which has been fully extracted. Russell L.J. pointed out the crucial tests in the following manner :
'Did this impose on the first defendant-company the character of trustee of the money I do not see why it did not. The arrangement says quite plainly that the first defendant-company was not at liberty to treat the money advanced as the beneficial property of the first defendant-company except for the limited activity of paying a particular class of its creditors, viz., the shareholders entitled to the declared dividend. It is argued that the fact that the money was lent displaces the notion of a trust imposed on the borrower affecting the money. I do not see why the two conceptions are inconsistent one with the other, the relationship of creditor and debtor being, of course, necessary if and when the first defendant-company should in fact use the money in the only manner permitted, by paying the dividend. Moreover, there appears to be ample recognition in the authorities, including those of this court, of the existence of a trusteeship in a debtor in respect of the money lent. These cases I shall refer to in connection with the second question. Accordingly, in my judgment, Plowman J. made a correct assumption on the first question.
Granted that the arrangement referred to above imposed on the first defendant-company the character of a trustee of the money advanced, the trust that was reposed in the first defendant-company was that the first defendant-company would not use the money for any purpose of the first defendant-company other than the payment of the dividend. How, then, can it be said that, upon that one purpose ceasing to be feasible, the first defendant-company shed its character of trustee in relation to the money, and became, vis-a-vis the plaintiff-company, at liberty to treat the money as beneficial property of the first defendant-company? The arrangement remained that the first defendant-company was not entitled to do this ..... But I think however, that there is authority to show the continuingtrusteeship of the borrower, the sole permissible use by the borrower of the money having ceased to be feasible, that trusteeship necessarily being for the lender.'
22. Russell L.J. also referred to with approval the catena of the early English decisions referred to already. While referring to Toovey v. Milne; the learned Lord Justice observed:
'Rather do I think that Abbott C.J. was using this formula to indicate that the arrangement forbade the use by the bankrupt of the money lent for any purpose other than that of settling with creditors, and, therefore, that the money was not beneficially the property of the bankrupt to be caught by the relation back of the assignee's title.'
23. Sachs L. J. agreed with this view in his concurring judgment tracing the entire case law from the earliest decision of Toovey v. Milne. At page 628, the learned Lord Justice observed as follows;
'If, however, there was not the slightest chance of the money being thus applied, then, either because there was throughout a further trust in favour of the plaintiff-company as stated by Harman L.J., or because (as was pressed by counsel for the plaintiff-company) upon the well-recognised principle that what a settlor does not give is retained by him on a resulting trust, the money was, after the winding-up had commenced, held on trust in favour of the plaintiff-company.'
24. From the foregoing it will be seen that the following legal principles emerge from this decision : (i) there may be a blending of the notions of a contract and a trust in any particular arrangement, that both the conceptions may co-exist and the existence of the notion of a contract does not exclude the existence of a trust side by side; (ii) if money or property is entrusted for a specific purpose and no other purpose, and if that purpose fails or is not feasible, the property does not become the general assets of the recipient, but he must hold it on trust for the person who entrusted it; (iii) the circumstance of crucial importance is that the arrangement forbade or did not permit the recipient to use it for any other purpose in the sense that he had no freedom, dominion or authority over the same; (iv) if the entrustment of the property was such that a trusteeship was created, the trusteeship continued throughout and it did not matter whether the money was in the hands of the recipient or had passed on to a third party in pursuance of an arrangement, which arrangement however failed, with the result that the right to obtain a refund from the third party must be exercised for the benefit of the person who entrusted the property or the money ; (v) there is nothing in the subsequent case law to depart from the well-settled rule enunciated in the consistent line ofcases over the last 140 years, according to which money advanced by A to B for a definite purpose can be impressed with a trust.
25. On appeal, the House of Lords (while confirming the decision of the Court of Appeal) stressed the alternative ground of the secondary trust arising when the purpose could not be fulfilled. The following is the relevant head-note in the decision of the House of Lords which fully brings out the principle underlying this decision :
'The respondents were entitled to recover the money from the appellants, since-
(i) as between the respondents and R. R. Ltd., the terms on which the loan was made were such as to impress on the money a trust in the respondents' favour in the event of the dividend not being paid, because-
(a) it followed from the clear terms of the loan, that the money was not to become part of the assets of R. R. Ltd., but was to be used only for the payment of a dividend, and that if, for any reason, the dividends were not paid, the money was to be repaid to the respondents; and furthermore,
(b) the transaction of loan, giving rise to a legal action of debt, did not of itself exclude the implication of a trust enforceable in equity, for legal and equitable rights and remedies can co-exist in one transaction; and there was no reason why the law should not give effect to the clear intention to create a secondary trust for the benefit of the respondents, which would arise if the primary trust (to pay the dividend) could not be carried out.'
26. Lord Wilberforce, Barclays Bank Ltd. v. Quistclose Investments Ltd.  3 W.L.R. 1097 ; delivered the judgment of the House of Lords while the other learned Lords merely concurred. The first test on which emphasis was laid was that the defendant-bank could use it only for the purpose of paying the dividend and not for any other purpose. In our case, as already observed, the entire scheme of arrangement and in particular Clauses 3 and 4 indicate that the company cannot use the money for any other purpose. Some effort was made by counsel for the appellant (before the House of Lords) to show that the early decisions referred to already, Toovey v. Milne, Edwards v. Glyn, In re Rogers, etc., are not in consonance with the later decisions and should not be followed. But this argument was not only not accepted, but, on the other hand, it was observed that those early cases had the support of longevity, authority, consistency and good sense. While rejecting the argument that the obligation is purely contractual and there was no trust, either at the inception or a secondary trust arising, the law was stated thus, at page 655 :
'My Lords, I must say that I find this argument unattractive. Let us see what it involves. It means that the law does not permit an arrangement to be made by which one person agrees to advance money to another, on terms that the money is to be used exclusively to pay debts of the latter, and if, and so far as not so used, rather than becoming a general asset of the latter available to his creditors at large, is to be returned to the lender. The lender is obliged, in such a case, because he is a lender, to accept, whatever the mutual wishes of the lender and borrower may be, that the money he was willing to make available for one purpose only shall be freely available for others of the borrower's creditors for whom he has not the slightest desire to provide.
I should be surprised if an argument of this kind--so conceptualist in character--had ever been accepted. In truth it has plainly been rejected by the eminent judges who, from 1819 onwards, have permitted arrangements of this type to be enforced, and have approved them as being for the benefit of creditors and all concerned. There is surely no difficulty in recognising the co-existence in one transaction, of legal and equitable rights and remedies : when the money is advanced, the lender acquires an equitable right to see that it is applied for the primary designated purposes (see In re Rogers, where both Lindley L. J. and Kay L. J., explicitly recognised this) i when the purpose has been carried out (i. e., the debt paid) the lender has his remedy against the borrower in debt : if the primary purpose cannot be carried out, the question arises if a secondary purpose (i.e., repayment to the lender) has been agreed, expressly or by implication; if it has, the remedies of equity may be invoked to give effect to it, if it has not (and the money is intended to fall within the general fund of the debtor's assets), then there is the appropriate remedy for recovery of a loan. I can appreciate no reason why the flexible interplay of law and equity cannot let in these practical arrangements, and other variations if desired : it would be to the discredit of both systems if they could not. In the present case, the intention to create a secondary trust for the benefit of the lender, to arise if the primary trust to pay the dividend could not be carried out, is clear and I can find no reason why the law should not give effect to it.'
27. We are clearly of the view that this decision completely supports both the limbs of the argument of Mr. M.S. Venkatarama Iyer. He also relied upon some observations in the latest decision of the House of Lords in National Westminster Bank Ltd. v. Halesowen Presswork & Assemblies Ltd., in which the question of the bank's right to set off the customer's account came up for consideration in the context of a claim to set off under Section 31 of the Bankruptcy Act, At page 466, Lord Simon of Glaisdale laiddown the test as to what constitutes mutual dealings and mutual credits as capable of being set off. The law was stated in these terms at page 466 :
'But before I venture to indicate my own view on whether Section 31 may be excluded by agreement, there is one subsidiary matter on that section with which I should like to deal. The section concerns the right or duty of set off ' where there have been mutual credits, mutual debits or other mutual dealings.....' It was common ground that 'mutual dealings' would not cover a transaction in which property is made over for a ' special (or specific) purpose' : See In re Pollitt : Ex parte Minor,  1 Q.B. 455 In re Mid-Kent Fruit Factory,  1 Ch. 567 (Ch.D.)and In re City Equitable Fire Insurance Co. Ltd.,  2 Ch. 293But I regret that I cannot agree with the view of the majority of the Court of Appeal on what meaning should be attached to this concept of ' special (or specific) purpose '. I prefer the view of Buckley L.J. and I agree with all that my noble and learned friend, Viscount Dilhorne, has said on this matter. Every payment of money, every contractual provision, is for a special or specific purpose in the ordinary sense of those words i something more is required to take the transaction out of the concept of ' mutual dealings'. It was suggested on behalf of the appellants that the situation only arises when the transaction gives rise to a payment on which a quasi-trust is imposed. My only quarrel with this way of putting it is that quasi-anything gives uncertain guidance in the law. I would prefer to say that money is paid for a special (or specific) purpose so as to exclude mutuality of dealing within Section 31 if the money is paid in such circumstances that it would be a misappropriation to use it for any other purpose than that for which it is paid.'
28. Mr. Venkatarama Iyer urged that in order to determine whether the property has been made over for a specific purpose impressed with a trust, one test as pointed out by the House of Lords is to determine whether the company would not be guilty of misappropriation if it used the money for any purpose other than the one for which it was paid, and if the answer is yes, it necessarily follows that a trust has been created. Applying this test, we have not the slightest hesitation in holding that a trust has been created in the arrangement and the fact that this arrangement embraces contractual obligations does not detract from the substance of the arrangements being essentially in the nature of a trust. We may also refer to the following statement of the law in 38 Halsbury's Laws of England, at page 865 (paragraph 1459) in which it is stated that where property is transferred into the possession of a person ostensibly for his own use, but really to effect or assist a purpose which is never carried out, there is a resultingtrust of it for the person who transferred the property and he can make good his claim to it. We may also refer to the statement of the law in Mulla's Insolvency, second edition, at pages 460 and 461, where the learned author has observed that money lent to a person for a specific purpose like paying pressing creditors is impressed with a trust for that purpose and that it is not the debtor's property and the official assignee cannot claim the same in insolvency. Williams on Bankruptcy, 18th edition, discusses this matter at pages 304 and 305 under the caption, 'property or money deposited for specific purpose', and at page 306, the learned author has referred to the decision of the Court of Appeal in Quistclose Investments Ltd. v. Rolls Razor Ltd.,  2 W.L.R. 1097 ;  38 Comp. Cas. 810 (C.A.) because, at the time when the book was published, the case had not been decided by the House of Lords. In Lewin on Trusts (latest--16th edition) the statement of the law is to be found at pages 399 and 651. (Note : In the foot-note to the relevant statement of the law, there is reference to the decision in Gibert v. Gonard,  52 L.T. 54 already referred to in the preceding discussion).
29. It only remains to refer to some of the decisions of the Indian courts in which facts are similar and the principle enunciated therein is in conformity with the decision of the Supreme Court. In Kodak Ltd. v. South Indian Film Corporation : AIR1937Mad833 a company, let out films on hire to renters, one R, on R depositing with the company a sum of Rs. 1,000 of which Rs. 250 was immediately deposited. But S, the company, informed of its inability to conclude the contract. Despite repeated demands, the sum of Rs. 250 was not returned to R. The company, S, was subsequently wound up and the question was whether the sum of Rs. 250 paid by R was entitled to preferential payment. The company court held that the fact that that money had been spent away does not affect the right of priority and R would be entitled to a preferential payment against the other assets of the company. The same view was taken in connection with some other film distribution agreement in Karnataka Films v. Official Liquidator, Chitrakala Movietone Ltd. : AIR1952Mad481 .In that case, a sum was deposited in a film producing company (which went into liquidation) by the distributor and it was agreed that the sum shall be refunded at the end of the period of the deposit or on a prior determination of the agency. The company court observed that when the sum was deposited for a specific purpose, it became trust money. In the Bench decision in Indian Hume Pipe Co. Ltd. v. Travancore National and Quilon Bank Ltd. : AIR1942Mad646 a company had two places of business, one at N andthe other at B and the bank, which subsequently became insolvent, had branches in both the places, N and B. The customer-company had an account in the bank's branch at N but no account at the branch at B. The company instructed the branch at B, to collect the amount of a cheque drawn in its favour and remit the proceeds to the branch at N, to the credit of the company's account. The branch at B collected the amount of the cheque, but did not carry out the further instruction of the customer-company, and retained the money at the branch at B till the bank went into liquidation. It was held that the money in the hands of the bank's branch at B was entrusted for a specific purpose of making collection and remitting to the branch at N and till that purpose was achieved the money in the hands of the branch at B was clothed with a fiduciary character. Toovey v. Milne and Edwards v. Glyn, the early English cases, were all referred to as supporting the conclusion arrived at by the court. The Bench also referred to and followed the leading decision of the Court of Appeal in In re Farrow's Bank,  1 Ch. 41 (C.A.) in which also it was held that till the moneys are collected by the collecting bank and credited to the customer creating the relationship of debtor and creditor, the value of the cheque in the hands of the collecting bank were moneys held for a specific purpose on behalf of the customer. The principle which emerges from this decision also is to the effect that the money entrusted is money entrusted for a specific purpose and if that purpose failed and the company became insolvent, the money entrusted would not constitute the assets of the company in the hands of the liquidator, but it will be only the assets of the person who entrusted it. It is to be noted that this Madras High Court decision and the principle underlying it stands apart from the Supreme Court's decision referred to above, and that apparently is the reason why no reference was made to this Bench decision in Indian Hume Pipe Co. Ltd. , v. Official Liquidator, Travancore National & Quilon Bank Ltd. Kshetra Mohan Dass v. Official Liquidator, East Bengal Sugar Mills Ltd. : AIR1943Cal105 was a case of security deposit. In pursuance of a sole selling agency of the East Bengal Sugar Mills, a security deposit of Rs. 10,500 carrying interest at 3 per cent. per annum was made and there was also a provision for commission. Within a short time after the agreement, the mills stopped supply and the sole selling agent, the plaintiff, instituted the suit for recovery of the security deposit and, in the meanwhile, the company was wound up. The Bench pointed out that the security deposit has to be regarded as trust money under the circumstances of the case. On behalf of the liquidator, it was argued that, under the terms of the agency agreement, the company would be entitled to adjust and set off any claim which the company may have against the sole selling agent and that the right to set-off detracted from the transaction being a trust. But this argument was not accepted. It was observed at page 322 as follows :
'That creates the trust and makes the bank a trustee for the money so sent, in spite of the fact that the ordinary and normal relation between a customer and a banker is that of creditor and debtor. That principle, in our judgment, applies with greater force to security deposits in cash made by an employee or by a selling agent of a company. The money would be regarded as trust money in the hands of the employer or the company, unless there are other terms and conditions which would make the relation between them to be that of creditor and debtor. As we have already pointed out, the mere fact that there is a stipulation for payment of interest on the deposit money or the fact that in certain contingencies the employer or the company, as the case may be, would be entitled to liquidate his or its claim from out of it against the employee or the selling agent would not establish the relationship of creditor and debtor. The money deposited as a security would still be regarded as trust money in the hands of the employer or the company. We, accordingly, agree with the view taken in In re Hindustan Commercial Bank Ltd.,  8 Comp. Cas. 101 ; A.I.R. 1938 Mad. 651 and In re Travancore National & Quilon Bank Ltd.,  9 Comp. Cas. 60 ; A.I.R. 1939 Mad. 337 On the terms of the contract which was made in this case between Kshetra Mohan Dass and the East Bengal Sugar Mills Ltd. the former is entitled to have the sum of Rs. 10,500 together with interest in terms of his contract out of the assets of the company in the hands of the liquidator in priority of all other claims against the company.'
30. This reasoning does not run counter to the decision of the Supreme Court, because the Supreme Court itself has observed that if the contract clearly implies a trust, the fact that the recipient has a contingent right to adjust the fund for certain specific purposes would not make the arrangement any the less a trust. We may finally refer to the Bench decision of the Calcutta High Court in Ganesh Export and Import Co. v. Mahadeolal Nathmal : AIR1956Cal188 in which there is a fair review of all the early cases in In re Rogers, etc. There also, the arrangement was a sole selling agency and the selling agent had deposited a huge sum of Rs. 3 lakhs odd with the industries, the other party. But, it became insolvent and the claim of the sole selling agent to preferential payment in the entirety of the sum of Rs. 3 lakhs odd was upheld. The important point to be noticed in this judgment is that both the learned judges, though they held that there was no trust, took the view that the obligation on the part of the other side to return the money is sufficient to make the fund not the assets of the company, but the property belonging to the person who made the payment. The reasoning underlying this decision is that when 1he arrangement came to an end or became not feasible, the money must be held on trust by the insolvent company in view of the fact that there is the obligation to return the sum on that contingency. This decision goes further than the other decisions in holding that under the law of insolvency the money entrusted cannot be said to be the property or assets of the insolvent, i.e., assets of the insolvent company, when only the question of distribution would arise. It is true that this Bench decision goes much further than the other decisions.
31. For all these reasons, we hold that the decision of the learned company judge is correct; the appeal fails and is dismissed with costs.
32. This appeal having been set down 'for being mentioned' on September 7, 1972, the court delivered the following judgment on September 7, 1972.
33. It is stated on behalf of the appellant that the sum of Rs. 30,000 has been invested in a fixed deposit with some bank. As we have held that this money belongs to the respondent, N. Chandranarayanan, the official liquidator will either assign or transfer the fixed deposit receipt in favour of the respondent or pay him the proceeds of the same. The respondent will be entitled to the sum of Rs. 30,000 with interest at 6 per cent. from the date of the application and after adjusting the proceeds of the deposit of Rs. 30,000 with accrued interest, the official liquidator will pay the balance to the respondent.
34. This case having bean set down for being mentioned again on this day on the letter of the advocate for the appellant dated September 20, 1972, the court delivered the following judgment:
The order of the court was pronounced by:
35. The order pissed by us on the 7th September, 1972, by way of implementation of our main judgment dated 4th September, 1972, does not appear to be correct. It is now found, as stated by the official liquidator, that the sum of Rs. 30,000 has not been invested in separate fixed deposit in any bank. What the official liquidator has done is to invest it along with the general funds, as he is bound to do under the statute. The official liquidator states that this does not earn 6% separate interest and the interest which is apportionable to this sum of Rs. 30,000 is Rs. 9,000. We, therefore, direct the official liquidator to pay a sum of Rs. 39,000 to the applicant-respondent. The official liquidator will pay thesum of Rs. 39,000 to the respondent within two weeks after he obtains the copy of the decree. If there is any default, the amount will carry an interest of 6% from that date.
36. As the amount involved is large and as the applicant-respondent has been kept out of this money for a considerable time, for over a decade, the office is directed to furnish the copy of the decree to the official liquidator forthwith, within Wednesday, the 27th September, 1972. It is hoped that the official liquidator will make the necessary application for the grant of the decree copy forthwith to enable the office to furnish the copy of the decree.