1972 (9) TMI 157 - HC - Companies Law

Court recognizes trust agreement for deposit, orders payment to applicant, affirms fiduciary duty

Official Liquidator Versus N. Chandranarayanan

The court held that the agreement between the applicant and the company created a trust for the specific purpose of depositing Rs. 40,000 with the mills. ... - Issues Involved:1. Preferential payment claim of Rs. 30,000 by the applicant.2. Fiduciary relationship and trust in the context of insolvency.3. Segregation and earmarking of funds.4. Legal principles governing trust and specific purpose funds.5. Failure of the primary purpose and secondary trust.Issue-wise Detailed Analysis:1. Preferential Payment Claim of Rs. 30,000 by the Applicant:The official liquidator representing Manasuba & Co. (P.) Ltd. in liquidation appealed against the order upholding the claim of the applicant for preferential payment of Rs. 30,000. The applicant initially sought Rs. 40,000 but later restricted the claim to Rs. 30,000, which was deposited by the company with the mills and later returned to the liquidator. The learned judge upheld this claim, leading to the appeal.2. Fiduciary Relationship and Trust in the Context of Insolvency:Section 529 of the Companies Act mandates that in the winding-up of an insolvent company, the same rules regarding the rights of secured and unsecured creditors as in insolvency law must be observed. It is settled law that where a fiduciary relationship is established between the company and a third party, the money paid by the third party to the company is impressed with a fiduciary character and does not form part of the general assets of the company. Property held by an insolvent company in a fiduciary capacity is treated as property held in trust for the purposes of insolvency laws.3. Segregation and Earmarking of Funds:The agreement between the applicant and the company specified that the sum of Rs. 40,000 was to be used exclusively for depositing with the mills. Clause 3 of the agreement stated that the sum would be returned to the applicant when the agency ceased, indicating a clear segregation and specific purpose for the funds. Clause 4 further emphasized this by stipulating that an assurance would be obtained from the mills for the return of Rs. 40,000 to the applicant.4. Legal Principles Governing Trust and Specific Purpose Funds:The Supreme Court in Seth Jessa Ram Fatehchand v. Om Narain provided guidelines to determine whether a deposit is impressed with a trust:- If the terms of the agreement clearly indicate a trust, it will be given effect regardless of provisions for interest or utilization in business.- If the agreement does not clearly indicate a trust, the provision for interest and lack of segregation tend to infer no trust.- Other terms and circumstances must also be considered to conclude whether the deposit was impressed with a trust.5. Failure of the Primary Purpose and Secondary Trust:The agreement between the company and the mills never took effect due to the company's failure to deposit the entire sum of Rs. 87,500 and subsequent liquidation. This failure of the primary purpose led to the creation of a secondary trust in favor of the applicant. The trust character of the funds continued throughout, and when the refund was obtained from the mills, it did not form part of the general assets of the company but should be handed over to the applicant.Conclusion:The court held that the agreement between the applicant and the company created a trust, and the sum of Rs. 40,000 was entrusted for a specific purpose. The trust continued to subsist, and upon the failure of the primary purpose, a secondary trust arose in favor of the applicant. The official liquidator was directed to pay the sum of Rs. 39,000 to the applicant, representing the principal amount and interest accrued. The judgment emphasized that the funds were not part of the general assets of the company but were held in trust for the applicant.