Treatment of Deposit as Security not Trust: absence of earmarking converts relationship to debtor creditor, no preferential liquidation claim.

A cash deposit under a commercial agency agreement was not held on trust because the agreement permitted the company to use the funds, provided for interest, and required earmarking only upon a contingency that never occurred; absent segregation or clear directions to keep the money separate, the deposit did not form an identifiable trust fund. The court treated the arrangement as creating a debtor-creditor relationship rather than a fiduciary trust, and held the depositor is not entitled to preferential payment in liquidation and ranks as an ordinary unsecured creditor.

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Issues: (i) Whether a cash deposit paid to a company under a commercial agency agreement was held on trust or as a security giving the depositor a preferential claim in the company's liquidation.

Analysis: The Court analysed the terms of the agency agreement governing the deposit, including the clause providing for payment of interest and the contingency clause that required investment and earmarking only if the company raised certain secured loans. The Court treated the presence of an agreement to pay interest and an express provision that the deposit would not be computed for lien purposes as indicia that the company could use the moneys for its general purposes. The contingency in which the agreement required investment and earmarking never arose, so no earmarking occurred. On these facts the agreement did not direct that the deposit be kept aside in trust or segregated from the company's funds. The Court contrasted cases where a deposit is effectively treated as an identifiable trust fund with authorities where payment with an agreement to pay interest converts the relationship into debtor-creditor, concluding that mere receipt as security and the form of receipt did not create a fiduciary trust in the absence of earmarking or clear directions to keep the funds separate.

Conclusion: The deposit was not held on trust and did not constitute trust property; the depositor is not entitled to preferential payment and ranks as an ordinary creditor entitled to pro rata distribution. The application claiming preferential payment is dismissed.

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