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of <h1>Provident Fund Members Deemed Preferential Creditors in Company Liquidation</h1> <h3>Fazalbhai Mills, Ltd. (in liquidation) In re</h3> The court held that the company held the provident fund amount in a fiduciary relationship, rejecting arguments of alteration in the relationship by ... Winding up - Preferential payments Issues Involved:1. Whether the company held the provident fund amount in a fiduciary relationship or as a trustee.2. Whether the relationship between the company and the provident fund members was altered by an agreement, express or implied.3. Whether the claimants are entitled to rank as preferential creditors in the winding up of the company.Detailed Analysis:1. Fiduciary Relationship or Trustee:The primary issue was whether the company was a trustee or held a fiduciary relationship concerning the provident fund amount credited to the employees. The court noted that a fiduciary relationship could be established without the explicit use of the term 'trust' and that a person might become a trustee by his actions and conduct. The definition of 'trust' under Section 3 of the Trusts Act was cited, emphasizing that the owner retaining an interest in the property does not negate the foundation of a trust.The provident fund rules, when read as a whole, indicated that the company held the fund in a fiduciary capacity. The subsidiary ledger and the general ledger entries, along with the purpose of the fund (to provide for employees and their families upon death or leaving service), supported this conclusion. The court rejected the liquidator's argument that the company's charge on the fund and the discretion in payment negated a fiduciary relationship. The court also distinguished this case from the decision in *In re Maneckji Petit Manufacturing Co.*, emphasizing that the provident fund was intended for employee benefits, unlike the deposit in the cited case.2. Alteration of Relationship by Agreement:The liquidator contended that the relationship was altered by an agreement when a petition was submitted to the directors, proposing that the provident fund amounts be treated as deposits carrying interest. However, the court found that the petition was rejected by the directors, and no member had signed acceptance of the proposed scheme as required by the resolution passed on 1st December 1932.The court emphasized that the company's conduct, such as maintaining the subsidiary ledger and not issuing fixed deposit receipts, indicated no alteration in the relationship. The evidence did not show that the terms of the resolution were conveyed to the members or accepted by them. Thus, the liquidator failed to establish any alteration in the legal relationship between the company and the provident fund members.3. Preferential Creditors:Given that the provident fund was held in a fiduciary capacity, the court concluded that the members were entitled to rank as preferential creditors. The evidence showed that sufficient liquid assets were available at the time of liquidation to pay the fund in full with interest. The court referenced Section 229 of the Companies Act and the decision in *Official Assignee v. Bhatt*, which governed the rights of parties in insolvency, affirming the claimants' preferential status.The court ordered that the claims of claimants Nos. 1 to 80, 189, 190, and 191 be allowed as preferential creditors. The costs of the claimants, except those related to allegations of undue influence, coercion, and threats of dismissal, were to be added to their claims and paid out of the company's assets. The official liquidator's costs were also to be paid from the company's assets, with two counsel allowed for both the official liquidator and certain claimants.Conclusion:The judgment comprehensively analyzed the fiduciary nature of the provident fund, the lack of any valid alteration in the relationship between the company and the members, and the entitlement of the claimants to preferential creditor status. The court's decision ensured that the provident fund members were rightfully prioritized in the liquidation process.
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