1975 (4) TMI 61 - HC - Companies Law

Court rules credit society's funds held in trust separate from company assets in liquidation

The court determined that the amount standing as a credit balance in the account of the credit society was trust money and did not form part of the ... Winding up – Overriding preferential payments Issues Involved:1. Whether the amount standing as credit balance in the account of the credit society is trust money, not forming part of the assets of the company, and that the society ranks outside winding up.2. Whether the amount is part of the assets of the company and distributable as such in the course of winding up.Issue-wise Detailed Analysis:1. Trust Money and Legal Title:The primary issue revolves around whether the amount standing as a credit balance in the account of the Baroda Spinning and Weaving Mills (Rajratna Sheth Jhaverchand Laxmichand) Co-operative Credit Society Ltd. (the society) is trust money and does not form part of the assets of the company in liquidation. The company was ordered to be wound up, and the official liquidator took custody of the company's assets, including a credit balance of Rs. 86,166.86 in the society's account.The society argued that the amount deducted from the wages of its members (employees of the company) was held in trust by the company and should be paid to the society before any distribution to other creditors. This argument was based on a tripartite arrangement where the company deducted amounts from employees' wages to be paid to the society. The society claimed that the company acted merely as a collecting agent, and the amount collected was impressed with a trust.2. Legal and Beneficial Ownership:The court examined whether the company had legal or beneficial ownership of the amount in question. It was established that the company acted as an agent for the society, collecting amounts from employees' wages based on a tripartite agreement. The company had no legal or beneficial interest in the money, which was held in trust for the society.The court analyzed the provisions of the Payment of Wages Act, 1936, and the Gujarat Co-operative Societies Act, 1961, to determine the legality of the deductions. It was concluded that the deductions were legal and valid under section 50 of the Gujarat Co-operative Societies Act, which allowed employers to deduct amounts from employees' wages for payment to co-operative societies.3. Nature of the Amount in the Company's Hands:The court considered whether the amount in the company's hands was impressed with a trust. It was determined that the company held the money as a custodian for the society, with no legal title or beneficial interest. The amount was collected for a specific purpose (payment to the society) and retained its character as trust money.The court referred to various legal precedents, including Quistclose Investments Ltd. v. Rolls Razor Ltd. (In liquidation) and Toovey v. Milne, which established that money advanced for a specific purpose can be impressed with a trust. The court concluded that the amount in the company's hands was impressed with a trust and did not form part of the company's assets.4. Liquidator's Duty and Distribution of Assets:The liquidator's duty is to realize the assets of the company and distribute them according to the priorities established by law. However, if the company holds property or money impressed with a trust, the liquidator must pay it to the beneficiary (the society) before distributing the company's assets.The court reaffirmed that the amount collected by the company from employees' wages for the society was trust money. The liquidator was bound to pay this amount to the society in full before any distribution of the company's assets.Conclusion:The court answered the reframed question in the affirmative, concluding that the amount standing to the credit of the society in the company's books was impressed with the character of a trust. Therefore, it did not form part of the company's assets, and the liquidator was bound to pay it to the society before distributing the company's assets. The alternative question posed by the liquidator was answered in the negative.