TaxTMI 
TaxTMI 
1992 (2) TMI 294
X X X X Extracts X X X X
X X X X Extracts X X X X
....en the applicant and the bank in respect of the amount so deposited is an ordinary relationship of debtor and creditor and the amount of margin money in this case is liable to be treated as a part of the general asset of the bank available for distribution amongst all its creditors in the event of the bank being wound up? I answer question No. 1 in the affirmative and question No. 2 in the negative. The Reserve Bank of India has filed Company Petition No. 389 of 1991, in this court for the winding up of the Bank of Credit and Commerce International (Overseas) Ltd., Bombay, under the provisions of the Banking Regulation Act, 1949, read with the Companies Act, 1956, and for the appointment of the State Bank of India, Central Office, Bombay, as liquidator of the Bank of Credit and Commerce International (Overseas) Ltd., Bombay, with all necessary powers under the provisions of the Banking Regulation Act, 1949, read with the Companies Act, 1956. The abovereferred to banking company is incorporated outside India. The abovereferred to banking company carried on banking and other business on a large scale in Bombay with the permission of the Reserve Bank of India. The said business is s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....thout obtaining prior approval of this court and without obtaining the concurrence of the provisional liquidator on the assumption that an application for approval thereof could be made later on. The State Bank of India, as provisional liquidator appointed by this court, submitted a report to this court for regularisation of the above-referred to memorandum of arrangement dated January 16, 1992, in view of the procedural lapse on the part of the Reserve Bank of India indicated above. By my order dated February 14,1992,1 granted provisional approval to the said memorandum of arrangement dated January 16, 1992, on the condition that all effective steps to be taken hereafter shall be taken by the Reserve Bank of India with the concurrence of the State Bank of India. By the said order,. I also clarified that no legal right shall accrue in favour of the proposed buyer or any other party unless the transaction was approved by this court after the details of the proposed transaction are made available to this court. Section 584 of the Companies Act, 1956, confers jurisdiction on the company court in India to wind up a foreign company incorporated outside India which carries on or which h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dated April 22, 1991, issued by the Reserve Bank of India to all scheduled commercial banks, it was laid down that the banks must insist on a cash margin of 200% in the case of imports under OGL instead of 133⅓ per cent. By a circular dated August 1, 1991, the Reserve Bank of India informed all the scheduled commercial banks that the prescribed minimum cash margin in terms of the guidelines already laid down must be maintained until the same was realised by the bank after the goods were cleared by the customs and the exchange control copy of the customs bill of entry was produced to the bank. Thus, the scheduled banks were prohibited by the Reserve Bank of India from opening letters of credit in relation to import of goods unless security deposit/ margin money was obtained by the bank from the customer to the extent of 200% of the amount involved in the opening of the letter of credit and the same was earmarked as a separate identifiable fund for the specific purpose of honouring the letter of credit only. (c)On May 20, 1991, an agreement was arrived at between Priya Plastics and foreign supplier Hipkomerc carrying on business in Yugosla via for supply of high density polyet....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... was thus segregated from the current account. Such segregation was in a business and commercial sense of the term so as to constitute the said amount as a separate identifiable fund earmarked for a specific purpose. (f)On June 2, 1991, the applicant entered into a contract with the said bank (copy whereof is exhibit 'E' to the affidavit in support of the judge's summons) in order to avoid any loss on account of fluctuations in exchange rates. (g)On June 12, 1991, the said foreign supplier, Hipkomerc, shipped the contracted goods through vessel Vishwapanhaj belonging to Shipping Corporation of India and forwarded 10 bills of lading bearing Nos. 301 to 310 to the bank through proper channels. (h)Inpea Overseas Ltd., the beneficiary named in the contract dated May 20, 1991, negotiated the relevant documents under the letter of credit through their bankers, i.e., Bank of Cyprus, and claimed reimbursement from the BCCI, Bombay, in terms of the said letter of credit. On July 2 or 3, 1991, the BCCI, Bombay, reimbursed the Bank of Cyprus for the value of the goods through its London branch by appropriating the margin money provided by the applicant to the extent required. The rupee equ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ter of credit in favour of the beneficiary named therein in a sum of US $84,000. Inpea Overseas Ltd. was named as the beneficiary in all the documents in respect of the said letter of credit. In terms of the mandate of the Reserve Bank guidelines, the applicant was obliged to make a cash deposit of margin money equivalent to 200% of the value of the letter of credit as security. On June 26, 1991, the applicant instructed the BCCI (Overseas) Ltd., Bombay, to appropriate a sum of Rs. 28.14 lakhs from the fixed deposit already held by the bank for the purpose of earmarking of the margin amount and also appropriate a sum of Rs. 7,55,092 from their current account for the same specific purpose. The bank opened the necessary letter of credit in favour of the beneficiary as instructed by the applicant. A sum of Rs. 35,69,092 was segregated and kept apart as margin money in respect of this letter of credit in a sum of US $84,000 as aforesaid. The bank issued the necessary fixed deposit receipt for the said amount subject to the stipulation that the said fixed deposit receipt would operate subject to the stipulation that it was earmarked as a security/margin money in relation to the letter ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... stocks". It is well-settled that ordinarily there is a relationship of debtor and creditor between the banker and the customer in respect of ordinary deposit made by the customer with the banker. It is equally well settled that there may be special relationship arising from particular circumstances and requirements of the transaction which would rebut such general relationship. There may be situations where a customer deposits an amount with a bank not as a general deposit but as a specific deposit for a specific purpose creating the relationship of a bailee and a bailor or trustee and beneficiary or constituting the bank as a sort of stakeholder. In such cases where money is deposited with the bank as a specific deposit for a specific purpose and the same is earmarked as identifiable fund for being utilised in contingencies specified, the bank holds the amount as a trustee and the relationship between the parties in respect of such specific deposit is not that of debtor and creditor. In such a case, the amount so earmarked does not constitute a part of the general assets of the bank. Learned counsel for both sides have invited my attention to several judgments of the Supreme Co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion between bank and depositor, which may be that of bailee and bailor, but is ordinarily that of debtor and creditor". And it is pointed out, when money is delivered to a bank for application to a particular specific purpose' it is not a general deposit creating the relationship of debtor and creditor, but a 'specific deposit' creating the relationship of bailee and bailor or trustee and beneficiary", (emphasis supplied) In such a case, the bank holds the amount as a stakeholder. Thus the apex court held that if the deposit made by the customer was a specific deposit for a specific purpose and there was a special contract concerning the same between the customer and the bank or a special relationship could be inferred from the facts and circumstances relating to the transaction of the amount deposited with the bank, such deposit could not be treated as a loan or create an ordinary relationship of debtor and creditor between the bank and the depositor. At page 330 of the said report, the Supreme Court made observations to the effect that the mere fact of the bank being at liberty to use the said amount in the ordinary course of business did not by itself destroy the fiduciary rel....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ure date and the amount was sent by the banker as directed. In both the above-referred to Madras High Court cases as well as in the case of Farley v. Turner [1857] 26 LJ Ch 710, to which I will refer a little later, it was held that the bank held the amount as a trustee and the presumption ordinarily arising from the normal transaction of banking was rebutted in view of the creation of a special relationship by the earmarking of the amount under the specific arrangement arrived at between the bank and the depositor. Shri J. I. Mehta, learned counsel for the applicant, also relied on certain standard works on the subject of the law of bankers' commercial credits. Learned counsel relied on the formulation of the relevant principles by the well known author H. C. Gutteridge in his standard work known as The Law of Bankers' Commercial Credit, sixth edition. At page 54 of the said standard work, it was observed by the learned author as under: "If the buyer has many transactions of this kind he is normally granted a limit (similar to a limit for advances); or he may in advance place the banker in funds for the purpose of meeting the payment to be made under the particular credit, in wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... In other words, if the amount is deposited with the bank duly earmarked for a specific purpose such amount is segregated in a business or commercial sense of the term though not in the physical sense of the term and such amount is impressed with trust. It is obvious that such specific deposits are held by the bank as a custodian, bailee or trustee, rather as a stakeholder and can never be treated as part of general assets of the bank. Shri J. I. Mehta, learned counsel for the applicant, also invited my attention to certain passages from the well known work by an American author on the subject known as Bank Credits and Acceptances written by Wilbert Ward, fourth edition. Chapter XIV of the said book is directly relevant on the subject. Learned counsel also relied on the judgment of the New York Court of Appeal in Shaiomut Corporation v. Bomick Sales Corporation's case (260 NY 499) referred to hereinafter. I shall first discuss the facts and the ratio of this judgment. The facts of this case are of considerable significance. A firm of merchants desiring to purchase goods requested the defendant bank to issue to the seller a commercial letter of credit, which was done. The purchase....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ollar credit, be reimbursed in full, and in the case of a foreign currency credit should also be reimbursed in full, unless the transaction has taken on the color of a remittance or foreign exchange transaction in that the bank has purchased for the account and risk of the customer foreign currency in order to meet its position under the letter of credit". Shri J. I. Mehta is fully supported in his submission by the authorities cited at the Bar. I am in agreement with each of the submissions of learned counsel for the applicant. The submissions made are correct and deserve to be accepted. Learned counsel appearing for the Reserve Bank of India invited my attention to some of the passages from the Law of Bankers' Commercial Credits by the late H. C. Gutteridge and Maurice Megrah, seventh edition. At page 32 of the said standard work, it is observed as under: "It must, of course, be borne in mind that where a bank receives moneys for the express purpose of satisfying a debt for its customer it cannot utilize these moneys for any other purpose and there is some authority for saying that if it communicates to the creditor the fact that it holds such moneys at the disposal of the cre....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... its creditors generally in the event of the bank being wound up. In Rai Bahadur Seth Jessa Ram Fatehchand v. Om Narain Tanhha [1967] 37 Comp Cas 204 (SC), the appellants had deposited a certain sum of money with certain mills as a security for performance of a contract of selling agency of the mills. The facts showed that there was no segregation. The mills had to pay interest. The agreement provided that though the period fixed in the agreement came to an end, the agreement would continue if the security deposit was not refunded and the commission due was not paid. Having regard to various clauses of the agreement and the totality of the facts and circumstances of the case, the court came to the conclusion that the deposit was in the nature of a debt and not a trust. After considering a large number of Indian and English cases, the Supreme Court held that the question whether the security 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, the facts and circumstances of each case and the conduct of the parties. If the terms of the agreement, if it is in writing, clearly indicate that the deposi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tween the bank and its customer in respect of deposits made. Such a relationship is presumed subject to rebuttal thereof. (b)If an applicant makes a specific deposit with the bank for a specific purpose and the amount is earmarked or segregated in the business or commercial sense of the term though not in the physical sense of the term, the presumed relationship of debtor and creditor is rebutted. It follows that in such cases the bank is the custodian of the amounts entrusted to it in a fiduciary capacity and such amounts are impressed with trust. In such a case, the relationship constituted between the bank and the customer is that of bailor and bailee, trustee and beneficiary. In some of the situations, the bank holds the amount merely as a sort of stakeholder. In such cases, the insolvency of the bank, if any, has no adverse effect on the beneficiary and moneys are refundable to the beneficiary in full. In such a case, such specific amounts held by the bank do not form part of the general assets of the bank and can never be available to its creditors for rateable distribution in the event of the company being wound up. (c)The ratio of three of the judgments of the Supreme Cou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ransaction was of debtor and creditor or bailor and bailee or trustee and beneficiary. If the moneys entrusted to the bank for a specific purpose are used by bank for its own purpose, the equivalent amount would be payable by the bank to the applicant in full and the doctrine of tracing the trust fund would apply so as to protect the interest of beneficiary in the trust fund or its equivalent. In my judgment, the facts of this case clearly indicate that the margin moneys in question were undoubtedly impressed with trust and the bank held the same as trustee for the benefit of the depositor to the extent of unutilised amount. In view of the background of the Reserve Bank guidelines and segregation of the amounts from the current account of the applicant for a specific purpose, it must be held and it is held that the amounts deposited by the applicant were impressed with trust and are refundable to the applicant in full to the extent of the unutilised amount. In my judgment, it is irrelevant that the mode followed by the bank was that of issuing the four fixed deposit receipts in favour of the applicant after segregation of the amounts from the current account of the applicant for t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ell in a case which appeared to be of some complexity in the beginning. When I started with the hearing of this case, I felt that the questions involved in this case were rather complex. After going through all the cases cited at the Bar and studying the legal literature produced by learned counsel for the petitioner and listening to their clear and lucid arguments, I feel that the issues involved are plain and simple and the application must be allowed without any hesitation. In the result, I make the judge's summons absolute in terms of prayers ( b), (c) and (d ). Prayers (b), (c) and (d ) of the judge's summons read as under: "(b)That the respondents or either of them as may be found necessary or liable be directed by the mandatory order of this hon'ble court to forthwith pay to the applicant the sum of Rs. 8,19,570 being the balance amount standing to the credit of margin account No. FC/336059 after adjusting the value of letter of credit No. FC/336059/91. dated 23rd May, 1991, at the agreed exchange rate of US $4,700 per Rs. 100 as per foreign exchange forward sales contract No. PCB/6088/91; (c)That the respondents or either of them as may be found necessary or liable be di....