R. B. Seth Jessaram Fatehchand Vs. Om
Narain Tankha & ANR  INSC 13 (19 January 1967)
19/01/1967 WANCHOO, K.N.
CITATION: 1967 AIR 1162 1967 SCR (2) 429
Trust-Security deposited with company by sole
selling agentInterest payable by company-Deposit allowed to be mixed with other
funds--Deposit whether held by company as trusteeMatters to be taken into
The appellant firm was appointed sole selling
agent of a sugar manufacturing company and deposited Rs. 50,000 as security for
due performance of the contract; this amount was to carry interest at 6 per
cent per annum. There was no restriction on the use of the said deposit by the,
According to cl. (9) of the agreement the
security and interest were to be refunded at the termination of the agency; in
default of such payment the appellant firm was entitled to a commission as if
agency had not terminated.
The clause further said that "as long as
security with interest is not refunded and commission due is not paid this
agreement will not be terminated." The company was ordered to -be wound up
before the period of agency came to an end.
Consequent on the winding up the appellant
made an application praying for refund of its security deposit along with
interest. It was contended that as the company held the amount of deposit as a
trustee the appellant was entitled to priority among the creditors. On behalf
of the liquidators it was denied that the amount deposited was in the nature of
a trust entitled to preference over other debts. The company judge held that he
amount was an ordinary debt. The Division Bench of the High Court also decided
against the appellant. In appeal by special leave to this' Court.
HELD: The deposit did not amount to a trust.
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 and the facts and
circumstances of each case, without any leaning one way or the other on the
fact that the money was given as a., security deposit. [434 C] If a trust can
clearly be spelled out from the terms of the agreement that ends the matter.
But if the trust cannot be spelled out clearly the fact that there was no
segregation provided for, and the fact that interest was paid, would go a long
way to show that the deposit was not impressed' with the character of a trust
particularly when the person with whom the deposit was made could mix it with
his own money and could use it for himself. In such a case the inference would
be that the relationship between the parties was that of a debtor and creditor.
Further besides these circumstances, if there is any other term which suggests
one kind of ' f relationship rather than the other that will also have to be
taken into account. [436 B-C] In the present case the company was free to use
the money for its own purpose and had to pay interest on it. Further, in cl.
(9) of the agreement the security was put on a par with the commission which
was nothing but a debt. The courts below had therefore rightly treated the
security deposit as an ordinary debt. [436 F] Peter Donald Macpherson v. Dugald
Mckechine and Ors. XXVIII (1923-24) Cal. W.N. 721. In the matter of Travancore
National and 430 Quilon Bank Limited, Official Liquidators and Another
Applicants, A.I.R. 1939 Mad. 337, In re Manekji Petit Manufacturing Company
Ltd. A.I.R. 1932 Bom. 31 1, Maheshwari Brothers v. Official Liquidators, I.L.R.
 All. 242, Keshetra Mohan Das v. D. C. Basu, I.L.R.  1 Cal. 313.
Gee v. Liddell, (1866) 55 E.R. 1038, Knatchbull v. Hallett, (1879-80) XIII Ch.
D. 696. In re Hallett & Co.,  2 Q.B.D. 237 and Frank M.Mckey v.
Maurcie Paradise, 81 L. Ed. 75, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 891 of 1964 Appeal by special leave from the judgment and decree dated
October 30, 1961 of the Allahabad High Court in Letters Patent Appeal No. 83 of
N. C. Chatterjee, B. C. Mishra, B. R. G. K.
Achar and M. V Goswami, for the appellant.
Chaman Lal Pandhi and S. L. Pandhi, for the
The Judgment of the Court was delivered by
Wanchoo, J. This is an appeal by special leave against the judgment and decree
of tie Allahabad High Court. The appellant is a registered partnership carrying
on business at Kanpur. -It entered into an agreement in December 1948 with the
VijiaLakshmi Sugar Mills Limited, Doiwala, District Dehra Dun (hereinafter
referred to as the Mills) and was appointed sole selling agent of the Mills.
According to the terms of the agreement, the appellant ,deposited a sum of Rs.
50,000/as security for due performance of the contract, and this amount was to
carry interest at the rate of Rs. 6/per cent per annum to be paid by the Mills.
In November 1949 an order was passed. winding-up the Mills and this happened
before the period of agency can* to an end.
Consequent on the winding-up of the Mills,
the appellant made an application in September 1950 by which it prayed for
refund of security deposit -along with interest. It was also prayed that the
Mills held the -amount of deposit as trustee and in consequence the appellant
was ,entitled to priority with respect to the amount of Rs. 50,000/-. In
addition, there was a claim of Rs. 24,500/with respect to commission. That
claim was given up and we are now not concerned with it.
The liquidators admitted that there had been
an agreement as alleged by the appellant and that a sum of Rs. 50,000/had been
deposited with the Mills. But their case was that this amount -was an 'Ordinary
debt with respect to which the appellant could not claim any preference and
that the appellant's contention that -the amount deposited was a kin 1 of trust
with the Mills was not -correct. The only question that had to be decided
therefore was whether the amount of Rs. 50,000/deposited as security for due
performance of the contract of sole selling agency was in the nature of a trust
which was entitled to preference. or was an ordinary, ,debt.
431 The learned Company Judge held on a
construction of the agreement that the amount was an ordinary debt. He referred
in this connection to the apparent conflict between the decisions of the
Calcutta and Madras High Courts on one side and the Allahabad and Bombay High
Courts on the other but was of opinion that this conflict was largely illusory
as the question whether the deposit in a particular case was in the nature of a
trust or was an ordinary debt depended on the facts and circumstances of each
case. He finally held that the deposit in question was not In the nature of a
trust and, was not entitled to any preference on that ground.
The appellant then went in appeal to, a
Division Bench.. The Division Bench upheld the view taken by the learned
Company Judge and dismissed the appeal. The High Court having refused to grant
a certificate, the appellant applied for an obtained special leave from this
Court, and that is how the matter has come before US.
The two main terms of the agreement, viz.
Nos. 8 and 9 between the appellant and the Mills which call for consideration
in the present case are these:"(8) That the firm has deposited sum of Rs.
50,000/with the said Mill as a security for
the due performance of the contract on their part, on which amount the Mill
shall pay interest to the said firm at the. rate of 6 per cent per annum.
"(9) That the Mill shall refund the said
security deposit of Rs. 50,000/with interest thereon at the rate on termination
of the agency. In case he said amount is not refunded with interest thereon the
firm shall be entitled to commission at the rates mentioned above as if agency
has not terminated. In other words as long as security with interest is not
refunded and commission due is not paid this agreement will not be
terminated." It may be mentioned that the agreement was for a period of
one year which, as already indicated, had not expired before the winding up
order was passed on November 8, 1949.
It will be seen from the terms of the
agreement already set out: that there was no stipulation that the amount of Rs.
50,000/deposited as security would be kept as
a separate fund by the Miffs and it would not use it for its own purposes. On
the other hand,, it is clear that interest had to be paid and there was nothing
in the agreement to prevent the Mills from using the money as its own so long
as it paid interest on it. It is true that the money was to be refunded along
with interest on the termination of the agency, but cl. (9) further provided
that in case the money was, not refunded after one year, the appellant would be
entitled to commission as if 432 the agreement had not terminated. As the
agreement itself puts it, it will remain alive even after the period of one
year so long as the security with interest was not refunded and the commission
due was not paid. The last words of cl.
(9) of the agreement put the security deposit
and the commission due on the same footing. It is because of this provision
that the learned Company Judge held that as the security deposit and the
commission due were put on the same footing and the commission could only be a
debt, the security deposit in the circumstances of this agreement could not be
treated on a higher footing. It seems to us that the view taken by the learned
Company Judge so far as this agreement is concerned (which was upheld by the
Division Bench) is correct.
We may now refer to the apparent conflict
between the Calcutta and Madras High Courts on one side and the Allahabad and
Bombay High Courts on the other, on this question. The representative cases on
one side are: (i) Re:
Alliance Bank. of Simla: Peter Donald
Macpherson v. Dugald Mckechnie and others,(1) and (ii) In the matter of
Travancore National and Quilon Bank Limited, Official Liquidators and other
applicants (2). On the other side the cases are (i) In re: Manekji Petit
Manufacturing Company, Limited(3) and (ii) Maheshwari Brothers v. Official
Liquidators(4). The two Calcutta and Madras cases seem to take the view that
where there is a deposit there is creation of some kind of trust even though
the deposit may carry interest and the person with whom the deposit is made is
entitled to use the money as his own. It may however be mentioned that the
Calcutta case was with respect to provident fund of the employees of a bank
which went into liquidation while the Madras case was with respect to security
deposit by an employee of a bank for due performance of his duties. It may be
added that such cases were later provided for specifically by the amendment of
the Indian Companies Act (No. VII of 1913) which was made in 1936 and by which
s. 282-B was added to the Companies Act along with cl. (e) in S. 230(1) of the
same Act. Even so, these two cases make it clear that the proper approach to
the question is to ask whether on the interpretation of the document, if there
is one, or from proved or admitted facts and circumstances a trust is
established or not. if a trust is established, a provision for payment of
interest by the trustee does not destroy the character of the trust nor does
the fact that the money is not segregated.
The matter was again considered by the
Calcutta High Court in Kshetra Mohan Das v. D. C. Basu(5) in connection with a
deposit made by a sole, selling agent and the principle for deciding whether
the deposit was in the nature of a trust or a loan was put thus:.
(1) XXVIII (1923-24) Cal. W.N. 721.
(3) A.I.R. 1932 Bom. 311.
(2) A.I.R. 1939 Mad. 337.
(4) I.L.R.  All.24.
(5) I.L.R.  1 Cal. 313.
433 "If the security deposit of an
employee or an agent of a company in the hands of such company can be regarded
as impressed with trust or held in a fiduciary capacity company then such
employee or agent is entitled the whole of the security deposit even after such
goes to liquidation........ In the absence of or fiduciary relation the
employee or the agent company in liquidation is merely a creditor of the and
must share the assets pro rata with other There can in our opinion be no
disagreement by such to get back company such trust of the company creditors.
There can in our opinion be no disagreement
with the principle so enunciated, and the conclusion whether the deposit is in
the nature of a trust or a loan will depend upon the facts,and circumstances of
each case, particularly on the terms of the agreement if there is one in
The difficulty however arises in the
application of -the principle to particular cases. But the Calcutta and Madras
High courts seem to lean to the view that where there is a security deposit it
will generally be in the nature of a trust.
This brings us to the cases on the other
side. The Bombay High Court in Manekji Petit's case(1) was 'also considering
the case of a deposit by an agent. It considered the terms of the agreement
which provided for Rs. 6/per cent interest. Ordinarily the company was entitled
to use the deposit as it thought fit, but there was a provision in the
agreement that in the event of the company raising a loan secured by debentures
of the company or by mortgaging company's property, the moneys deposited by the
agent were to be forthwith invested in Government securities and to be
earmarked in some manner satisfactory to the agent. It was held on the basis of
this last clause in the agreement that there could be no trust till the
contingency provided therein came to pass. In that case that contingency had
not come to pass and the moneys were mixed with the moneys of the company and
used by it. The Bombay High Court held that upto that stage there was no trust
In Maheshwarl Brothers(2), the question arose
whether the security deposited by the agents for the fulfillment of their
obligation under the agreement was impressed with trust. The Allahabad High
Court considered the agreement and came to the conclusion that as interest was
provided and further as the company was entitled to use the deposit as its own
and lastly because a floating charge was intended to be created on the assets
of the company which failed for want of registration, the deposit was not in,
the nature of a trust. Thus absence of segregation and presence -of interest
coupled particularly with a,provision for a floating charge which had failed
for want of registration inclined the court to hold that the deposit was not in
the nature Of a trust.
(1) A.I.R. 1932 Bom. 311.
Sup. Court./67-14 (2) I.L.R.  All. 242.
434 It will thus be seen that the view of the
learned Company Judge that the conflict between the Calcutta and Madras High
Courts on one side and the Allahabad and Bombay High Courts on the other is
more apparent than real is borne out by the fact that in each case the court
considered the agreement to decide whether on the terms thereof and facts and
circumstances of the case the deposit was impressed with a trust, though it
must be admitted that the conclusion reached was not the same.
We are of opinion 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 he terms of the agreement and the
facts and circumstances of each case, without any leaning one way or the other
on the fact that the 'money was given as a security deposit. If the terms of
the agreement, if it is in writing, clearly indicate that the deposit was in
the nature of a trust, the court will come to that conclusion in spite of the
fact that interest is provided for in the agreement. But where the terms of the
agreement do not clearly indicate a trust, the court will have to consider the
facts and circumstances of each case along with the terms to decide whether in
fact something in the nature of a trust was impressed on the security deposit.
In such a case the fact whether segregation was provided for or not would be
one circumstance to be taken into consideration. Where segregation is provided
for the court would lean towards the deposit being in the nature of a trust.
But where segregation is not provided for and the deposit is permitted to be
mixed up with the funds of the person with whom the deposit is made, the court
may come to the conclusion that anything in the nature of trust was not
intended, for generally speaking in view of s. 51 of the Indian Trust Act, (No.
2 of 1882) a trustee cannot use or deal with the trust property for his own
profit or for any other purpose unconnected with the trust. It is true that where
there is a clear trust and the trust deed if any provides that the trustee may
use the trust property as he likes, the fact that the trustee can mix the trust
property with his own may not make any difference. But where there is no clear
indication that a security deposit was impressed with a trust, absence of
segregation would be a circumstance against there being a trust.
Another circumstance which may have to be
taken into account in a case where the agreement does not indicate clearly that
the security deposit is impressed with a trust is the payment of interest.
Where there is no payment of interest provided for an inference may be readily
drawn that the deposit was in the nature of a trust. But where the person with
whom the deposit is made is to pay interest it may be possible to infer that
payment of interest is a pointer towards there being no trust. Further any
other provision in the agreement and any other circumstance as to the manner in
435 which the deposit was dealt with may also have to be taken into account in
coming to the conclusion whether the security deposit in a particular case was
impressed with a trust or not.
We may now refer to some English and.
American cases in this connection. In Gee v. Liddell(1) the facts and
circumstances of the case were considered and it was held on those facts and
circumstances that there was a trust. In that cast pound 2,000 had been left as
trust by a will,-but the executor who was', the son of the testator said that
his father had intended to bequeath pound 3,000 and the question was whether
the further pound. 1,000 was also a trust. On the facts and circumstances of
that case it was held that as the amount bequeathed (namely, pound 2,000) was
certainly a trust, -the addition of pound 1,000 to it by the executor would be
of the same kind and would be equally impressed with trust. That case also
shows that where a trust can be inferred clearly a provision for payment of
interest would be immaterial.
In re: Hallett's Estate, Knatchbull v.
Hallett(2) it was held that if a person held money in a fiduciary character but
mixed it up with his own account, the person for whom the money was held could
follow it and had a charge on the balance in the bankers' hands. This case
again shows that the main question that courts have to decide in such cases is
whether on the facts and circumstances a fiduciary relationship is established.
If it is established, then the fact that the money was mixed with the trustee's
money may not make any difference.
In re: Hallett & Co.,(3) segregation was
the test used for the purpose of deciding whether there was trust or not.
In Frank M. McKey v. Maurcie Paradise,(4) the
question arose with reference to a claim of an employee welfare association
against the employer and it was held that without segregating any money as due
to the association there could be no trust. This case shows the significance of
segregation in arriving at the inference whether there was a trust.
A consideration of these English and American
cases also in our opinion shows that the first question in each case where the
court is dealing with a security deposit is to ask whether on the agreement in
writing, if any, and on the facts and circumstances of the case and. conduct of
the parties it can be said that the security deposit was unpressed with some
kind of a trust. If that can be said then the question whether interest was
provided for and whether the trustee could mix the deposit money with his own
money would not be of importance and would not take away the character of the
deposit being impressed with a trust. The mere fact that money was deposited as
a security is not sufficient to come to the conclusion (1) (1866) 55 E.R. 1038.
(3)  2 Q.B.D. 237.
(2) (1879-80) XIII Ch. D. 696.
(4) 81 L. Ed. 75.
436 that it must be treated as trust money.
The court will have to look to all the terms of the agreement if in writing and
to the facts and circumstances of the case and to the conduct of the parties
before coming to the conclusion whether with a trust. If a trust can clearly be
spelled out from the agreement that ends the matter. spelled out clearly the
fact there was for and the fact that interest was to be to show that the
deposit was not impressed trust particularly where the person with whom the made
could mix it with his own money and could use it In such a case the inference
would be that the relationship the parties was that of a debtor and creditor.
Further these circumstances if there is any other term which a security deposit
was impressed the terms of But if the trust cannot be no segregation provided
paid would go a long way with the character of a deposit was for himself.
between besides suggests one kind of relationship rather than the other that
will also have to be taken into account. Illustrations of this will be -found
both in the Bombay case (i.e. in Manekji's case(1) and in the Allahabad case
(i.e., Maheshwari Brothers' case(1). In the Bombay case besides absence of
segregation and presence of interest there was a further fact that in certain
circumstances segregation had been provided for. The court was entitled to take
that fact into consideration and hold that the deposit was not impressed with
trust till segregation took place. In the Allahabad case a floating charge was
created which failed for want of registration, and that circumstance was also
used to show that the relationship between the parties was that of a debtor and
creditor and not that of a trustee and beneficiary.
Let us now apply these principles to the
facts of the present case. The facts show that there was no segregation in this
case and the Mills could mix the security deposit with its own money and use it
for its own purpose. Further because the Mills could use the money for its own
purpose, it had to pay interest. In addition to these two circumstances which
would incline one to the view that the relationship was that of a debtor and
creditor, there is the further fact that cl. (9) of the agreement provides that
even though the period fixed in the agreement would continue if the security
deposit mission due is not paid.We agree Judge that the last words in cl.(9)
commission due on a par.
The commission other than a debt; the
security deposit That is a further indication that the case was that of a
debtor and creditor are of opinion that the High Court was commission due is
not paid. The agreement is not refunded and the commission with the learned
Company make the security deposit and due can be nothing is put on a par with
that relationship in the resent In the circumstances we right in its view as to
the nature of the security deposit in the present case.
The appeal therefore fails and is hereby
dismissed with costs.
G.C. Appeal dismissed.
(1) A.LR. 1932 Bom. 311. (2) LL.R.