ORDER
S.D. Dave, J.
1. Under a tripartite agreement between the workers, the workers' co-operative society and the mills company (in liquidation), the said mills company used to deduct amounts at the specified rate, from the worker's wages every month, and to transmit the same to the credit society to enable it to credit the amounts so received in the accounts of the workmen individually against the dues of the credit society. An amount of a significant value had remained with the mills company till the orders of winding up. The question before me is, as to whether the said money can be said to have been impressed with the character of trust money, for which the credit society can make a preferential claim, or whether the said money can be said to be the assets of the mills company in liquidation, for the recovery of which the credit society shall have to lodge a claim before the official liquidator, which once again shall have to rank pari passu with the dues of the secured creditors under section 529A of the Companies Act, 1956
2. The subsequent question based upon the contention coming from the learned counsel for the secured creditor is, as to whether the credit society can make a preferential claim over the money, when the assets of the mills company were mortgaged to the secured creditors and the liquidator on a transfer of equity of redemption was entitled only to the redemption
3. The said questions arise in company application which has been taken out in the company petition by applicant, Nutan Mills Employees Co-operative Credit Society Limited. The respondents are the liquidator for the mills company in liquidation, the secured creditors and the Textile Labour Association, Ahmedabad.
The prayer in the Judge's summons which has been taken out by learned counsel for the applicant and is supported by the affidavit of one Shri Sindhi runs thus :
'That this court be pleased to issue direction to the respondent official liquidator to pay Rs. 8,95,196.50 to the applicant being the amount standing to the credit of the applicant in the books of accounts of Nutan Mills Ltd. (in liquidation) as it is impressed with the character of a trust and not forming part of the assets of the company. It stands in priority to claims of all creditors.'
4. The relevant facts on the basis of which the abovesaid prayer has been sought by the applicant society could be gathered from the supporting affidavit of Shri Sindhi. The Chairman of the applicant society has said in his supporting affidavit that the applicant society was registered on 26 September, 1951, with the Registrar of the Cooperative Societies, with the main object of promoting, encouraging habits of thrift and saving and to extend credit on easy terms to the members of the applicant society. According to the applicant, the bye laws of the society provide that every member shall have to contribute compulsorily, the requisite amount as set out in bye laws of the society as the savings and that for the purpose of advancing of the loans the members of the applicant society and the smooth recovery thereof, a tripartite agreement came to be worked out between the applicant society, its members and the company in liquidation under which it was agreed that the society would advance loans to its members and that the loans would be repayable by monthly instalments and that the instalment amount and interest over the same would be deducted from the wages that would become payable to the employees. This deduction was to be effected by the mills company (in liquidation) regularly every month and that the society was to send every month a requisition to the company (in liquidation) showing the amount claimed from each of the employees of the company and that the company was to make deductions from the wages or salaries as per the requisition to be received from the society, and was to remit the said amount to the society.
5. It is the case of the applicant society that the mills company had started to suffer financial difficulties and was required to approach BIFR for revival. Anyhow the BIFR had declared the company as a sick industrial undertaking and IRBI, the respondent No. 2, came to be appointed as the operating agency with effect from 20 January, 1992. The mills company in liquidation came to be closed down on account of disconnection of electricity. According to the applicant society, the company (in liquidation) was regular in remitting the dues to the society prior to 1988; but later on, the company was not able to honour its commitment and after the failure of the revival exercise, the BIFR had formed the opinion that the company requires to be wound up under section 433(f) of the Companies Act, 1956, as it was just and equitable to wind up the company. This opinion came to be forwarded to this High Court and ultimately the orders of winding up came to be passed by this court on 6 July, 1993, and the respondent No. 1 came to be appointed as the liquidator.
6. According to the applicant society, from 14 July, 1991, to 19 November, 1998, the mills company (in liquidation) had remitted an amount of Rs. 8,35,000.00 to the applicant society as the deductions made by the mills company from the workers salary/wages, but on the date of the closure of the mills company, the amount of Rs. 8,95,196.50 remained outstanding to the society. According to the applicant, this amount which had remained in the hands of the company would be impressed with the trust and that the mills company (in liquidation) would be a sort of trustee, or quasi trustee qua the abovesaid amount and that the liquidator is bound to repay the same to the beneficiaries, namely, the workers of the mills company in liquidation before he undertakes the exercise of the distribution of the assets of the company.
7. Shri Sindhi has filed a further affidavit in support of the Judge's summons, dated 3 February, 1999, saying that the applicant society has claimed the abovesaid amount standing to its credit in the books of account of the company (in liquidation), as the money impressed with the character of the trust and not forming part of the assets of the company. It is said that learned counsel, Shri M. V. Shah, for the applicant society that he had taken the inspection of the accounts of the society and the books of account of the society would show that an amount of Rs. 9,00,742.35 is payable by the company in liquidation to the applicant society.
8. It has been said that the machineries and other movable assets of the company in liquidation have been sold and the amount realised as the sale proceeds has been deposited by the purchaser with RBI, the respondent No. 2, and that, therefore, the said respondent should be directed to deposit the entire amount as claimed in the Judge's summons with the respondent No. 1, the liquidator, for the purpose of making the payment of the same to the applicant society.
9. One more affidavit, dated 9.6.1999, came to be filed by Shri Sindhi in support of the Judge's summons saying that, there was a prescribed proforma for obtaining the loans from the applicant society by the members, available at Annexure A to the affidavit and that on 31 October, 1991, the Arrears Recovery Officer attached to the Office of the Arrears Recovery Mamlatdar situated at Collector's Office at Chedkantha, Ahmedabad, had issued a notice to the mills company in liquidation, saying that an amount of Rs. 9,90,129.60 was due and payable by the company (in liquidation) to the applicant society, and that if it is not paid within a stipulated period of seven days, the Recovery Officer would invoke the provisions contained in section 154 of the Bombay Land Revenue Code for recovering the abovesaid amount.
10. Learned official liquidator has submitted his report, dated 9 February, 1999. Learned official liquidator says that under the orders, dated 6 July, 1993, in Company Petition No. 64 of 1993, the mills company was ordered to be wound up and the official liquidator attached to this court has been appointed as the liquidator of the said company. It has been said that [when] the matter had come up for hearing before this court on 21 January, 1999, this court had directed the liquidator to give the inspection of the books of accounts to Mr. M. V. Shah, learned counsel for the applicant, and that, as per the said directions, he had deputed his representative who had given inspection of the books of account of the company to Mr. Shah in presence of the representative of the applicant society and the representative of the Textile Labour Association. Learned liquidator has submitted that it would be necessary to establish the claim of the applicant society according to the provisions of the Companies Act, 1956, after hearing the secured creditors, namely, the respondent Nos. 2 to 10 and the Textile Labour Association, the respondent No. 11.
11. The case put forth therefore by the Chairman of the applicant society in the abovesaid three supporting affidavits is that, under a tripartite agreement, the mills company in liquidation promised to deduct the amount, but has not remitted the same to the applicant society. It is the say of the applicant that the abovesaid amount lying with the respondent No. 1 company, the liquidator, is impressed with the character of trust money and, therefore, the applicant society is entitled to make preferential claim of the same and to receive the same from the monies which are now lying with the respondent No. 1, the liquidator.
12. Annexure A is the bye laws of the applicant society speaking of capital, the membership, the contribution, taking of the loans and the repayment of the same. Annexure B happens to be the report of the internal audit prepared by the auditor, Shri V. M. Patel, dated 14 December, 1993, along with copy of the accounts which would go to show that the account books of the applicant society showed that Rs. 7,46,742.35 was found to be due to the society by the mills company (in liquidation) as on 30 June, 1993. Annexure C happens to be the affidavit of proof of debt filed by Shri Sindhi, the Chairman of the applicant society in Company Application No. 64 of 1993. It is said that the abovesaid amount is lying with the respondent company and that the Chairman of the applicant society lodges the claim in that respect.
13. The Textile Labour Association, respondent No. 10, is supporting the case of the applicant society but without filing any affidavit in reply. As indicated above, the liquidator has submitted his report, which shows that his office does not take any stand. The respondent Nos. 2 to 9 have not filed requisite affidavit in reply.
14. The case of the applicant society, therefore, regarding the factum of the said accounts of the mills company in liquidation goes unchallenged. Same is duly supported by the report of the internal auditor, Shri Vithalbhai N. Patel, at Annexure B, duly supported by the accounts of the applicant society as on 30 June, 1993.
15. Learned counsel, Mr. Shah, who appears on behalf of the applicant society urges that the abovesaid amount which was lying with the mills company (in liquidation) has been impressed with a character of a trust, and as the trust money could be recovered from anybody who holds that trust money, the claim of the applicant society must be treated as a preferential claim and that the abovesaid amount should be directed to be paid by the liquidator who has got the funds in his hands as the sale proceeds of the assets of the mills company in question.
16. Learned counsel, Mr. Vasavada who appears on behalf of respondent No. 10 has supported the say coming from learned counsel, Mr. Shah. Anyhow, the combat coming from learned counsel Mr. Roshan Desai who appears for respondent No. 11, Bank of Baroda, gets full support from the contentions being raised by learned counsel, Mr. Buch who appears for the respondent No. 3, the ICICI Limited. The say coming from learned counsel for the secured creditors is that the abovesaid money which according to the applicant, would be lying with the mills company (in liquidation) cannot be said to be the money impressed with the character of a trust, and that the liquidator is having funds in his hands which are nothing, but the sale proceeds of the assets of the company, over which the secured creditors had a first charge and, therefore, the preferential claim being put forth by the applicant society cannot be sustained and that, therefore, no prayer can be granted to the applicant society in these proceedings. Alternatively, the contention coming from learned counsel, Mr. Desai and Mr. Buch is that, if at all the abovesaid money could be said to be workers' dues, their claim should rank pari passu with the claim of the secured creditors under section 529A of the Companies Act, 1956, and that the payment could be effected after ascertaining the funds available for secured creditors, whose claim would rank pari passu.
Learned counsel, Mr. Shah for the applicant society first draws my attention to a small paragraph captioned 'following trust property' at page 775, Palmer's Company Law, 21st Edition. The same could be reproduced thus :
'Following trust property
Property which can be identified as belonging to or held by the company in trust for other persons may be followed and recovered from the liquidator. Purchase money paid for property which is not delivered may, sometimes, be recovered.
Money fraudulently obtained may be followed into the banking account of a person who receives it without consideration.'
17. Learned counsel places reliance upon two English decisions, namely, Re Kayford Ltd. (1975) 1 All ER 604 (Ch D) and Chase Manhattan Bank v. Israel British Bank (1979) 3 All ER 1025. Re Kayford Ltd. was a case in which the company carried on a mall order business and the customers either paid the full purchase price or a deposit when ordering goods. The company, which went into financial difficulties, being concerned for the customers who had sent and were sending money for goods, took advice on how the customers might be protected in the event of the company becoming insolvent and came to be advised to open a separate bank account to be called 'Customers' Trust Deposit Account', into which all further sums of money sent by customers for goods not yet delivered came to be deposited. The company's bank opened a dormant deposit account in the company's name and the account had a credit balance. In the liquidation proceedings against the company, the question had arisen whether the amounts of money paid into bank account were held on trust for those who had sent them or whether they formed part of the general assets of the company. It was held by the Chancery Division that, in the circumstances, a trust had been created and that all the requisites of a valid trust of personality were present and the company had manifested a clear intention to create a trust in favour of the customers.
18. [The decision] in Chase Manhattan Bank NA v. Israel British Bank (1979) 3 All ER 1025, reveals that the plaintiff, a New York bank, was instructed to pay a huge amount to another New York bank, for the account of the defendant, a bank in England. The plaintiff had duly made the payment through the New York clearing house system. Later that day, by mistake 'because of a clerical error', it made a second payment of the same amount through the clearing house system to the New York bank for the account of the defendant, a bank in England. On 2 August, the defendant petitioned the English High Court to be wound up compulsorily. The plaintiff brought the action in England against the defendant claiming, inter alia, a declaration that on 3 July, 1974, the defendant became a trustee for the plaintiff of that sum, namely, US $ 2,000,687.50. In these facts and circumstances, it was held that the plaintiff was entitled in equity to trace the mistaken payment and to recover the same and that the abovesaid money at the commencement of the winding up did not belong to the defendant and had never formed part of its property, subject to the statutory trust under the winding up.
19. Anyhow, the question appears to be easily answerable with the assistance of the pronouncement of this court in Central Bank of India v. Recovery Mamlatdar and other, (1996) 2 Comp LJ 322 (Guj) : (1996) 87 Comp Cas 284 (Guj). Learned Company judge in this decision has taken a view that the sums payable by the company to Employees' State Insurance Corporation and deducted from employees' wages are to be held in trust by the company. It has been said that the money which the company had deducted from the wages of the employees' towards the employees' contribution had to be kept apart by the company as it was held by the company in trust, and was liable to be returned to the employees or the Employees State Insurance Corporation.
20. Anyhow, after deducing the abovesaid view, the learned Company Judge while allowing the application of the bank restrained the recovery proceedings by the Revenue Recovery authorities, permitting the bank to proceed with the sale of the company's assets subject to the bank's setting apart a sum equivalent to the claim of the Employees State Insurance Corporation.
21. Kshetra Mohan Dass v. Official Liquidator, East Bengal Sugar Mills Ltd. and others (1943) 13 Comp Cas 54 (Cal) was a case before the Calcutta High Court in which a sole selling agent of a company made a security deposit of a certain sum with the company as a guarantee for due performance of obligations undertaken by the contract of agency. The contract, however, provided that the company would pay interest on the sum deposited and that it would be entitled in certain contingencies, to appropriate it or a part thereof in satisfaction of its claim against the selling agent. The company went into liquidation and the depositor, the sole selling agent claimed that the amount deposited was a trust money and, therefore, was a preferential creditor. These contentions coming from the depositor came to be accepted by the Calcutta High Court holding that the deposit was trust money in the hands of the company and the depositor was entitled to have the whole of the sum together with interest in terms of the contract out of the assets of the company in the hands of the liquidator in priority of all other claims against the company.
22. The third and the last decision in this respect would show that the first question no longer remains res integra and has been duly answered and covered under the decision. In Baroda Spg. and Wvg. Mills Co. Ltd. (in liquidation) v. Baroda Spg. & Wvg. Mills Cooperative Credit Society Ltd. (1976) 46 Comp Cas 1 (Guj), the learned Company Judge has taken the view that there was in fact an agreement between the credit society and its members as envisaged under section 50(1) of the Gujarat Co-operative Societies Act, and that would impose a statutory liability on the employer of such member to make deduction from the wages or salary payable to such person. The company would, accordingly, acquire the character of an agent of the credit society to effect recovery on behalf of the society and to pay the amount to the society. The company would have no legal, title or beneficial interest in the money so collected by it, and when the company had neither legal nor beneficial ownership in the property, and when it was merely a custodian until it remitted the amount to the society, and could not mix the amount with its own funds and had no liability to pay interest, undoubtedly, the amount in the hands of the company was impressed with a trust and could not form part of the assets of the company in liquidation. It has been further held that the liquidator has, therefore, to pay the amount out before he undertakes distribution of the assets of the company.
23. This decision puts the controversy to an end and, therefore, question No. 1 shall have to be answered accordingly by saying that, the money in the hand of the company had been impressed with the character of a trust money and that the credit society can make a preferential claim.
24. The subsequent question referred to above is based upon the contention coming from learned counsel Mr. Roshan Desai appearing on behalf of one of the secured creditors, saying that the assets of the mills company in liquidation were mortgaged to the secured creditors and that, therefore, the mills company had the equity of redemption with them and on the appointment of the liquidator for the company in question after the orders of winding up, the liquidator was having that equity alone and that, though he has significant amounts in his hand, the entire amount would be required to be paid to the secured creditors and that, no money as urged by the applicant credit society should be either set apart or paid.
25. This contention coming from learned counsel in this respect, requires to be repelled on the reasonings which has governed the answer for the first question. Undoubtedly, the money lying with the mills company on the date of the order of liquidation and/or winding up were the money belonging to the credit society - the applicant before me, and that, the mills company in liquidation was holding the money in the capacity of a trustee. The mills company in liquidation was obviously not the owner of the money and in the same way, not the beneficiary. The money were being held by the mills company in liquidation in trust which were required to be transmitted to the credit society, so that it could be adjusted by the said society against the dues of the members, who incidentally would he the workers' of the mills company in question.
26. It is indeed true that when the properties were mortgaged with secured creditors having the first charge over the same, the mills company in liquidation had the equity of redemption with them. On the passing of the orders of winding up, the said equity of redemption gets transferred in favour of the liquidator who can exercise the right of redemption as per the contract of mortgage or hypothecation. But it should not be overlooked that the money in question were never the assets of the mills company in liquidation and that the said money were impressed with the character of the trust. This money could not have been mixed up by the mills company with other assets belonging to them. Though accounts duly manifest that the abovesaid amount was lying with the mills company (in liquidation), when the mills company had gone in liquidation, and has ceased to be a viable going concern, naturally, no money could be found which could have been set apart as the trust money. But that would not mean that this money loses the character and significance of a trust money.
27. This trust money lying with the mills company, has not been set apart and has mingled with the assets of the mills company. But this intermingling of trust money held by the mills company in trust, with the assets of the mills company, cannot take away the element of trust from the transaction and would not convert trust money into the assets of the mills company. The intermingling of these two different properties can never be taken as the passing of the property in the trust money in the hands of a trustee, in favour of a trustee, or else, the trustees in many such cases would also enjoy position of a creator of a trust and the only beneficiaries. This would militate against the very basics of the doctrine of 'trust' not only implied, but express also.
28. The conclusion, therefore, is that, the prayer as prayed for in the Judge's Summons requires to be granted. I order accordingly.
29. In the result, therefore, the liquidator is directed to pay the abovesaid amount to the applicant credit society from the funds available with him, before he undertakes the exercise of distribution of the said proceeds realised by disposing of the assets of the mills company in question. This should be done as early as possible, but at any rate, within a period of four weeks hereof.