Case: Velji Lakhamsey &amp; Company Vs. B.R. Banaji

4. On 29th April, 1949, the claimants sent a cheque in the sum of Rs. 22,600 with a letter asking the bank to issue a draft payable to Podar Trading Company in the sum of Rs. 22,600. The bank in liquidation on 29th April, 1949, issued a pay slip in favour of Podar Trading Company or order. Podar Trading Company presented this through their bankers, the Chartered Bank of India, Australia and China for payment, but the bank in liquidation failed to pay this amount. In these circumstances the claimants argue that in fact they are now in the shoes of Podar Trading Company and that the bank held these moneys on behalf of Podar Trading Company as bailees or trustees, that this amount in the hands of the bank in liquidation was impressed with a trust in favour of Podar Trading Company and therefore Podar Trading Company are entitled through the claimants to follow these moneys as moneys had and received on their behalf by the Exchange Bank, the bank in liquidation. The facts of the case are not in dispute. The question is whether this was a normal purchase of a demand draft by the claimants through their bankers or whether the bank in liquidation received these moneys for a specific purpose and in the capacity of an agent for applying these moneys for a specific purpose(2) NOW, it must be stated that on the facts of this case, the claimants had a current account and it is not as if these moneys were expressly deposited by the claimants for the specific purpose of paying Podar Trading Company. In fact the current account showed a credit of Rs. 14,000 odd; they added Rs. 7,000 odd and purchased a demand draft or ap payable to Podar Trading Company or order. In these circumstances the question is whether this transaction was an ordinary transaction between the bank and its customer, namely, the purchase of a demand draft which is incidental to the normal business of the bank, or whether these moneys were received from the claimants for the specific purpose of being earmarked as payable to Podar Trading Company(11) BY this appeal the appellants question the correctness of the decision of Mr. Justice Coyajee who held that they were not preferential creditors for the winding up of the Exchange Bank of India and Africa Limited. It appears that on April 29, 1949, the appellants had to their credit in the current account of the bank a sum of Rs. 14,000 odd. On that day the appellants added a further sum of Rs. 7,000 odd, and they wrote a letter to the bank asking them to deliver to them a draft of Rs. 22,600 in the name of Podar Trading Company. These instructions of the appellants were carried out by the bank and the bank sent to the appellants a pay order in favour of the Podar Trading Company. The Podar Trading Company presented this pay order through their bank, the Chartered Bank, on April 30, 1949. The pay order was not honoured and it was returned to the Chartered Bank with the endorsement : no advice, present again.It was again presented on May 2, 1949, and it was dishonoured. On that very day the bank suspended payment. On June 14, 1949, the bank as wound up by an order of the court and the appellants made a claim that they were preferential creditors on two grounds : (1) as the customer of the bank, and (2) as the endorsee of the pay order which had been issued to Podar Trading Company.

Court's reasoning:
The essence of the transaction was in my opinion the normal transaction a bank puts through daily and hourly, namely they sold a demand draft in favour of a particular party, the firm of Velji Lakhamsey. Having sold the demand draft they transferred the amount to their suspense account.It is pointed out by Mr. Khambatta that this amount having been deposited to the account of Velji Lakhamsey was to be kept in the suspenseIn my opinion once the bank debits this account it is entirely for the bank how to utilise the sale proceeds of the demand draft, and if it is entirely for the bank to utilise the sale proceeds of the demand draft, having debited his account, there is no question of earmarking this specific amount for the specified repayment of this demand draftthere is in my opinion no evidence whatever of any specific instructions being given by the claimants or any such instructions being implied from the nature of the transaction. This was purely as I have stated above a normal transaction between the bank and its customer who bought a demand draft against the moneys lying in his current account. When the demand draft was sold by the bank the bank was paid through that current account and those moneys were not earmarked in my opinion for any specific purpose. When the demand draft was presented and had the bank been in a solvent state, the demand draft would have been met from the moneys of the bank and not from a specific amount earmarked for the purpose. To my mind once the bank had sold the demand draft there was no question of there being any impediment in the way of bank utilising and using the money of that sale for any purpose that they may have selected according to the exigencies of the bank(12) NOW, Mr. Jethmalani has cited before us several decisions. In our opinion, it is unnecessary to consider them because the principle that emerges from these directions is clear and well established, and the question in this appeal is not so much to discover what is the true principle of law which should be applied, but how to apply a well settled principle to the facts of this caseWhen we turn to the direction given by the customer on April 29, 1949, the instructions are clear and specific and the instructions are that the bank should deliver to them a cheque, as the customer calls it, or a pay order, as in fact it was in the name of Podar Trading Company. The bank carried out that instruction and sent the cheque or the pay order to its customer. As soon as this instruction was carried out, the agency terminated and whatever fiduciary relation there was came to an end. After the pay order had been delivered to the customer, it is impossible to contend that there was any obligation upon the bank to earmark this amount of Rs. 22,600 and that it had no right to utilise that amount for its ordinary normal business. The sum of Rs. 22,600 continued to remain part of the general funds of the bank and the only obligation upon the bank was to meet the cheque or the pay order when it was presented by Podar Trading Company. Therefore there was neither a trust as for as the customer was concerned because the customers direction had been carried out and the agency had come to an end, nor was there any trust quae Podar Trading Company because the bank never intimated to Podar Trading Company that it was holding the sum of Rs. 22,600 for Podar Trading Company pending the presentation of the pay orderIn our opinion, far from this method ofg supporting the contention of the appellants, it negatives the contention put forward by them. The matter would have been different if a specific account with regard to this pay order had been opened. The account in which this amount is credited is a general account in which all entries are made with regard to all pay orders issued by the bank. The account is maintained for the convenience of the bank and the account shows to the bank what pay orders they have to meet and when and for what amount. The account does not indicate that there is any special appropriation of this amount for any specific purpose. On the contrary, the account shows that the amount in question continued to remain part of the general funds of the bank and the bank merely for its own information and convenience made certain entries in certain accounts which did not in any way change the nature of the amount or impress it with any trust. There are cases undoubtedly where even the sending of a pay order by the bank may be held to constitute a trust with regard to the amount covered by the pay order, but in all these cases it will be found that apart from the sending of the pay order there were circumstances which led the court to the irresistible conclusion that the direction given by the customer was not merely to send a pay order but to transmit the amount over to a particular place or to a particular person. Now, if we could read this direction given by the customer on April 29, 1949, as a direction to the bank that they should pay this amount of Rs. 22,600 to Podar Trading Company, we would certainly have upheld the contention of the appellants. But in our opinion there is no circumstance in this case which goes to suggest that the customer wanted the bank not merely to issue a pay order in the ordinary course but to hold this amount for the purpose of paying it to Podar Trading Company. Therefore that contention of the appellants must failIn our opinion, the principle of equity, which is undeniably sound, has no application to the facts of this case. Equity would not permit the bank to deny the debt, nor would it permit the court when it is winding up the bank to deny to the creditor his claim against the bank. But nobody is denying the appellants the claim to this amount, nor is anybody suggesting that he is not a creditor. But what the appellants are claiming is not that they are creditors, but that they are preferential creditors, and in deciding whether the appellants should be paid in preference to other creditors the principles that have got to be applied are not the principles of equity but legal principles. Equity is not concerned with whether a creditor should be paid in preference to another creditor. These questions are governed by technical legal principles which have been well settled. Again, in order that we should hold that the appellants are entitled to be paid in preference to others, we must come to the conclusion that the sum of Rs. 22,600 was held by the bank in trust. Unless the amount was held in trust, there is no principle on which the claim of the appellants can be justified for being treated as preferential creditors. Trust is as much a principle of equity as the principle on which Mr. Jethmalani is relying, and it is precisely because it is a principle of equity that the courts have laid down that the right to be treated as preferential creditor only arises when the moneys with the bank are not held merely as a debtor but held as a trustee. If the bank is to a trustee, as we have held it is not, in respect of this amount, then the appellants cannot justify their claim as preferential creditors on any other principle of equity which has no application whatsoeverWe are not dealing here with a case of a scheme where the court may agree to certain creditors being paid in a certain manner. We are here dealing with an order of winding up made by the court and payment of creditors according to law, and in law in our opinion the claim of the appellants to be treated as preferential creditors is not justified.