Case: R. B. Seth Jessaram Fatehchand Vs. Om Narain Tankha &amp; Anr

The appellant is a registered partnership carrying on business at Kanpur. It entered into an agreement in December 1948 with the Vijai Lakshmi 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 came 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 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.2. 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 appellants contention that the amount deposited was a kind 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.3. 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.4. The appellant then went 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 and obtained special leave from this Court, and that is how the matter has come before us.

Court's reasoning:
6. 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 Mills 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 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.There can in our opinion be no disagreement with 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 writing. 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 aso 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.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 on reached was not the same.13. We are of opinion that the question whether the security deposit in a particular case can be said to be impressed with 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. 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 Trusts 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 security deposit was impressed with trust absence of segregation would be a circumstance against there being a trust.trust.19. 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 impressed 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 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 a security deposit was impressed with a trust. 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 to be paid would go a long way to show that the deposit was not impressed with the character of a trust particularly where 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 relationship rather than the other that will also have to be taken into account.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 comes to an end, the agreement would continue if the security deposit is not refunded and the commission due is not paid. We agree with the learned Company Judge that the last words in Cl. (9) make the security deposit and the commission due on a par. The commission due can be nothing other than a debt; the security deposit is put on a par with that. That is a further indication that the relationship in the present case was that of a debtor and creditor. In the circumstances we are of opinion that the High Court was right in its view as to the nature of the security deposit in the present case.14. 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 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.