(1.)THE petitioners are persons conducting chitties governed by the provisions of the Travancore Chitties Act, 1120 foremen, as the act calls them who had made deposits with the banking company in liquidation in compliance with S. 17 (1) of the Act, in some cases in compliance with S. 19 (2)as well. In the winding up they claimed priority for the debts due to them on the score that the deposits were special deposits made for a specific purpose and were therefore impressed with the character of a trust. Priority was denied by the liquidator who ranked the petitioners with the ordinary creditors; and hence these applications by way of appeal under S. 640 (6) of the Companies Act read with R. 164 of the Companies (Court) Rules.
(2.)IN the words of the Supreme Court in Shanti Prasad v. Director of Enforcement (AIR. 1962 Supreme Court 17b4 at page 1775) "now the law is well settled that when moneys are deposited in a Bank, relationship that is constituted between the banker and the customer is one of debtor and creditor and not trustee and beneficiary. The banker is entitled to use the moneys without being called upon to account for such user, his only liability being to return the amount in accordance with the terms agreed between him and the customer. There might be a special arrangement under which a Banker might be constituted a trustee, but apart from such an arrangement, his position qua Banker is that of a debtor, and not trustee. The law was stated in these terms in the old and well-known decision of the House of Lords in Foley v. Hill, (1848) 2 H. L. C. 28: 9 E. R. 1002 and that has never been questioned. The question is whether there was a special arrangement in the present cases by which the bank was constituted a trustee of the moneys deposited with it.
The deposits under S. 19 (2) of the Act present no difficulty and the case in respect of them deserves no more than summary rejection. They are ordinary deposits in current account and it is not pleaded that there was any agreement express or implied between the depositor and the bank affecting the ordinary relationship of debtor and creditor. Nor is there anything in the statute which gives the least indication that the bank is to hold the money in a fiduciary capacity. S. 19 of the Act runs as follows: 19 (1) The foreman shall, on the prized subscriber furnishing sufficient security for the payment of future subscriptions, be bound to pay him the prize amount and shall be entitled to get an acknowledgment in writing from him evidencing such payment. (2) If, owing to the default of the prize winner, the prize amount due in respect of any drawing remains unpaid before the data of the next succeeding instalment, the foreman shall invest the same forthwith in any approved bank mentioned in the variola and intimate in writing the fact of such investment to the prize winner, (3) Payment of the prize amount under sub-section or investment of the same under sub-section (2) shall be intimated to the subscribers at the next succeeding instalment and such payment or investment entered in the minute of proceedings of that instalment. (4) If the prize amount has not been invested in accordance with the provisions of subsection (2) or if the amount so invested has been withdrawn for purposes other than those for which the same has been held in deposit, the foreman shall be liable to a fine which may extend to five hundred rupees. " All that this means is that if the money cannot be paid owing to the prize winner's default the foreman is bound by the statute to invest the money in an approved bank mentioned in the variola instead of keeping it himself so that it can be withdrawn and paid to the prize winner when the default ceases, and that the foreman is not to withdraw the money for any other purpose. The investment is by the foreman in his own name. The withdrawal also is by him and no responsibility is cast on the bank in the matter. The words, "purposes other than those for which the same has been held in deposit" refer to the purposes for which the foreman holds the money in the shape of the bank deposit and do not imply that the bank holds the money for the purpose of payment to the prize winner. That is no concern whatsoever of the bank; the obligation is solely that of the foreman.
On money being invested in a bank, the relationship created between the investor and the bank, is that of a mere debtor and creditor and that the investor is under an obligation, statutory, contractual or fiduciary, to make the investment and to apply its proceeds in a particular way does not in any way alter the relationship so long as the bank has not placed itself in the position of a trustee or an agent or other fiduciary. Here there is nothing to show that the bank did anything more than accept the deposit in the ordinary course, and, even if it knew that the depositor occupied a position akin to that of a trustee and was bound to apply the money in a particular way, the only duty cast on the bank is that it should not be a party to a breach of trust as, for example, by knowingly paying the money for a personal purpose of the depositor.
(3.)THE law on the point is succinctly stated by Scott on trusts (Second Edition, Vol. IV page 3347): "if a general deposit is properly made by a trustee in his name as trustee the bank does not become a trustee of the money, but a debtor to the trustee. THE trustee becomes a creditor of the bank and holds his claim against the bank in trust for the beneficiaries of the trust. THE bank is as free to use the money deposited by a trustee as it is to use any other funds which are placed on general deposit with it. If the bank fails, the trustee or the beneficiaries are not entitled to priority over other creditors of the bank even though the money deposited is traceable. It is true that if the bank permits the trustee to withdraw money knowing that he intends to commit a breach of trust with the money, it is liable to the beneficiaries of the trust; but this is not because the bank is a trustee, but because it is assisting the trustee to commit a breach of trust and is thus liable for participation in the breach of trust. " See also In re T. N. and Q. Bank (AIR. 1940 Mad. 178), which was confirmed in appeal in Nayar Modern Bank v. Travancore N. and Q Bank (AIR. 1941 Mad. 48 ).
The deposits made under S. 17 (1) stand on no different footing. They are interest bearing fixed deposits in the foreman's name, on the face of them not different from any ordinary fixed deposit, and, just as in any other case, the fixed deposit receipt made out in the foreman's name is delivered to him, although, for the purpose of securing acceptance of the security given by him, he has to deposit the receipt with the Chitty Registrar so as to prevent him from drawing the money without the latter's concurrence. A fixed deposit, like any other deposit, is only a loan, although for a stated term, and, like any other deposit, the relationship it creates between the depositor and the bank is, in the absence of a special arrangement whether express or implied, impressing it with the character of a trust, that of an ordinary debtor and creditor. The essence of the matter is whether the deposit is a species of trust. And to say, as some decisions do, that the test is whether the bank holds the money in a fiduciary capacity, or whether the deposit is a special deposit for a specific purpose, is to say the same thing in different words. But, with regard to the latter test, it is necessary to bear in mind the caution that it is not enough that the depositor has in mind a special purpose when making the deposit, even if that purpose be known to the bank. An example would be of a trustee depositing trust funds in a bank. As already pointed out, even if the bank knows that the funds are trust funds, the transaction is, in the absence of any special arrangement, a mere loan creating only the relationship of an ordinary debtor and creditor. To make it something more and to entitle the deposit to priority, it is necessary that the bank should have agreed to hold the money and to apply it for the particular purpose thus making of itself an agent or a trustee.