The nature of the relationship between a company and a bank in the context of depositing money as security for employees, and the priority of payment in the liquidation process.

Alfred Henry Lionel Leach, C.J.

1. The appellant is a company registered under the Indian Companies Act and carries on a banking business at Palghat in Malabar. The appellant requires certain employees to deposit sums of money with it as security for the due fulfilment of their duties. Section 282-B(1) of the Indian Companies Act states that all moneys or securities deposited with a company by its employees in pursuance of their contracts of service with the company shall be deposited by it in a special account to be opened for the purpose in a scheduled bank as defined in Clause (e) of Section 2 of the Reserve Bank of India Act, 1934, and that no portion of the money shall be utilised by the Company except for the purposes agreed to in the contract of service. The Travancore National and Quilon Bank, Limited (I will refer to it for brevity as the Bank) was a scheduled bank as defined in the Reserve Bank of India Act, but it is now in liquidation as the result of an order for compulsory winding up passed by this Court on the 4th September, 1938. On the 30th July, 1937, the appellant deposited with the Bank a sum of Rs. 1,000 received as security from an employee. On the 15th of January, 1938, and on the 21st of February, 1938, it deposited with the Bank Rs. 5,000 and Rs. 500 respectively, these sums also representing security received from employees. These moneys were credited to the appellant in an account headed "employees cash security". They were, of course, deposited with the bank as the result of the statutory obligation imposed upon the appellant by Section 282-B(1) of the Indian Companies Act. The question involved in this appeal is whether the appellant is entitled to rank in the liquidation of the Bank in priority to the ordinary creditors. The question was decided against the appellant by Venkataramana Rao, J., and this appeal is from his order.

2. The learned Counsel for the appellant frankly and rightly concedes that the Bank did not hold the moneys as a trustee for the employees of the appellant, but he says that his client is entitled to prior payment because it is recognised that property which has been delivered to a bankrupt for a specific purpose does not pass to his trustee in bankruptcy, and quotes a passage. from Halsburys Laws of England where it is stated that property of this nature is clothed with a species of trust and is subject to the same principle as trust property. (Vol. 2, p. 228, Hailsham edn.) The learned Judge rejected this contention. He recognised that in such a case as the present one the depositor is the trustee and the money deposited is trust money, but he held that this does not affect the relation which the law creates between a bank and an ordinary customer, namely, the relation of debtor and creditor. The learned Judge pointed out that the legal effect of the notice to the Bank that the moneys deposited were trust moneys was only to cast a duty on, the bank not to participate in a breach of trust by the trustee.

3. We agree with the opinion of the learned Judge. The appellant would be entitled to succeed only if the Bank was in the position of a trustee or if the money had been deposited for a specific purpose. The appellant has conceded that the Bank was not a trustee; and we think it is equally clear that these moneys were not deposited with it for a special purpose so far as the Bank was concerned. The appellant held the moneys for a special purpose and was required by statute to deposit them in a Bank, but the section makes no difference in the position, of the Bank. Its position was still that of a banker keeping an account for a customer. The Bank, having notice of the trust, could not be a party to a breach of trust but that does not help the appellant. There has been no breach of trust.

4. The appeal fails and will be dismissed with costs.