Kodak Ltd. V/s South Indian Film Corporation held - Funds held in trust for failed negotiations

 High Court Madras (08/01/1937) in  Kodak Ltd. V/s South Indian Film Corporation held that; An advance received in respect of a contract which was under negotiations retains its character of trust money, upon the failure of negotiations. As such, these funds will not form part of “Liquidation Estate” in liquidation proceedings.

 

Excerpts of the order;

# 2. ………….By Section 52(1), Presidency Towns Insolvency Act 1919, it is provided that the properties of the insolvent divisible amongst his creditors shall not comprise amongst others the property held by the insolvent on trust for any other person. Section 94, Trusts Act, provides that in any case not coming within the scope of any preceding sections of the Act, where there is no trust, but the person having possession of property has not the whole beneficial interest in such property, he holds it for the benefit of the persons having such interest.

# 3. …………..  I have been referred to Official Assignee of Bombay v. Abdul Hajee AIR 1933 Bom 437, a case in which a sum of Rs. 1,000 was paid to a firm subsequently becoming insolvent by way of deposit in contemplation of the payer entering into a service agreement with the payee, the sum paid being the contemplated sum by way of fidelity guarantee. No agreement was ever concluded and in that case it was held by Wadia, J. that the payees were the trustees of the payers in respect of that money.

 

# 4. When the Company intimated to the creditor that there would be no concluded contract between them, in other words, when the Company withdrew its offer to make a contract upon the terms contained in an earlier letter (which they were entitled to do), the position of mere negotiation which had then existed terminated and upon the letters which I have seen it is quite clear that the Company were holding this sum of Rs. 250 for the benefit of the creditor …………...

 

# 5. I therefore hold that the sum of Rupees 250 out of the sum of Rs. 1,100 is in the words of Section 52(1) property not divisible amongst the general body of creditors, in other words they are not entitled to that amount. Whether questions arise in regard to other secured creditors I do not know. It may be a matter for subsequent application to the Court. So far as this matter is concerned, these creditors' claim is allowed with costs.

 

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Author’s Comments ; Section 36 of the Code in respect of Trust Money in Liquidation Estate reads as follows;

Section 36. Liquidation estate. -

(1) For the purposes of liquidation, the liquidator shall form an estate of the assets mentioned in sub-section (3), which will be called the liquidation estate in relation to the corporate debtor.

(2) The liquidator shall hold the liquidation estate as a fiduciary for the benefit of all the creditors.

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(4) The following shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation: -

• (a) assets owned by a third party which are in possession of the corporate debtor, including -

• (i) assets held in trust for any third party;

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