HC Bombay (27.02.1992) in Reserve Bank Of India vs Bank Of Credit And Commerce [1993 78 CompCas 207 Bom] held that;
#16. . . . .And it is pointed out, when money is delivered to a bank 'for application to a particular specific purpose' it is not a general deposit creating the relationship of debtor and creditor, but a 'specific deposit' creating the relationship of bailee and bailor or trustee and beneficiary".
# 17. . . .Supreme Court made observations to the effect that the mere fact of the bank being at liberty to use the said amount in the ordinary course of business did not by itself destroy the fiduciary relationship constituted by transaction of such specific deposit under a special arrangement. . . . . .
# 18. . . it was held that the bank held the amount as a trustee and the presumption ordinarily arising from the normal transaction of banking was rebutted in view of the creation of a special relationship by the earmarking of the amount under the specific arrangement arrived at between the bank and the depositor.
# 19. . . ."If the buyer has many transactions of this kind he is normally granted a limit (similar to a limit for advances); or he may in advance place the banker in funds for the purpose of meeting the payment to be made under the particular credit, in which latter case the funds so deposited cannot be utilized by the banker for any other purposes as, e.g., a set-off against other liabilities incurred by the buyer."
# 23. . if the amount is deposited with the bank duly earmarked for a specific purpose such amount is segregated in a business or commercial sense of the term though not in the physical sense of the term and such amount is impressed with trust. It is obvious that such specific deposits are held by the bank as a custodian, bailee or trustee, rather as a stakeholder and can never be treated as part of general assets of the bank.
# 34. . . . .the margin moneys in question were undoubtedly impressed with trust and the bank held the same as trustee for the benefit of the depositor to the extent of unutilised amount . . . . The said fixed deposits were also impressed with trust as the same were earmarked for a specific purpose, i.e. as a separate and distinct identifiable fund for honouring of letters of credit. Having regard to the nature of the transaction, it is clear that the transaction entered into between the bank and the applicant was in a special fiduciary capacity. It is, therefore, irrelevant that the bank agreed to pay some interest to the applicant. The applicant did not deposit these amounts in fixed deposit in order to earn interest. . . . . A trust money does not cease to be trust money merely because of user thereof by the trustee. In such a case, the bank in bound to reimburse the beneficiary an equivalent amount and the doctrine of tracing the trust fund would clearly apply. . . .
Excerpts of the order;
# 1. The judge's summons raises the following questions for consideration of this Court :
(1) Whether the amount of "margin money" deposited by the applicant with the Bank of Credit and Commerce International (Overseas) Ltd. in pursuance of the mandate contained in the godliness issued by the Reserve Bank of India to secure payments to be made by the bank under its letters of credit opened at the instance of the applicant in favour of the foreign exporter is impressed with the trust in favour of the applicant-depositor to the extent of the unutilised amount and the said amount is refundable in full to the applicant-depositor ?
(2) Whether the relationship between the applicant and the bank in respect of the amount so deposited is an ordinary relationship of debtor and creditor and the amount of margin money in this case in liable to be treated as a part of the general asset of the bank available for distribution amongst all its creditors in the event of the bank being wound up ?
# 2. I answer question No. 1 in the affirmative and question No. 2 in the negative.
# 12. The expression "margin" has been defined in the Black's Law Dictionary as under :
"A sum of money or its equivalent placed in the hands of a stock broker by the principle or person on whose account a purchase or sale is to be made as security to the former against losses to which he may be exposed by subsequent fluctuations in the market value of stocks."
# 13. It well-settled that ordinarily there is a relationship of debtor and creditor between the banker and the customer in respect of ordinary deposit made by the customer with the banker. It is equally well settled that there may be special relationship arising from particular circumstances and requirements of the transaction which would rebut such general relationship. There may be situations where a customer deposits an amount with a bank not as a general deposit but a specific deposit for a specific purpose creating the relationship of a bailee and a bailor or trustee and beneficiary or constituting the bank as a sort of stakeholder. In such cases where money is deposited with the bank as a specific deposit for a specific purpose and the same is earmarked as identifiable fund for being utilised in contingencies specified, the bank holds the amount as a trustee and the relationship between the parties in respect of such specific deposit is not that of debtor and creditor. In such a case, the amount so earmarked does not constitute a part of the general assets of the bank.
# 15. I shall first refer to the relevant judgments of the Supreme Court having a bearing on the two questions required to be decided in this judge's summons. To my mind, the judgments of the Supreme Court in the case of Shanti Prasad Jain v. Director of Enforcement [1962] 2 SCR 297; [1963] 33 Comp Cas 231 and in the case of New Bank of India Ltd. v. Pearey Lal, are more directly on the point.
# 16. In Shanti Prasad Jain's case [1963] 33 Comp Cas 231 (SC), . . . . .The question before the court was as to whether section 4(1) of the Foreign Exchange Regulation Act, 1947, was attracted to such a transaction of "specific deposit" as contra distinguished from general deposit. At page 252 of the above-referred to judgment in Shanti Prasad Jain v. Director of Enforcement [1962] 2 SCR 297; [1963] 33 Comp Cas 231 (SC), Venkatarama Aiyar J., speaking for the Bench of the apex court extracted passages from Paget's Law of Banking, sixth edition, page 48, and passages from the Corpus Juris Secundum, volume 9, page 570, and proved the statement of law laid down therein. The relevant passage from the Corpus Juris Secundum, volume 9, approved by the Supreme Court, reads as under :
“The intention the parties controls the character of the relation between bank and depositor, which may be that of the bailee and bailor, but is ordinarily that a debtor and creditor". And it is pointed out, when money is delivered to a bank 'for application to a particular specific purpose' it is not a general deposit creating the relationship of debtor and creditor, but a 'specific deposit' creating the relationship of bailee and bailor or trustee and beneficiary".
# 17. In such a case, the bank holds the amount as a stakeholder. Thus the apex court held that if the deposit made by the customer was a specific deposit for a specific purpose and there was a special contract concerning the same between the customer and the bank or a special relationship could be inferred from the facts and circumstances relating to the transaction of the amount deposited with the bank, such deposit could not be treated as a loan or create an ordinary relationship of debtor and creditor between the bank and the depositor. At page 330 of the said report, the Supreme Court made observations to the effect that the mere fact of the bank being at liberty to use the said amount in the ordinary course of business did not by itself destroy the fiduciary relationship constituted by transaction of such specific deposit under a special arrangement. On this aspect, the Supreme Court noticed the judgment of the Privy Council in the case of Official Assignee v. Bhat [1933] LR 60 IA 203, where it was held that a trust fund invested in business could be traced on the principle laid down in the well known case known as Hallett's Estate, In re : Knatchbull v. Hallett [1879-80] 13 Ch 696.
# 18. In New Bank of India Ltd. v. Pearey Lal [1962] 32 Comp Cas 91 (SC), the customer had paid an amount to the bank for transmission to another branch for issue of a fixed deposit receipt subject to instruction to be issued later on. The amount was transmitted by the head office of the bank to its newly opened branch. No instructions were issued by the customer for issue of a fixed deposit receipt. A moratorium was issued and the bank was prohibited from making payment to its creditors. The question before the apex court was as to whether the bank was a trustee for the said amount and whether the depositor had a right to demand the amount in full. All ordinary creditors were entitled to receive only 70% of the amount of deposit. Shah J., speaking for the Bench of the Supreme Court, held that in this case money was paid by the depositor for a specific purpose with an instruction to retain custody thereof till further instructions were issued for conversion thereof into an ordinary fixed deposit, which instruction were never issued. In paragraph 8 of the said judgment, the Supreme Court approved the ratio of the judgment of the Vice Chancellor in Farely v. Turner [1857] 26 LJ Ch 710. The facts of this case bear close analogy to the facts of this case. In paragraph 8 of the judgments, the Supreme Courts referred also to the ratio of judgments of the High Court of Madras in the case of Official Assignee v. Natesam Pillai [1940] 10 Comp Cas 66; ILR 1940 Mad 845; AIR 1940 Mad 441, and in the case of Official Assignee v. D. Rajam Ayyar [1910] ILR 36 Mad 499 [FB]. In the case of Natesam Pillai [1940] 10 Comp Cas 66, the customer had paid the money to the bank with special instructions to retain the same pending further instructions. In D. Rajam Ayyar's case [1910] ILR 36 Mad 499 [FB], the customer had kept the money with the bank with instructions to forward the same to another bank to meet a bill to become due and payable by the customer at a future date and the amount was sent by the banker as directed. In both the above-referred to Madras High Court cases as well as in the case of Farley v. Turner [1857] 26 LJ Ch 710, to which I will refer a little later, it was held that the bank held the amount as a trustee and the presumption ordinarily arising from the normal transaction of banking was rebutted in view of the creation of a special relationship by the earmarking of the amount under the specific arrangement arrived at between the bank and the depositor.
# 19. Shri J. I. Mehta, learned counsel for the applicant, also relied on certain standard works on the subject of the law of bankers' commercial credits. Learned counsel relied on the formulation of the relevant principles by the well known author H. C. Gutteridge in his standard work known as The Law of Bankers Commercial Credit sixth edition. At page 54 of the said standard work, it was observed by the learned author as under :
"If the buyer has many transactions of this kind he is normally granted a limit (similar to a limit for advances); or he may in advance place the banker in funds for the purpose of meeting the payment to be made under the particular credit, in which latter case the funds so deposited cannot be utilized by the banker for any other purposes as, e.g., a set-off against other liabilities incurred by the buyer."
# 20. Shri J. I. Mehta, learned counsel for the applicant also relied on certain passage from the book known as the Law Relating to Commercial Letters of Credit by David and particularly the passages at page 62. At pages 61-62, the learned author considered the question as to the status of the amount deposited by the customer with the bank becomes so as to enable the bank to meet the seller's draft. Another question which would rise in such a situation is as to what is to happen if the bank becomes insolvent and the money is not utilised for the specific purpose for which it was handed over by the depositor to the bank. At page 62 of the said book, the learned author dealt with the situation where the amount was specifically appropriated or earmarked to meet the seller's drafts. The relevant passage appearing in the said book in extracted below as it appears to me to have a bearing on the question under consideration in this case :
" In these circumstances the buyer who has deposited them retains, as it were, jura in rem over the cash or securities and, if the banker does not apply them in the way directed by his customer, i.e., to meet the seller's draft, then he must return them to his customer. Thus, in the event of the banker's insolvency, the buyer will be able to claim back what he has deposited with the banker and will not have the right merely to claim in the bankruptcy or winding-up rateably with the other creditors."
# 21. In all the standard works relied on before me at the hearing, the case of Farely v. Turner [1857] 26 LJ Ch 710, has been specifically referred to and relied upon. Our Supreme Court has already approved the ration of the said judgment in the case of New Bank of India Ltd. v. Pearey Lal [1962] 32 Comp Cas 91 (SC) referred to in the earlier part of this judgment.
# 22. In Farley v. Turner (29 Law Times Reports, 257) Vice Chancellor Kindersley, inter alia, observed as under :
"It is true that the money was not earmarked as if it had been sovereigns in a box, but it was earmarked in this manner .... This sum was not deposited as part of the general account, but for the express purpose of being dealt with in a particular way, and beyond that they had nothing to do with it."
# 23. In other words, if the amount is deposited with the bank duly earmarked for a specific purpose such amount is segregated in a business or commercial sense of the term though not in the physical sense of the term and such amount is impressed with trust. It is obvious that such specific deposits are held by the bank as a custodian, bailee or trustee, rather as a stakeholder and can never be treated as part of general assets of the bank.
# 25. The relevant passage from the book on the subject of Bank Credits and Acceptances by Wilbert Ward and Henry Harfield (pages 248 to 254) clearly project the through that the segregation by the bank if an amount sufficient to cover the letter of credit and treatment thereof in a separate account amounts to the bank holding the said amount as a bailee or as a trustee. At page 253, the learned authors summed up their conclusions as under :
"To sum up, therefore, it appears that the better rule, and one amply justified by decisions to date, is that in the case of a prepaid letter of credit which has expired unused where the bank issuing the letter of credit has become insolvent, the customer should, in the case of a dollar credit, be reimbursed in full, unless the transaction has taken on the color of a remittance or foreign currency in order to meet its position under the letter of credit."
# 26. Shri J. I. Mehta is fully supported in his submission by the authorities cited at the Bar. I am in agreement with each of the submissions of learned counsel for the applicant. The submissions made are correct and deserve to be accepted.
# 27. Learned counsel appearing for the Reserve Bank of India invited my attention to some of the passage from the Law of Banker's Commercial Credits by the late H. C. Gutteridge and Maurice Megrah, seventh edition. At page 32 of the said standard work, it is observed as under :
"It must of course, be borne in mind that where a bank receives moneys for the express purpose of satisfying a debt for its customer it cannot utilize these moneys for any other purpose and there is some authority for saying that if it communicates to the creditor the fact that it holds such moneys at the disposal of the creditor in satisfaction of the debt an action will lie against the bank for money had and received if the amount is no paid over in due course."
# 34. In my judgment, the facts of this case clearly indicate that the margin moneys in question were undoubtedly impressed with trust and the bank held the same as trustee for the benefit of the depositor to the extent of unutilised amount. In view of the background of the Reserve Bank guidelines and segregation of the amounts from the current account of the applicant for a specific purpose, it must be held and it is held that the amounts deposited by the applicant were impressed with the trust and are refundable to the applicant in full to the extent of the unutilised amount. In My judgment, it is relevant that the mode followed by the bank was that of issuing the four fixed deposit receipts in favour of the applicant after segregation of the amounts from the current account of the applicant for the specific purpose as aforesaid. The applicant was not at all free to utilise the said fixed deposits or the amounts thereunder. The applicant could not seek encashment of the fixed deposit receipts even on expiry of the due dates of the fixed deposit receipts at least so long as the letters of credit subsisted. The said margin money was constituted as a separate identifiable fund for honouring of letters of credit by the bank and for refund thereof to the applicant to the extent of credit by the bank and for refund thereof to the applicant to the extent of money not utilised for the specific purpose. The said fixed deposits were also impressed with trust as the same were earmarked for a specific purpose, i.e. as a separate and distinct identifiable fund for honouring of letters of credit. Having regard to the nature of the transaction, it is clear that the transaction entered into between the bank and the applicant was in a special fiduciary capacity. It is, therefore, irrelevant that the bank agreed to pay some interest to the applicant. The applicant did not deposit these amounts in fixed deposit in order to earn interest. The bank was not willing to open a letter of credit unless the applicant furnished security/margin money in terms of the Reserve Bank guidelines and retained the same till the letters of credit were worked out or cancelled on expiry thereof. Even if it is to be assumed that the bank had the permission of the applicant to use the amount of specific deposit in the meanwhile for purposes of its business, it would make no difference to the conclusion of the court. A trust money does not cease to be trust money merely because of user thereof by the trustee. In such a case, the bank in bound to reimburse the beneficiary an equivalent amount and the doctrine of tracing the trust fund would clearly apply. The principles laid down in Hallet's case [1879-80] 13 Ch 696 were clearly approved by the Privy Council in the case of Official Assignee v. Bhatt [1933] LR 60 IA 203 and by our Supreme Court in Shanti Prasad Jain's case [1963] 33 Comp Cas 231 (SC). Thus, the factual aspects emphasised by Mr. Thakkar noted in paragraph 23 of this judgment have not bearing on the ultimate conclusion of the court on the principal questions formulated in paragraph.
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