The Judgment of the Court was delivered by

Sir Lionel Leach, C.J:— The appellant company carried on business at Nagercoil in the State of Travancore and at Bombay. The Nagercoil office had a current account with the Travancore National and Quilon Bank, Limited, which suspended business on 20th June 1938 and is in the process of liquidation under an order for its compulsory winding up passed by this. Court. It will be convenient to refer to the appellant company as “the Company” and to the Travancore National and Quilon Bank, Limited, as “the Bank”. The Bank had a branch at Bombay, but the Company had no account there. On 14th June 1938 the Company instructed the Bombay branch of the Bank to collect Rs. 5,000, the amount of a cheque drawn in its favour on the Indian Bank at Bombay, and to remit the proceeds to the Nagercoil branch of the Bank to the credit of the Company's account. The cost of collection and remittance was Rs. 4-11-0 which the Company paid. The Bombay branch of the Bank collected the amount of the cheque the next day, but did not carry out its instructions to remit the money to Nagercoil. When the Bank went into liquidation the money remained with its Bombay branch and was never sent to Nagercoil. In these circumstances the company applied to this Court in the liquidation proceedings for an order directing the Official Liquidators to pay to it the Rs. 5,000 on the ground that it represented money held by the Bank in trust. The application was heard by Venkataeamana Rao, J., who was of the opinion that the entrustment of the money to the Bombay branch of the Bank for the purpose of transmission to its Nagercoil branch could not be considered to be money received by the Bank for a special purpose. He regarded the position as being one merely between creditor and debtor: The Company has appealed from this order.

Section 229 of the Indian Companies Act makes the insolvency rules applicable in the winding up of an insolvent company. Section 52 of the Presidency-towns Insolvency Act states that the property of the insolvent divisible amongst his creditors shall not comprise, inter alia, property held by the insolvent on trust for any other person. This corresponds to section 38 of the English Act. It is pointed out in Williams on Bankruptcy, Fourteenth Edition, page 244, that trusts, for the purpose of this section, include:—

(a) Express trusts and trusts virtute officii

(b) Trusts created by the bankrupt on what was his own absolute property; and

(c) trusts of agency on the subject-matter of which the bankrupt had not the general, but only a special property.

It is common ground that if the Bank had paid the Rs. 5,000 into the Company's account at Nagercoil, the Official Liquidators would be entitled to it, but as it never reached that account the appellant says that the case falls within the category (c).

In deciding this question great assistance is to be obtained from certain English decisions, which we will proceed to examine. The first is that in Toovey v. Milne(1). There a person advanced to a bankrupt money for the purpose of settling with his creditors. The purpose failed and a part of the money was repaid to the lender. It was held that this re-payment was protected. Abbott, C.J said that the fair inference from the facts proved was that the money was advanced for a special purpose and, being so clothed with a specific trust, no property in it passed to the bankrupt.

The principle in Toovey v. Milne was applied in Edwards v. Glyn(2) where the facts were these. A firm of bankers carried on business at Blandford in Dorsetshire under the style of Oak and Snow. A run on the bank was anticipated and certain friends of the firm signed a guarantee on the understanding that it should not be used unless the bankers could clearly see that it would carry them over the crisis. The defendants carried on business as bankers in London, and in that capacity acted as the London agents of Oak and Snow. The defendants advanced to the firm on the security of the guarantee the sum of £3,000 in gold and notes, which were placed in a box and handed to Snow. On his return to Blandford the same evening Snow ascertained from his partner that it was hopeless to expect to meet the run the next day and the box containing the £3,000 was returned to the defendants. On the day after, the firm suspended payment. It was held by Lord Campbell, C.J and Erle and Crompton, JJ. that there had been no fraudulent preference because in returning the money Snow was influenced by a letter received from one of the sureties stating that as the position of the firm was hopeless they could not safely or honourably regain the money and that it ought to be returned. It was held by Erle and Crompton, JJ. that the money having been obtained for a special purpose, and that purpose having failed, the sureties had an equitable right to the return of the money. In the course of his judgment Crompton, J. said:

“The question does not appear to me to be what the rights of the defendants are, but what the rights of the bankrupt are in equity as well as law, and whether a third person has an equitable right which prevents the assignees from interfering. This is a perfectly well-known and well-established principle of Bankruptcy Law, and from the decided cases it appears that this principle has been extended to the case of money advanced for a special purpose; and it appears to me that the present falls within the authority of the case before Lord Tenterden [Toovey v. Milne].”

Crompton, J.:— Also said:

“It is a new case, but I think we must look to ascertain whether the bankrupts had an equitable right to use the money as against all persons. I think equity would have prevented them from using it had there been time to interfere, and so the bankrupts had not the equitable right, but only the legal right to the possession of the money; and therefore I am of opinion that the money would not pass to the assignees under the principle of Bankruptcy Law to which I refer.”

The next case is In re Farrow's, Bank, Ld. where the facts are more complicated. On 16th December 1920 one Voyce paid into his account at the Birmingham branch of Farrow's Bank a cheque for £1,493 drawn on the West Bromwich branch of the London joint City and Midland Bank. Farrow's Bank immediately credited Voyce's account with the amount and sent the cheque to its agent, Barclays Bank, for clearance. On 17th December Barclays Bank, having presented the cheque at the clearing house to the London Joint City and Midland Bank remitted the amount to its West Bromwich branch. At the same time Barclays Bank credited Farrow's head office on the clearance sheet, but subject to recourse. On 18th the West Bromwich branch of the London Joint City and Midland Bank debited the drawer and informed its head office that the cheque had been cleared. On Sunday the 19th December Farrow's Bank suspended payment and all cash remittance's received on Monday were returned. At 8-30 a.m on that day a notice was posted on the doors of the head office of Farrow's Bank stating that payment had been suspended and at 2-15 p.m instructions to suspend payment were telegraphed to all its branches. When the London Joint City and Midland Bank received information from its West Bromwich branch that the cheque had been cleared it settled with Barclays Bank through the clearing house. This was at 12-30 p.m Thereupon Barclays Bank informed Farrow's head office that the cheque was cleared. The question was whether the proceeds of the cheque had become part of the general assets of Farrow's Bank and therefore divisible among the creditors or whether Farrow's Bank remained in the position of a mere collecting agent, which meant that the proceeds belonged to Voyce.

The summons was heard by Astbury, J. whose judgment was confirmed by the Court of Appeal. The points decided are concisely stated in the head-note from which the following extracts are taken:

“Where a customer pays a crossed cheque into his bank, the question whether the bank receive it as holders for value or as agents for collection is a pure question of fact.

The fact that the cheque is immediately credited in the ledger does not necessarily make the bank holders for value. That inference may be rebutted by notices in the pass book and paying-in-slip or other evidence showing that the customer could not draw before clearance.

If the bank receive the cheque as agents for collection and stop payment before it is finally cleared at the clearing house, they can only receive and hold the proceeds as collecting agents for their customer, and not on the ordinary bank relationship of debtor and creditor.”

It was pointed out by Astbury, J. that the moneys were never in fact collected by Farrows Bank at a time when they were entitled to claim them as part of their assets. In the present case the cheque was collected by the Bank before suspension, but it did not send the money to Nagercoil and it could not claim the proceeds as part of its assets until it had done so.

In Rex v. Lovitt Lord Robson said that although branch banks are agencies of one principal firm it is well settled that, for certain special purposes of banking business, they may be regarded as distinct trading bodies. So far as the Company was concerned, the Nagercoil and Bombay branches of the Bank were distinct business concerns, and the ordinary relationship between a bank and a customer keeping a current account with the bank never existed between the Company and the Bank in Bombay. Lord Macnaghten in delivering the judgment of the Privy Council in Capital and Counties Bank v. Gordon pointed out that if a banker before collection credits a customer with the face value of a cheque paid into his account the banker becomes the holder for value of the cheque; but that was never the position here and the principle stated in Toovey v. Milne(3) and Edwards v. Clyn(4) applies. Undoubtedly if the money had got into the Company's account at Nagercoil, the Bank's position would no longer have been that of an agent holding his principal's moneys. It would then have been entitled to the control and the use of the money, which would give the Official Liquidators a right to it for the benefit of the general body of creditors. But as the money never got to Nagercoil it belonged to the Company and the Company's money cannot be retained for paying the Bank's creditors. The Official Liquidators must pay it over to the Company.

The appeal is allowed with costs. The Official Liquidators will have their costs out of the assets of the Bank.

Solicitors for respondents: King & Partridge.

G.R