Karnataka High Court
B.S. Madhva & Company And Ors. vs Kapila Textile Mills Ltd. And Anr. on 1 January, 1800
Equivalent citations: [1966]36COMPCAS63(KAR), (1967)1MYSLJ
JUDGMENT
1. This is an application under Section 446 of the Companies Act of 1956 by one of the creditors of the Kapila Textile Mills Limited in liquidation. The particular clause of that section which is obviously the basis for this application is clause [d] of sub-section [2] which confers jurisdiction on the winding-up court to entertain and dispose of any question of priorities or any other question whatsoever, whether of law or fact, which may relate to or arise in the course of the winding up of the company.
2. The first respondent to the application is the company itself represented by the official liquidator. Although the only other respondent is the Bank of Mysore, the prayers in the application being those which have wider scope and may affect the rights of other unsecured creditors also, the earliest orders passed on this application by this court were to notify the other unsecured creditors of the company as well as the State of Mysore which is the guarantor in respect of two mortgage loans claimed by the second respondent, the Bank of Mysore.
3. The claim by the applicants arises out of a building contract entered into between them and the company when it was just started. The applicants are a firm of engineers and builders constituted of two partners, viz., Abdul Wajid [now no more] and B.S. Madhava. The first named Abdul Wajid was also one of the directors of the company.
4. The building contract is represented by two documents-one called the articles of agreement with a schedule of rates annexed to it and the other called the conditions of contract. Both are dated 20th November, 1948. I shall make a more detailed reference to these documents at a later stage.
5. It will be sufficient for the present to state that the conditions of contract contains a clause for reference to arbitration of disputes between the parties relating to the contract.
6. The applicants after executing certain works tendered bills for payment which, according to them, were in accordance with the terms of the contract. The bills were not paid promptly or in accordance with the relevant terms of the contract. There were delays in payment and consequently disputes arose between the parties in relation to the bills which ultimately resulted in the parties proceeding under the arbitration clause mentioned above. It is unnecessary to refer to the litigation between the parties in regard to the applicants' claim to enforce the arbitration clause except to say that the proceedings finally resulted in the umpire. Mr. Nageshwara Iyer, making an award in favour of the applicants and against the company in the following terms:
"The position of the parties is thus as follows:
A. The plaintiffs are entitled to recover from the defendants: [1] Rs. 1,32,602-3-9 on bills P-3 to P-12 and P-15 to P-29. [2] Rs. 5,000-0-0 security deposit. [3] Rs. 60,000-0-0 damages. [4] Rs. 73,940-0-0 interest and [5] Rs. 6,500-0-0 costs. ------------- Rs. 2,78,042-3-9 B. The plaintiffs are liable to account for: [1] Rs. 13,653-11-0 Iron and steel account. [2] Rs. 14,968-0-0 receipts A.C. gutters and rain water pipes. [3] Rs. 10,414-8-0 Interests at the same rate of 10 per cent. from 9-5- 1958. ---------- Rs. 39,036-3-4 Omitting annas and pies, the difference is Rs. 2,39,006.
7. In the result, I award having been filed in the District Court at Mysore, that court made a decree in terms of the award, the operative portion of which reads as follows:
"It is ordered and decreed that there will be a decree in terms of the umpire's award with future interest at four per cent. per annum on the principle amount adjudged by the award."
8. Thereafter, there was presented to this court Civil Revision Petition No. 140 of 1960 by the liquidator against the said decree which was disposed on 18th January, 1962. This court held that the award was not open to question except only in one respect, viz., that the award of damages in the sum of Rs. 60,000 was erroneous in law, and directed the District Judge at Mysore to remit the award back to the umpire for reconsideration of that part of it which granted damages of Rs. 60,000. It was once again filed in the District Court of Mysore for passing a decree. Further proceeding in the District Court pursuant thereto have now been stayed by an inter in order made by the Supreme Court in an appeal by special leave presented by the applicants against the order of this court in Civil Revision Petition No. 140 of 1960.
9. The second respondent, the Bank of Mysore, is a secured creditor, the indebtedness of the company in respect of which is evidenced by two documents dated 30th October, 1949. Several attacks against the availability of security claimed by the bank under these documents were the subject of consideration in Company. Application No. 45 of 1961 which was disposed of by the order dated November 2, 1962, by which it was held that the bank was a secured creditor under both these deeds. One of them, it may be stated, is a simple mortgage in respect of immovable property of the company and the other a hypotecation of machinery and other movable belonging to the company. The principal amount secured by the simple mortgage was Rs. 2,00,000 and that secured by the hypotecation is Rs. 8,00,000. All details pertaining to these documents are found discussed in the order in Company Application No. 45 of 1961, and a repetition of these details is not necessary for the purpose of this application.
10. The prayers in the present application are the following:
"1. direct the official liquidator to pay to the petitioner therein the amount of the decree in M.A. No. 77 of 1953, on the file of the Additional District Court of Mysore, in full, after recognising the equity set up by them and, in priority.
2. declare that the petitioners have a prior claim over the materials put up by them on the priority of the 1st repondent mills under the terms of agreement dated November 20, 1948 in preference to the claim of the 2nd respondent the Mysore Bank,
3. Or in the alternative permit the petitioners to remove materials placed by them on the premises of the mills, in respect of which payments have not been made.
4. grant such other reliefs as this hon'ble count may deem fit and proper under the circumstances of the case."
11. Before proceeding to discuss the several points pressed on behalf of the contending parties before me, I may record two matters in respect of which there is no controversy. As already stated, the award of Rs. 60,000 by may of damages, which got deleted consequent upon the order of this court in Civil Revision Petition No. 140, of 1960 is the subject of appeal before the Supreme Court of India Mr. Karanth learned counsel for the applicants has stated and in my opinion rightly, that any equities or rights to preferential payment which he presses on behalf of the applicants in this case could have no application to the award of damages and that, in respect of that claim, his clients could rank only as ordinary un secured creditors. No further discussion is therefore called for on this point.
12. With reference to prayer No. 3. viz permission to the applicants to remove the materials placed by them on the premises of the mills, it is common ground that the materials therein referred to are not unutilised building materials lying on the land or premises belonging to the company nor any plant or scaffolding tools or implements belonging to the applicants left on those premises and still continuing to be in the custody of the company. It has been made clear that the materials to which the applicants refer in prayer No.3 could only be materials supplied by them and incorporated in the structures put up by them on the land belonging to the company pursuant to the building contract of 20th November, 1948.
13. So far as prayer No. 2 directed against the Bank of Mysore is concerned it is also made clear that competition between the claims of the applicants and the bank has reference only to the simple mortgage for Rs. 2,00,000 in respect of immovable property, because the machinery and movable which are the subject of hypothecation for the principal sum of Rs. 8,00,000 are not claimed to be materials supplied or furnished by the applicants or items of property in respect of which they have any interest in relation to the amounts found due to them by the arbitrator.
14. In substance, therefore the question relates to what is described in prayer No. 1 as the equity set up by the applicants for priority of payment over all other creditors.
15. The case of the applicant has been presented on the basis of the following propositions formulated as fully describing the equity claimed by them:
"1. Having regard to the terms of the two documents setting out the building contract, the title in the materials which have gone into the structure put up by the applicants pursuant to the contract could not pass to the company until they had been fully paid for and, therefore the applicants continued to be owners thereof to the exclusion of the company.
2. Even if it should be possible to hold that the title in the said materials did pass to the company, the applicants are entitled to a lien over them for payment of the money still remaining due to them,
3. There was, by virtue of a resolution adopted by the board of directors of the company at a meeting held on April 26, 1952 setting apart a sum of Rs. 1,75,000 for the specific purpose of paying the bills of the applicants, a trust created in respect of the said sum in favour of the applicants, and deducting a sum of Rs. 20,000 since paid the applicants as beneficiaries under that trust are entered either to trace that trust fund to the hands of the liquidator or to claim a charge in respect of it over the entire funds realised by the liquidator by the sale of building or structure put up by the applicants,
4. In any events, in regard to the earnest money deposit in the sum of Rs. 5,000 made by the applicants with the company when the contract was entered into, the title could not possibly have been in anybody except the applicants and, therefore, the liquidator is bound to refund the said sum of Rs. 5,000 in full, and
5. Considerations applicable to earnest money deposit would apply also to 10 per cent. of the bills which, according to the terms of contract the company was entitled to retain.
With particular reference to the competing claims of the applicants and the second respondent, the additional point suggested is that, at the time the mortgage in favour of the second respondent was executed there were no structures except a small shed on the land, that the structures were subsequently put up thereon by the applicants pursuant to the building contract mentioned above and that in view of the claim formulated under point No. 1. the second respondent cannot claim to enforce its mortgage as against the structures on the footing that they are accessions to the land which was the subject of mortgage.
16. In support of the claim that title in the materials did not pass or could not be held to have passed to the company, reliance was placed upon the position of law, now well established that the maxim of English common law "quic quid inaedificatur solo solo credit" does not apply in India or at the most could have only limited applications and also upon certain principles stated and English cases cited in Chapter XII of Hudson's book on Building and Engineering Contracts.
17. So far as the first part of the argument is concerns, viz, the applicability of the above maxim of English common law in India, the position does not call for any further discussion than is found in the order of this court in Company Application No. 45 of 1961 referred to above especially in view of the observations of the Supreme Court in Bishan Das v State of Punjab (1) . wherein their Lordships accepted as correct the statement of law contained in Thakoor Chunder Pramanick v Ramdhone Buttacharjee (2) (1866) 6 W R 228. approved subsequently by the Privy Council in Narayan Das v. Jatindranath (3) (1927) I L R 54 Cal. 669.
18. Among the English cases, Mr Karnath relied particularly upon two decisions, viz (1) Beeston v. Marrriott (4) (1864) 8 L T 690, 66 E R. 778. and (2) Bellamy v Davey (5) [1891] 3 Ch. 540.
19. I may at once mention that both these cases dealt with the respective rights of the contractor and the employer over the material lying on the site and not yet incorporated in the works contemplated by the contract. Before referring to them in greater detail, which I shall do presently I may note that one principle which both the cases state is that the nature and extent of the rights of the parties have necessarily to be ascertained from the terms of the contract. That principle is found stated in unmistakable terms but Blackburn J in Seath & Co. v. Moore (6) (1886) 11 App. cas. 350,370. as follows:
"I do not examine the various English authorities cited during the argument. It is, I think a question of the construction of the contract in each case, at what stage the property shall pass, and a question of fact in each case whether that stage has been reached."
20. This decision as well as the decision in Appelby v. Myers (7) (1867) L R 2 C P 651.are regarded as leading cases in England as laying down general principles although actually they refer to ship-building contracts. The same earned judge, Blackburn J., states in Appleby v, Mayers (7) (1867) L R 2 C P 651. at page 659 of the Report as follows:
"materials worked by one into the property of another become part of that property. This is equally true, whether it be fixed or movable property. Bricks built into a wall become part of the house, thread stitched into a coat which is under repair, or planks and nails and pitch worked into a ship, and therefore, generally and in the absence of something to show a contrary intention the bicklayer or tailor or shipwright is to be paid for the work and materials he has done and provided although the whole work is not complete. It is material whether in such a case the non-completion is because the shipwright did not choose to go on with the work...."
21. The two cases cited by Mr Karanth in as already stated related exclusively to loose materials not yet incorporated in the works to be executed under the contract. In the case of Bellamy v. Davey (1) [1891] 2 Ch. 540. the contractor had undertaken to build two large petroleum oil storage tanks to be placed (and not fixed) on concrete foundation to be furnished by the employer. Under the contract the cost was to be paid for after the completion of the work, the pound 45 in cash within three days of completion and four bills of pound 200 cash accepted to be payable in three six, nine and twelve months respectively from the said date. Before the work could be completed the employer which was a company was sought to be wound up upon action taken by its debenture holders. The question was whether the property in the tanks has passed to the company to be seized and appropriated by the receive in liquidation or the property was to still continue in the contractor. On a construction of the contract Romer J held that as between the contractor and the company the contractor was not bound to complete and deliver over the tanks without having his purchase money paid to him or securing a first charge on the purchase money.
22. In the case of Besston v. Marriott (2) (1864) 8 L T 690, 65 E R 778. a railway company employed Besston to execute certain works and the contract contained an express provision to the effect that rails, steelware and other material brought by the contractor to the site were to become immediately the absolute property of the employer-railway company, but contained certain further provisions indicating that such materials could be used whether by the railway company or by the employer only for the purpose executing the works and that surplus material, if any remaining after the completion of the works was to be handed back to the contractor. Messrs. Marriott and Jordan, a firm of solicitors who had obtained a decree against the railway company sought to get the materials seized in execution of that decree. The suit was by the contractor for an injunction restraining the firm of solicitors from seizing the materials in execution of their decree. The plaintiff succeeded Sir. John Stuart V C points out that although the expression "absolute property" is used in the contract the total effect of the contract is that having regard to the purpose for which the materials which are said to become absolute property of the employer were to be used the position in law clearly was that in respect of the material so placed on the site for the purpose of executing the works, the employer and the contractor had a certain special type of property short of absolute ownership.
23. Chapter XII of Hudson's book on Building Contracts dealing with the topic "Vesting and seizure of Materials and Plant" was considerably rewritten in the eighth edition. The opening paragraph of the chapter indicates that the propositions as suggested in the chapter of the same number in the previous editions of the book on the basis of certain observations in cases relating to ship-building contracts may not be quite accurate in relation to ordinary engineering and building contracts. It has been observed by the learned author as follows :
"Most building contract contain express provisions governing the ownership of materials or plant, The effect of these will be considered in section 2, express provisions below. In the absence of such provisions questions of ownership fall to be determined on general principles the most important of which is that the intention of the parties to be deduced from the surrounding circumstances will normally prevail. In considering problems of this kind, it is important to distinguish between materials or fitting on the one hand and plant on the other. The former are intended for incorporation into the buildings or other works contemplated whereas the latter , even if attached will usually require to be removed from the building or site when the work is completed. A further obvious distinction depends upon whether the materials or plant in question have in fact been affixed to the land or buildings of the employer. In the previous edition of this work many illustrations from ship- building contracts were cited, but it is obvious that a ship-building contract differs from a building contract in a most vital respect namely, that the work is not being done upon nor is it affixed to the land of the employer and the ship-building cases are consequently most concerned with two main questions viz at what point of time does the general property in the ship pass to the employer or purchaser and secondly, what is included with the ship when the property does pass?
The well-known rule is that the property in all materials and fittings once incorporated in or affixed to a building will pass to the free holder- ....The employer under a building contract may not necessarily be the freeholder, but may be a lessee or licensee or even but may be a lessee or licensee or even have no interest in the land at all as in the case of sub-contract. But once the builder has affixed materials the property in them passes from him and at least as against him they become the absolute property of his employer, whatever the latter's tenure or title to the land."
24. The position as summarised in Halsbury's Laws of England third edition third volume based upon the same rulings of English courts cited by Hudson is the same -vide paragraph 992 at page 502.
25. Now in the course of arguments on behalf of the applicants the attempt on the part of Mr Karnath had been to derive support for his client's case from the propositions fund stated in English cases relating to loose building material on the site yet incorporated into the works to be executed and to contend that the proposition well established in English law that the materials incorporated into the building or the works become the property of the employer cannot be invoked in India because of the ruling of the Privy Council and the Supreme Court already referred to.
26. I find it difficult to agree with the suggestion that because the Latin maxims frequently cited in English cases do not al fours apply as presumptions of law in India, the proposition that the material incorporated within a building or structure or works becomes the property of the employer is wholly inapplicable in India. It is not disputed nor cn it be that in the last analysis as pointed out by Blackburn J. in the cases cited above, the question is one of intention of the parties to be gathered from the terms of the contract and the surroundings circumstances. The reasonable and most natural intention which one could impute to a man employing a contractor to build a house for him could only be to own the house when completed and not to have the house constructed by the contractor to belong to the contractor. If such be the normally natural intention which could be imputed to a person the proposition that he does not become the owner of any part of the material used or used up in the construction of the house unless and until he pays the contractor's bill in full should be unacceptable. Among the dangerous consequences inherent in the proposition sought to be made by Mr. Karanth is that that owner of a land cold be successfully elbowed out of it by a contractor putting up a house under a contract between him and the owner, if the owner should fail to pay the money. Further, it is impossible to impute even to the contractor an intention to acquire a right in the house he has constructed. The contract that is entered into commonly called works contract is a composite contract under which he offers to expend his time, labour and money in return for payment of bills for construction which comprise or include cost of material, cost of labour cost of supervision and a margin of profit. A person who acquires profits by conducting or exercising a trade or profession cannot be described as a person the object of whose exercise of such profession is to acquire the property in respect of which he exercises his profession or trade.
27. I do not see therefore any reason to hold that because the Latin maxims do not apply in India, a building contractor whose bills have not been paid should be held to become the owner of the building.
28.As already stated, it is no part of the case of the applicants that the claim made by them in this application has any reference to loose materials or plant or scaffoldings tools or implements but to the materials incorporated into the structure constructed by the applicants.
29. Although this makes it not quite necessary to refer to the terms of the contract which, according to the argument have a bearing upon the question of passing of property in materials I might briefly indicate the argument.
30. Under clause 50 of the conditions of contract the entire work covered by the contract is to be maintained at the contractor's risk until the contract is fulfilled and the work is taken over by the employers and the contractor himself is required to take insurance against fire and other usual risks. Under paragraph 61, the employer in certain circumstances is authorised to take possession of the materials as well as the plant belonging to the contractor for the purpose of completing the works after determining or putting an end to the contract and prohibiting the contractor from further proceeding with it. Clause 62 provides among the thing that the accepted condition of the contract is that the payment of the final bill to the contractor less the withheld amounts and his acceptance thereof shall constitute a full and absolute release of the employer from all further claims by the contractor under the contract,
31. On the basis of these clause it is argued that the contractors' risk in respect of the materials continues until the completion of the works that the property in material continues in him until full payment is made and that it is only upon full payment the employer gets released from al claims against him by the contractors. If the risk is to continue in the contractors, it is argued the property should necessarily continue in him. If the employer gets released from all claims of the contractors only upon full payment, the contractors continue to retain the right to make claims which take along with the continuance of the property in him must be taken to mean either that the property can never pass until the last pie is paid or that the claim which the contractors can enforce against the property never comes to an end until such payment is made.
32. It seems to me that this is regarding too much into the language of the contract. Clause 50 making it incumbent upon the contractors to provide of the safety of the material until completion of the works is not, in my opinion in any respect different from the responsibility of a pledgee for the safety of articles which may belong to another person. It should be remembered that even when a contractor may enter upon the site or land belonging to the employer for the purpose of executing works, he is there merely as a licensee and apart from the necessity of his having full control over the property for the purpose of completing the contract, situation may be such that it may not be possible in normal circumstances for the employer to take necessary steps for the protection of the property. It is therefore in the fountains of things that the risk or responsibility for safe custody should lie upon the person who in the circumstances is more capable of having control over it than upon the employer. It is a well established proposition that a building contract is never said to have been properly completed unless the building or the structure is not only completed but all unnecessary materials and rubbish are removed from the site and the building or structure cleared and handed over in proper condition fit for immediate use. Hence, the provisions of clause 50 which are very commonly found in every building contract cannot be taken as indicative of where on in whom the property lies. The materials which may be taken possession of and used by enforcing the right under clause 61 are obviously materials which are yet to be incorporated into the works or building and as pointed out in the case of Beeston v. Marriott (1) (1964) 8 L R 690, 66 E R 778. even the taking up of that material by the employer could only be for the purpose of using it to complete the work left uncompleted by the contractor. Likewise, when plant and other implements of the contractor are taken possession of by the employer under a clause of the type of clause 61 in this case, that user could only be for the purpose of completing the work at the end of which the employer would be bound to return the plant and implements in the same condition as the one in which he found them at the time he took possession. This right of the employer also does not assist in deciding the question of the stage at which the property passes to the employer.
33. Regarding the provisions of clause 62 the claims of the contractor from which the employer gets released could only be payment of his bills. Far from being a clause in his favour, it is an onerous clause against the contractor. It will be noticed that the employer is released from all claims of the contractor in spite of the fact that the final payment by him referred to in the clause is payment of the amounts due to the contractor less the withheld amounts that is to say certain percentage of the bill with held for the benefit of the employer. Even after such payment less the withheld amounts, the contractor is not released of his responsibility. If any defects are discovered within six months thereafter, the employer will be entitled to make appropriate deductions from the withheld amounts notwithstanding the fact that every bill submitted by the contractor and every payment received by him might have been certified by an architect or other person nominated for the purpose of certification under the contract. This clause also does not therefore assist in deciding the question whether or not the property has passed.
34. The answer to the second question, I think, necessarily flows from my answer to the first question. The objective of a building contract, as pointed out, is that the contractor should for payment at stipulated rate construct a building which should belong to the employer. When therefore a contract is completed or a stage for payment of proportionate charges has arrived according to the terms of the contract, the contractor becomes entitled to payment thereof in accordance with the terms, and the structure or that part of the structure that has been completed inclusive of the material incorporated in that structure become the property of the employer. After such completion or completion of a stage at which payments should be made, the relationship between the contractor and the employer so far as payments becoming due are concerned could only be that of a debtor and creditor.
35. What is described as lien claimed by the applicants for unpaid money due to them under the contract is in my opinion not quite an accurate description of the exact right claimed by them. "Lien" in its real sense is a possessory right, a right to detain a specific movable in order to enforce some payment or the performance of some obligation which, by virtue of some previous contract between the owner of the thing and the detainer, the owner becomes, bound to pay. It is in fact in earlier stages a right to convert one's position as a workman into the position as a pledgee. Workman for example or a tailor has a lien to retain the article on which he has expended his work until his wages or cost of material, if any are paid. Such also are liens known in India as, for example banker's lien or lawayer's lien or the lien of an agent. All these liens are lost once the banker parts with the security in his possession, or the lawyer parts with papers in his possession or the agent parts with cash or other articles in his possession acquired by him in the way of his agency business.
36. Hence the right claimed by the applicants has to be understood as a charge. Charge can be created either by act of parties or by the operation of any law. It is not pointed out what act of the parties has conferred upon the applicants this charge which they claim. There is no term in the contract which gives the applicants a charge on the building to secure payment of their remuneration. It is stated that the charge is equitable in nature and springs from what is called the doctrine of unjust enrichment known to Equity Courts in England. But even in England no charge is recognised as enduring to the benefit of a contractor in respect of materials which are already incorporated into the building or structure put up by the contractor. In paragraph 1002, at page 506, of Halsubury's Laws of England third volume, third edition it is stated:
"When the property in the materials has passed to the employer by reason of their having been affixed to the freehold, the contractor has no lien on them, or on the works constructed with them, unless he has expressly contracted with the employer that he shall have such a lien."
37. It is further found stated in the foot note to this paragraph as follows, "The law on this point is so clear that it never seems to have been necessary formally to declare it in any judgment in England. In Upper Canada, however Macaulay J. stated the law as follows: 'Although a right of lien frequently attaches to goods or chattels sold or made until the price be paid, yet no such lien attaches upon houses erected under building contracts unless expressly sanctioned by the terms of such agreement, when it forms a species of mortgage including an interest in the estate."
38. That part of the case therefore of the applicants based on the theory of property not having passed or on the alternative theory of a lien or charge must fail.
39. The case sought to be made on the basis of the resolution of the board of directors dated April 26, 1952 is to the following effect. Although the applicants had gone through considerable portion of the works under the contract, adequate payments do not appear to have been made in spite of repeated demands. A stage therefore was reached when the the applications are said to have refused to proceed further with the contract. It was at this stage that the board of directors adopted a resolution assuring that a sum of Rs. 1,75,000 out of an indicated fund would be set apart exclusively for the purpose of paying the bills of the applicants. My attention has been drawn to certain letters also which passed between the applicants and the company before the resolution in question was adopted by the board of directors. On May 15, 1951 the applicants addressed a long letter to the company making several complaints against the company in the matter of this contract and concluded the same as follows:
"The fabrication, erection, glazing and painting work can be done and the entire work finished in about three months, a week or two more or less depending on whether conditions. If you will look into our contract estimate you will find that you will have to pay us about rupees 2,40,000 in round figures. This sum you must secure and we must have guarantee of payment for materials collected and the work executed during these months. It is up to you to make it possible that the program is kept up and the work completed.
On January 10, 1952 the mining agents of the company sent a circular letter to the shareholders pointing out that it was proposed to increase the capital of the company by an additional issue of 50,000 ordinary shares of Rs. 10 each. The circular letter contains a sentences reading:
"You are already aware that the company stands in dire need of further capital even to complete the building erect the machinery and put the plant to use."
40. On April 9, 1952, Abdul Wajid a partner of the applicants' firm and a director of the company, wrote a letter to the managing agents complaining. among other things, against what he describes as "the tendency of the managing agents recently utilising any money that comes their way for bolstering up their pet fad."
41. On April 18, 1952 Jankiram Chetty one of the directors of the company, wrote a letter to the Director of Industries & Commerce, who was a director nominated by the Government in which among other this he stated:
"Sri M N Basavarajiah has paid Rs. 20,000 towards the shares underwriting and I learn he will pay further to the tune of Rs. 1,20,000 on his return. This receipt permits a payment to Messrs. B S Madhava & Co. Banglore so that they may resume work at the mills"
42. On April 24, 1952 the said Janakriam Cheety addressed a letter to the applicants in which among other things he stated:
"With a view to expendite completion of the work in all respects and in terms of the discussions we had with Janab Abdul Wajid on the subject, we hereby enclose a cheque for Rs. 75,000 in your favour as part payment against work-in-progress and shell be glad to make immediate payment for full value of glasses either against railway receipt or arrange to take delivery of the glasses through our bankers, the Bank of Mysore Ltd., or make payment for the value of glasses as and when they arrive at the mill site. We suggest that you may please take up the work of fixing up the glasses forthwith both for windows and North light. We can assure you that immediately the work is completed even day by day payment will be made on bills that you may submit from time to time."
43. The resolution relied upon was passed two days thereafter by the board of directors at a meeting held on April 26, 1952. Reliance is placed also on another resolution passed at the same meeting. I give below full copies of both these resolutions:
"(5) The present financial position and the anticipated future receipts and payments were examined. It was considered that if all the moneys received on account of fresh issue of share capital are spent away on drawings of the moneys advanced by the managing agents or on purchases of cotton, or on other revenue items the object with which the capital was increased viz to complete all incomplete building works and bring into operation the weaving department, would be frustrated.
Resolved that a sum of Rs. 1,75,000 out of the moneys now received and moneys which will be available in the future be allotted for payment of the bills of Messrs. B.S Madhava and Co. Steel Structural Contractors, for completion of the building and that the balance of moneys may be utilised to the best advantage of the mills, with due regard for completion of the other items of capital works, all necessary works including the erection of looms and ancillary machinery driving equipments purchases of stores etc, to be completed not later than three months...
(7) Read the managing agents' note that Sir M S Nanjundaswamy, the underwriter had secured subscription for the full number of 29,552 shares which he had underwritten and perused the list of applicants for these shares. Recorded with thinks to Mr. M S Nanjundaswamy and Mr. M N Basavarajaiah.
Resolved that 29,552 shares of the fresh issue of capital be, and are hereby allotted to the four applicants as per the list perused."
44. The case as made out in paragraph 10 of the affidavit in support of the application may be set out in the applicants' own words.
"As stated already Janab S Abdul Wajid was a director of the K T. Mills. The notice of the said resolution was communicated to him. He was also a partner of the petitioners' (applicants') firm. On the faith of the representation contained in the above-said resolution and communicated to one of the partners the petitioner's firm who had stopped work shed their at the mill site."
45. Now, as already stated, Abdul Wajid was at once the director of the company and partner of the applicants' firm. The communication of the resolution referred to in paragraph 10 is clearly not to the applicant's firm but to Abdul Wajid. I find it difficult to understand how it could be said that a resolution to which Abdul Wajid himself was party was communicated to him. Communication is ordinarily to a person who is not already in the know of a thing. The representations on the faith of which according to the sentence in paragraph 10 extracted above the applicants are said to have shed apprehensions are not other than those said to be contained in the resolution. The resolution contains no representations made to anybody. The resolution of a board of directors of the type mentioned above is a decision by the body in charge of the affairs of the company in relation to one of the matters or topics in administration, and if it can at all be said to contain anything, it contained a direction by the body in charge of the affairs of the company in relation to one of the matters or topics in administration and if it can at all be said to contain anything, it contained a direction to whoever was bound to obey that resolution.
46. I also find it difficult to understand that, in the matter of the contract of building now in question the applicant stood in need of any special inspiration or inducement to tender for the contract or take it. It may well be that they, like any other contractors, were desirous of taking up a large contract of this type. It may also be and I think it is highly probable that the governing factor in the matter was the presence of Abdul Wajid on the board of directors. It was from the point of view of the company a circumstance which might have in spread confidence in the company that the firm of partners of which Abdul Wajid was a partner would get through the work successfully. From the point of view of the applicants, his presence on the board would have inspired confidence in them that they need no entertain any apprehensions or stand in need of shedding them at a later stage.
47. It is however stated that the resolution should be understood in the light of the previous correspondence between the parties. The correspondence so far as I have been able to assess its value merely amounts to this viz,that whereas the applicants who had not been paid large amounts due to them were anxious to get payments and were willing to exert pressure by threatening to abandon the contract, the company was anxious somehow to induce the applicants to continue to the contract to completion. The conduct of the applicants in that regard does not appear to me to be very different from that of a person to whom large sums are due from a recalcitrant debtor, and the attitude of the company in making promises is also not very different from a debtor of that type. No person with business experience would have placed any great reliance upon promises of a debtor of that type. If as the applicants indicated in their letter of May 15, 1951 the company should have furnished them with some assurance or guarantee of prompt and complete payment of the bills, they should have insisted upon regular documents being executed to that effect securing their interest. Probably it was not considered quite essential to get such documents executed. Whereas the learned counsel for the applicants explains that his clients did not insist upon any such document being executed in view of the resolution mentioned above, the learned counsel for the liquidator and the bank state that the applicants considered the presence of Abdul Wajid on the board as sufficient guarantee of due payment, however mistaken that confidence was, it has turned out to be.
48. Apart from these considerations following from surrounding circumstances, the question still remains whether by merely adopting a resolution of the type mentioned above or even by setting apart.
49. Whereas the learned counsel for the applicants explains that this clients did not insist upon any such document being executed in view of the resolution mentioned above, the learned counsel for liquidator and bank state that the applicants considered the presence of Abdul Wajid on the board as sufficient guarantee of due payment, however mistaken that confidence was,it has turned out to be.
50. Apart from this considerations following from surrounding circumstances, the question still remains whether by merely adopting the resolution of the type mentioned above or even by setting apart a certain sum of money for paying a particular debt or obligation of a company, the company can be said to have created any trust in favour or the applicants placed itself in a fiduciary relationship towards the applicant in relation to such money.
51. It is not uncommon for normal and properly managed companies to create and maintain reserve funds or set apart certain sums of money to meet certain contingencies or certain obligations. a company, for example, may set apart out of its profits a certain sum of money every year for payment of tax and another sum of money for meeting the claims of their employees for retirement such as gratuities or retirement compensation under the . they may also create a reserve for bad & doubtful debts. In such cases, could it be said that by creating a fund or payment of taxes the company has created a trust in favour of the taxing authorities or government or could it be said that by creating reserve for doubtful and bad debts the company has placed itself in such a position as to absolve its doubtful debtors from making any payment ? The answer must obviously in negative. By merely arranging one`s own funds for the purpose of meeting liabilities and obligations that might arise from time to time, it cannot be said that in respect of every such fund one creates a trust.
52. All that can be said in the circumstances is that confidence or trust in the etymological sense which the applicants permitted themselves to entertain by reason of resolution was either mistaken or misplaced.
53. In the circumstances, I find it difficult to accept the legal proposition that the resolution either by itself or upon such others facts as have been placed before me and sumarise above could be said to amount to a creation of a trust in respect of Rs.1,75,000/- in favour of the applicants.
54. That this conclusion is not only not unfounded but actually supported by the conduct of the applicants themselves in obvious from the following circumstances.
55. In the course of the arbitration proceedings the records of which disclose how the parties where at variance in respect of almost every detail of their disputes, the applicants did not raise any question of trust. While they very strongly protested that the conduct of the Company towards them was anything but fair, they did not formulate the case of trust in the shape it is now presented to me. It may be, as stated by Mr.Karanth, that at a stage it was unnecessary for them to have raise that point, because the proceedings to wind up the Company were instituted some time after the arbitration started. But it also suggested that the theory of trust now raised is clearly an afterthought suggested by the difficulties created by winding up. Not that it is blamed worthy to raise a legal point to protest ones own interest, but the fact that an argument or theory so strongly pressed was not even in the contemplation of the parties at a time when the conflicts between them have gone to the extent of invoking the arbitration clause is indeed a factor indicative of the position that neither the applicants nor the Company had any idea of trust in their mind when the letter mentioned above were exchanged or the resolution extracted above was adopted.
56. I may also extract the following sentence occurring in the paragraph 19 of the affidavit in support of the application. After referring to resolution, the deponent states:
"Notwithstanding this resolution, no attempt was made to so earmark the amount or to pay the same towards the bills of B.S.Madhava & Co., the petitioners, but was being spent for purposes contrary to the specific intendments of the resolutions."
57. Mr.Karanth has suggested in the course of his arguments that this an inaccuracy which crept in inadvertently. Even as an in accuracy it is indicative of the weakness of the case. It only means that at the back of the mind of the deponent, the resolution was in the nature of a direction either to the staff or to the managing agents to utilise whatever cash there was for payment of the applicants bills rather than what Abdul Wajid described their "Pet fads", and not a step taken towards the creation of a trust for the applicants. The applicants themselves state that in spite of the resolution no attempt was made to act on it.
58. I, therefore, decline to accept the position that any trust was made in favour of the applicants so as to entitle them to the payment of Rs.1,75,000 less Rs. 20,000 since paid.
59. In, this view, it is unnecessary to refer to or deal with cases proceeding upon the principles stated in In re Hallett's Estate (1879) 13 Ch.D.696 and Sinclair v. Brougham [1914] A.C. 398. AMong the cases Mr.Karnath cited,are the decision of the privy Council reported in Official Assignee of Madras v. Krishnaji Bhat (1933) I.L.R. 56 Mad. 570 and the decision of the Madras High Court in Official Assignee of Madras v. Devkottah Nagarathar Sri Minakshi Vidyasalai Paripalana Sangam (1929) I.L.R. Mad. 919 . I should, however, state that the privy Council decision expressly states that neither in the trial court nor before the appellate court was any question raised that the money which was the subject of that case was not trust money. In fact, throughout, the case proceeded on the basis that the money did constitute trust money and capable of being traced. The case in Official Assignee of Madras v. Devkottah Nagarathar Sri Minakshi Vidyasalai Paripalana Sangam (1929) I.L.R. 52 Mad. 919 also was a case in which it was conceded at the hearing before the insolvency judge that the money in question was undoubtedly trust money. Once it is conceded that a fund in question was a trust fund, it is necessary for us to go anywhere beyond Sections 63 and 66 of the Indian Trusts Act to support the case of the beneficiary either to claim that the trust attaches itself to the property into which the money has got converted or to claim a charge over the entire fund of the defendant if the trust money has been wrongfully mixed up with the defendant's funds.
60. Before proceeding to deal with the case of earnest money deposit of Rs. 5,000, it will be convenient to dispose of the applicant's claim in regard to the Mysore Bank's mortgage to the effect that the building or the structure by and at the expense of the applicants cannot, in the circumstances of the case, be treated as accession to the mortgaged property. The argument proceeds upon two assumptions, viz., that the mortgage originally was only that of the land in express terms and that it could attach itself to the building subsequently put up as being an accession to the original mortgaged property, the land, and, secondly, that the property in the structure itself did not pass to the company but remained with the applicants.
61. The second part of the case I have already rejected. So far as the first part is concerned, it appears to proceed upon an inaccurate reading of the deeds of mortgage. The preamble itself to both the documents makes it obediently clear that the intention was not merely to mortgage the land but also the building which either existed or was to be put up later. It, therefore, by express averment or clear intendments flowing from the language employed in the documents, the building also was intended to be mortgaged, it is unnecessary for the bank to rely upon the theory of accession.
62. The case of the applicants relating to earnest money and withheld amounts stands on a slightly different footing. It does not depend for its support upon any equitable principles of English common law or Latin maxims. The necessary facts which are the foundation of the claim are apparent from the building contract itself. Articles of agreement clearly indicate that the contractors have agreed to the retention by the employer (i.e., company) of earnest money deposit of Rs. 5,000 paid by the applicants along with their tender "as security for the due fulfillment of the contract to the satisfaction of the employers." The conditions of contract set out in a separate but contemporaneous document also contain some provisions which define the nature of this deposit. Under clause 58 provision is made enabling the contractor in certain circumstances to withdraw from the contract and obtain refund of his earnest money. By paragraph 60, which provides for consequences of delays on the part of the contractor, the employer is enabled to determine the contract, which determination according to the express language of the clause carries with it forfeiture of the earnest money, the security deposit and the total of the withheld amounts at the credit of the contractor with the employers. Paragraph 68 provides that the contractor is not to be entitled to interest upon the earnest money or the security or the withheld amount. Clause (b) of that paragraph reads as follows :
"Whenever the withheld amount reaches Rs. 5,000 or a multiple thereof the contractor may, at his option, deposit with the employers an equal amount in sums of Rs. 5,000 or a multiple thereof, in any of the forms of interest bearing securities recognised for the purpose by the employers and subject to the provisions contained therein in which case the equivalent withheld amount held under `deposits' shall be paid to him forthwith."
63. So far as the earnest money is concerned, there can be no doubt that it was initially and continued to be the property of the applicants. Its very purpose of serving as security to the employer to enforce due fulfillment of the contract by the contractor and to recoup loss, if any, consequent upon the contractor's default proceeds upon the footing that the money belongs to the applicants and should continue to belong to them until in exercise of the right of recovery or forfeiture which the employer has under the contract a portion of the earnest money or the whole of it is wiped out by recovery and forfeited for defaults.
64. In the present case, no action was taken by the company to enforce its right of forfeiture, if any. In fact, the case of the applicants is that the party at default at all times was the company and not themselves. Whichever be the correct position, the admitted fact is that no action was at any time taken to make adjustments against or forfeiture of the earnest money, and when in the course of the arbitration proceedings the applicants claimed, among other things, refund to them of Rs. 5,000 deposited as earnest money, the company does not appear to have made any particular objection. The arbitrator directed that the earnest money was liable to be refunded with interest from the date of demand.
65. The legal effect of all these provisions of the contract and the circumstances mentioned above is that the earnest money deposit of Rs. 5,000 at all times continued to be the property of the applicants and at no time did the company do anything under the contract which had the effect of depriving the applicants of their ownership of this fund.
66. It is also clear from the award of the umpire that he found no circumstances disentitling the applicants from obtaining refund of the earnest deposit of Rs. 5,000 or entitling the employer to make any deductions therefrom.
67. It has therefore to be held that the said sum of Rs. 5,000 is liable to be paid out in full to the applicants by the liquidator.
68. The claim of the applicants in relation to what are described as "withheld amounts" proceeds on the footing that the character or nature of such withheld amounts is in all respects same as and not to any extent different from the earnest money or security deposit.
69. The material in support of this has necessarily to be gathered from the terms of the contract. The relevant clauses of the contract relied upon are these : In paragraph 62 of the conditions of agreement, general provision is made in regard to payment, according to which payment is to be made on the basis of the measurements of actual work done at unit process or lumpsum as agreed upon. Final measurements have to be made jointly by the contractor and the employer's representative. Paragraph 63 which deals with payment for additions and deductions for omissions is not material for the present topic. Likewise paragraph 64 dealing with unsanctioned extras or paragraph 65 which leaves intact the liability of the contractor under the General Law for fund, willful neglect or default, etc. Paragraph 66 provides that no payment or advance will ordinarily be paid for unfixed materials when the rates are for finishing work in site. That also is not relevant to the present topic. The provisions of paragraph 67 have an important bearing on the question. The material portion thereof reads as follows :
"Payments will be made to the contractor under certificates to be issued once a month by the Modern Architects. Within fourteen days of the date of each to 90 per cent. of the value of the work, certified. Under the certificate to be issued by the Modern Architects, a further payment of 5 per cent. of the total amount so certified will be made when the works are completed, provided there is no recovery from or forfeiture by the contractor to be made under clause No. 60. Payment will made of the balance within a further period of six months, or as soon after the expiration of such period of six months as all defects shall have been made good according to the true intent and meaning hereof, whichever shall last happen."
70. It is thus clear that the purpose of withholding a portion of the amount billed for by the contractor is to ensure due performance of all the terms of the contract by him. If there is any default on his part or any defect in the works completed by him under the contract, provision is made in the contract, as already referred to be me, for recoveries being made from out of not only the earnest money but also the withheld amounts under the provisions of clause 60.
71. Out of the withheld amount as indicated above, only one-half thereof may be paid out to the contractor upon a certified by the architects and the balance has to continue in deposit for a period of at least six months, the purpose of such retention obviously being to compensate the employer in respect of whatever defects in the works as completed might have been discovered after completion before the expiry of the said period of six months.
72. All these circumstances leave no room for doubt that the withheld amounts are in the nature of security deposit intended for ensuring due performance of the contract by the contractor and appropriated or utilised by the employer to compensate himself for any defaults on the part of the contractor or defects in the works completed by him.
73. That the withheld amounts were also treated on a par with the earnest money deposit is clear from clause (b) of paragraph 68 which I have already extracted. The said clause actually states that the withheld amounts should be held under deposits.
74. That such is the real nature of the withheld amounts not merely under the contract with which we are concerned in this case but generally as a matter of practice in all properly drawn up building contracts is clear from the following statement of the position contained at page 472 of the third volume of Halsbury's Laws of England, third edition :
" As the interim payments to the contractor are usually made at a rate per cent. on the value of the work done or materials supplied, there remains on each of these values a balance unpaid. These balances constitute what is called retention money, which is retained by the employer as a security for the due completion of the work, and as a fund to be drawn upon either to complete the work or rectify defects on the failure of the contractor to do so."
75. It follows therefore that the retention amount serves the same purpose as one intended to be served by the earnest money or security deposit. If it is a fund to be utilised by the employer for his benefit and at the expense of the contractor, the clear assumption is that the property of ownership therein belongs to the contractor, and the interest which the employer has therein is in the nature of a security. That interest in the nature of security can be enforced by the employer in certain circumstances. In no occasion arises for the employer to enforce his right of security and the period stipulated for the purpose in the contract has expired, the withheld amount in the same way as earnest money or security deposit become refundable to the contractor. Having regard to the nature and purpose of this deposit, the question whether the whole of it becomes refundable or only a part thereof, depends upon whether occasion for exercising the employer's right of security in respect of it has not or has arisen.
76. The contract concerned in this case did not have a normal course or normal termination. Therefore, on the terms of the contract alone, it is not possible to ascertain the date on which the withheld amounts may be said to have become refundable. There is, however, one circumstance on which I could place reliance without any apprehensions about its inaccuracy. The parties, as I have already stated, had been before the arbitrator, and, in regard to the earnest money deposit of Rs. 5,000, there is a finding by him that the earnest money deposit of Rs. 5,000 became so refundable, it may not be inaccurate to proceed on the footing that his award for payment of interest thereon from May,9 1955, necessarily involves a finding by him that it became in any event refundable on a date not later than May 9, 1955.
77. Mr. Bhimacharya, learned counsel for the official liquidator, had however, contended that the general considerations which may normally be applicable to withheld amounts are not available in this case for two reasons. Firstly, the contract did not have a normal courts or normal terminations. Indeed, it was never completed as contemplated. Secondly, he states that the very expression "withheld amount" means that out of a certain sum of money payable to the contractor, a portion had been paid and the balance withheld. When no payment at all has been made, the learned counsel contends, there is no question of any part of the money being described as withheld.
78. The first reason stated is clearly no reason for not ascertaining the liabilities of the parties in the state of affairs that now exists. Indeed, no occasion for court or arbitrator to adjudicate upon any dispute in respect of the contract would have at all arisen if the contract had a normal progress or completion. It is because one party complains of breach by the other that adjudication by a COURT OF ARBITRATOR becomes necessary. In this case, at any rate, so far as the earnest money and withheld amounts are concerned it is unnecessary for me to go into the question which of the parties was at fault or had been guilty of breach of contract. I consider it proper to proceed on the footing that there has been an adjudication by the arbitrator to the effect that an ascertained sum of money including a portion which could have been withheld under the contract had become payable to the contractor.
79. The second, though it appears to be reasonable on the normal meaning of the expression "withheld", is not, in my opinion really available to the company and now to its liquidator. If, in the absence of any abnormal circumstances, certain number of bills had not been paid by an employer before the building contract has been completed, it would certainly not have been open to the contractor to insist on payment of the stipulated percentage of his bills which it was open to the employer to withhold. He could have asked for payment of the withheld amounts to withhold amounts only after the period provided for its being withheld by the relevant terms of the contract. This clearly indicates that rights and liabilities of the parties in respect of the rest of the amount. Even when in a normal case the employer makes payment of all bills submitted by the contractor and withholds a certain percentage thereof, the actual legal is the same as if the contractor having received the entire amount of the bill has simultaneously deposited with the employer a percentage thereof by way of security.
80. Hence, in any view of the matter, the character of the withheld amounts cannot undergo any change depending upon whether the amount payable under the bill has or has not been paid in accordance with the contract.
81. Even otherwise, the failure to pay the bills as and when they became payable being itself a default or wrongful act on the part of the employer, i.e., the company in this case, I do not think the company can be permitted to take advantage of its own wrong to deprive the applicants of whatever rights the law might give them.
82. I accept therefore the contention on behalf of the applicants that the withheld amounts are of the same nature as the earnest money deposit or security deposit and are refundable in the same way.
83. The next question is what would have been the total of the withheld amounts in this case. If the matter has had to be investigated upon facts and in the light of the findings of the arbitrator, I do not think it could have been quite easy for me to arrive at a figure. I am, however, relieved of this difficulty by the liquidator and the applicants through their respective counsel having stated before me that if as a matter of law I hold that the withheld amounts are refundable in the same way as earnest money, the figure of withheld amounts may be taken to be Rs. 11,800. I accept the suggestion and hold accordingly.
84. The next and last question is whether the amount which should be paid in full to the applicants is only the principle amount of Rs. 5,000 plus Rs. 1,800 or with interest thereon and, if so, at what rate and from what date?
85. According to paragraph 68 of the conditions of contract, it is clear that no interest could have been claimed by the applicants either in respect of the earnest money or in respect of the withheld amounts, the applicants having, however, the option of substituting these amounts by interest bearing securities in their own interest.
86. The legal effect of this provision is that if and so long as the employer is entitled to retain in deposit with him the earnest money as well as the withheld amounts, he is not to be saddled with any liability for payment of interest. I do not think, however, than once he ceases to be entitled to hold the money in deposit, he can claim the benefit of paragraph 68 and decline to pay interest. The question, however, is whether the mere fact that the employer does at a particular point of time lose the protection of paragraph 68 of the contract, automatically confers upon the applicants the right to recover interest. Such a right has to be traced to some provision of the contract between them or of law. There is no provision in the contract for payment of interest. There is no proof of any custom providing for payment of interest. The only remaining basis for the applicants' claim must be found in the provisions of some statute. Reliance has been placed on section 23 of the Trusts Act, according to which a trustee is not normally obliged to pay interest except when he is guilty of breach of trust and except in the circumstances specifically set out in that section. One of those circumstances set out under which a trustee is bound to pay interest is what is stated in clause (b) of that section which reads as follows :
" (b) Where the breach consists in unreasonable delay in paying trust money to the beneficiary."
87. That also seems to be the basis on which the arbitrator directed payment of interest on the earnest money of Rs. 5,000 at the rate of six per cent. His finding, as I have already stated, must be taken to indicate that the earnest money became refundable on a date not later than May 9, 1955, and that the withholding of that money thereafter was unreasonable on the part of the company. By parity of reasoning, it has it be held that the withheld amounts were also unreasonably withheld as form May 9, 1955. Mr. Bhimacharya has, however, stated that the proper date would be the date of award itself, i.e., September 30, 1958. To accept this argument would mean that it was reasonable on the part of the company to withhold payment till an award had been made. This decision of an arbitrator like a decision of a court necessarily deals with the position as at the institution of the proceedings. His finding, for the reasons already stated, may be taken to indicate May 9, 1955, to be the proper date.
88. The arbitrator having allowed six per cent. per annum on the earnest money, I think the appropriate rate for the withheld amounts should also be the same.
89. I therefore make a declaration that out of the amounts found due and payable to the applicants by the arbitrator, a sum of Rs. 16,800 with interest thereon at six per cent. from May 9, 1955, should be paid in full to the applicants.
90. The actual payment, however, will be deferred until the total figures relating to preferential payments and the available surplus are ascertained, for which appropriate action will be taken by the liquidator in the course of the next week.
91. Parties will bear their own costs.