1. By Clause.5 of the Motor Oars (Distribution and sale) Control Order, 1959, made under S.18-G of the Industries (Development and Regulation) Act, 1951 (Central Act 65 of 1951) every person wishing to buy a new motor car was required to make a written application to a dealer in the form prescribed. The application was to be accompanied by

"a written guarantee from a bank undertaking to pay the dealer, at the time when the motor car is ready for delivery to the applicant, a sum of rupees two thousand."

The petitioners are such applicants who obtained the required guarantee from the bank in liquidation after depositing Rs. 2,000 each with the bank for the purpose in fixed or short notice deposits. When the bank closed down, the guarantees given by it ceased to be in force, the dealers having rejected them and the petitioners being creditors of the bank in respect of their deposits filed proofs claiming payment in full. The liquidator rejected this claim for preference and admitted the debts only as ordinary debts, and the order he passed in each case was in the following terms:

"The letter of guarantee issued by the bank does not impress with any trust character the monies deposited by you. The relationship is only that of a debtor and creditor. Therefore your claim is rejected as a preferential claim, you rank only as an ordinary depositor."

The petitioners have therefore come to court with these applications under

S. 460(6) of the Companies Act read with R.164 of the Companies (Court) Rules by way of appeal against the order of the liquidator.

2. Ext. D-1, dated 10th July 1959 is a circular issued by the head office of the bank to its several offices prescribing the procedure to be followed in furnishing the guarantee. The material portion of that circular runs as follows:

"On request from the intending purchasers, you may furnish Bank Guarantee, provided they deposit Rs. 2,000 in Short Notice Deposit account. Interest may be allowed at the rate applicable to such account. The Deposit Receipts should be correctly discharged on the reverse by the depositors concerned, a receipt stamp being affixed and cancelled, and a letter of request as per form enclosed should be taken. If any Savings Bank or Current account holder requires this facility, you may first get Rs. 2,000 withdrawn from the respective account and place it under Short Notice Deposit and execute a guarantee after obtaining a letter of request. If a person who is already having a Fixed Depositor Short Notice Deposit account with you, requests you to execute a guarantee, you may do so after obtaining the receipt duly discharged with a letter of request.

The words care-lien must be written in red ink under the Managers authentication against the relative entry in the Deposit Register, and in the case of Fixed Deposit, against the date of maturity entered in the Daily List. In this connection, the procedure laid down in para 2 of Chap.7 of the Book of Instructions should be followed.

The amount deposited with you has to be paid to the dealer on receipt of advice that the motor car specified in the guarantee is ready for delivery to the applicant. As soon as you are called upon by the dealer concerned to pay the amount as per guarantee you may do so by allowing overdraft against the fixed deposits as laid down in para 4 of Chap.7 of the Book of Instructions under advice to the depositor. In the case of Short Notice Deposit the notice may be waived. The deposit should not be released before receipt of advice from the dealer and the depositor.

Before accepting the amount in Short Notice you should explain to parties the procedure that will be adopted by the Bank when notice for payment is received from the dealer. You have discretion to reduce the Banks commission for the guarantee to 25 nP per cent with a minimum of Rs. 5/-. This should be recovered from the parties at the time of executing the guarantee and credited to your Profit and Loss Account."

3. Ext P-1 is a letter of request addressed to the Madras Branch of the bank in a particular case, and Ext. P-2 the guarantee furnished by it to the dealer concerned. (This is not one of the cases under consideration, but these documents have been marked by consent as disclosing the true nature of the transaction in all the cases under consideration.) Ext. P-1 runs as follows:

"I hereby request you to issue a Bank Guarantee in favour of Union Company (Motors) Private Ltd., to the extent of Rs. 2,000 (Rupees two thousand only) in respect of a Standard 10 car for which I, Mr. S. R. Devasahayam have placed an order with them.

For the purpose of issuing the above guarantee, I hereby authorise and request you to earmark the sum of Rs. 2,000 in my Short Notice Deposit with you. As and when necessary the amount of Rs. 2,000 may please be remitted to Messrs. The Union Company (Motors) Private Ltd., in terms of the guarantee, debiting the same to my S.N.D. account. I further confirm that if under any circumstances you feel that the amount earmarked should be retained in a separate account, you are at full liberty to do so. You may please debit my account with Rs. 10/- towards your guarantee charges. These instructions will not be revoked without your permission."

4. Ext. P-2 which is addressed by the bank to the dealer, The Union Co. (Motors) Private Ltd., runs thus:

"In terms of notification which appeared in all newspapers, dated 5th April 1959 of the Ministry of Commerce and industry, Government of India, we hereby guarantee to pay a sum of Rs. 2,000 (Rupees two thousand) only, to The Union Co., (Motors) Private Ltd., on behalf

Mr. S. R. Devasahayam on demand by The Union Co., (Motors) Private Ltd., immediately notice is received that the car will be ready for delivery.

We further agree that this guarantee shall not be released or cancelled till cancellation is duly notified by The Union Co., (Motors; Private Ltd.

The guarantee will hold good till the vehicle is delivered and payment effected or duly cancelled by mutual consent."

5. It will be seen from Ext. P-1 (which it is not disputed embodies the terms of the agreement between the intending purchaser and the bank) that the procedure followed, and the contract entered into between the intending purchaser and the bank, were not in strictly accordance with the circular Ext. D-1. Ext. D-2 the form of the letter of request which accompanied the circular does not appear to have been generally followed. What the circular seems to contemplate as a condition for the issue of the guarantee is a deposit of Rs. 2,000 by the intending purchaser with the bank by way of security, and payment of the sum of Rs. 2,000 covered by the guarantee, on demand, from an overdraft sanctioned to the intending purchaser against the deposit, the overdraft being thereafter adjusted against the deposit. Had this been what was actually done, it might have been possible to contend that, as a condition of issuing the guarantee, the bank wanted the intending purchaser to make a deposit of Rs. 2,000, that this deposit which only created the relationship of debtor and creditor was to be security for the guarantee it was giving, payment being eventually made from an overdraft sanctioned against the deposit, and that the circumstance that a deposit, in other words a debt due by the bank, was made security for the reimbursement of the money which the bank would have to pay under the guarantee, would not alter its character as a mere debt. Even so, the sentence in the circular saying,

"The amount deposited with you has to be paid to the dealer on receipt of advice that the motor car specified in the guarantee is ready for delivery to the applicant,"

would create difficulty, for, it would indicate that the money deposited by the intending purchaser was deposited for the special purpose of payment to the dealer at the proper time in accordance with the guarantee, and that the retention of the money in a fixed or short notice deposit and the provision for actual payment out of an overdraft sanctioned against the deposit are only matters of accounting procedure which cannot affect the agreement that the money deposited would be paid to the dealer on demand. Ext. P-1, however, puts the whole matter beyond any doubt, for, it says that the money deposited is to be earmarked for the purpose of issuing the guarantee and that, as and when necessary, the sum of Rs. 2,000 should be paid to the dealer in pursuance of the guarantee and debited to the deposit account. It shows that the deposit was made and the money thereunder earmarked for the special purpose of payment to the dealer in terms of the guarantee; and that, so long as the money remained with the bank it was to be kept in short notice deposit or in fixed deposit earning interest accordingly, cannot alter the position. It seems to me that the bank accepted the money for the special purpose of payment to the dealer when demand was made in terms of the guarantee given by it and that the particular machinery it adopted for effecting the payment and adjusting accounts cannot alter this fact. It is as if the bank had said, "you pay us Rs. 2,000 which we shall keep in fixed or short notice deposit and we shall give the guarantee and pay the money to the dealer at the proper time," not as if it had said, "we shall give the guarantee and pay the money at the proper time provided you invest Rs. 2,000 with us in fixed or short notice deposit and make the deposit security for our reimbursement." The difference between the two would not have been material had the bank continued to function and was in all probability, not appreciated either by the bank or the petitioners, but, in a winding up it is vital.

6. It seems to me that the bank was only an agent for payment to the dealer, at the proper time, of the money deposited with it by the intending purchaser, and therefore that it held the money in a fiduciary capacity. It follows that the petitioners are entitled to the priority they claim.

7. In the result, I allow the applications, but make no order as to costs. Allowed.