Judgment :- The company which is under liquidation is an unregistered company not have been registered under the Indian Companies Act and in respect of which a winding up order has been made. The company had its head office in Colombo, and a branch of which was in Mathurai, has now been wound up. Respondents 3 to 11 who are the directors of this company are all permanent residents of Ceylon and the applicants ask for an order that these respondents who were directors of the company may be directed to submit themselves for public examination under Section 195 of the Indian Companies Act and that they may be proceeded against for misfeasance under Section 235 of the Act. There is also a further prayer that the applicant claim for payment of the deposit amount may be treated as preferential claim. The applicants entered into an agreement on 7th September, 1946, with the company and they were appointed distributor for the company's production for certain territory and a sum of Rs. 50, 000 was paid as deposit as follows : Rs. 15, 000 on 7th September, 1946, Rs. 10, 000 against delivery of copies of "Kumaraguru" and the balance of Rs. 25, 000 was to be paid or before 27th October, 1946. The grievance of the applicants is that in spite of demand the company has not refunded the deposit of Rs. 50, 000 or such other amount as would be found actually due out of the deposit, that in contravention of the terms of the agreement these monies were utilised by the company and that the directors should be made liable to pay for breach of trust or misfeasance caused by them and that they should also submit for public examination regarding their dealing and other matters concerning the company. Apart from the merits, a preliminary objection was taken as to the jurisdiction of this court to consider an application of this nature under Sections 195 and 235 of the Indian Companies Act. Apart from the merits, a preliminary objection was taken as to the jurisdiction of this court to consider an application of this nature under Sections 195 and 235 of the Indian Companies Act. It is contended that the directors who are permanent residents of Ceylon which is a foreign territory cannot be proceeded against and that no summons could be issued under Section 195 compelling them to appear and that no order can be made directing them to reimburse any loss or to make any payment for any misfeasance on their part under Section 235 of the Indian companies Act. The decision in Bishadendu Gupta v. H. Langham Reed is cited in support of this contention. In that case in respect of a company which was registered within the Province but some of whose directors were residing in England and against whom an application under Section 235 was made in order to enquire into their conduct, it was held that the High Court had no jurisdiction over persons residing in England but had jurisdiction only on persons residing in British India, though in a different Province, and that therefore an enquiry should be made only with respect to the directors residing in British India and not with respect to those residing outside British India. It was observed by Wort, Ag. C.J., as follows : "It is a principle of international law that a court shall not serve its processes on persons outside its own jurisdictions and upon persons against whom, if an order was made, the order cannot be enforced. It is expressed in these words : 'extra territorium jus decenti non paretur legis extra terrorum non obligant'".A passage from the judgment of their Lordships of the Privy Council in Gurdayal Singh v. Rajah of Faridkot is quoted. It is as follows : "All jurisdiction is properly territorial, and extra territorium jus decenti, impune non paretur. Territorial jurisdiction attaches (with special exceptions) upon all persons either permanently or temporarily resident within the territory while they are within it; but it does not follow them after they have withdrawn from it, and when they are living in another independent country. Territorial jurisdiction attaches (with special exceptions) upon all persons either permanently or temporarily resident within the territory while they are within it; but it does not follow them after they have withdrawn from it, and when they are living in another independent country. It exits always as to land within the territory, and it may be exercised over movables within the territory and, in questions of status or succession governed by domicile, it may exist as to persons domiciled, or who when living were domiciled, within the territory." * Reliance has also been placed on a passage in Cheshire's Private International Law at page 100 which is as follows :- "The general doctrine of English law is that the exercise of civil jurisdiction, in the absence of an Act of Parliament, must in all cases be founded upon one or other of two principles, namely, the principles of effectiveness or the principle of submission. The principle of effectiveness means that a judge has no right to pronounce a judgment if he cannot enforce it within his own territory. The elementary fact several times stated by Holmes, J., that 'the foundation of jurisdiction is physical power', is worthy of attention, although, as we shall see, there are certain exceptional cases in which jurisdiction may be assumed by virtue of statute over persons who are abroad and thus not within the power of the court. Power in this connexion means that physical power which becomes exercisable because the property which is the subject matter of the suit is in England or because the defendant is present at the time of service of the writ in England, and, broadly speaking it is true to say that an English court does not consider itself competent to adjudicate upon a claim if neither of these elements is present. In such a case the maxim is actor acquitur forum rei and the plaintiff has no alternative but to sue the defendant in the country where he happens to be".It is argued relying on this passage that the purpose of an application under Section 195 is to summon any officer of the company and examine him on oath concerning any dealing or affair or property of the company or direct him or require him to produce any document and if he refused to come to court at the time appointed, the court may cause him to be apprehended and cause him to be brought before it for examination and that directors of the company, not being subject to the jurisdiction of the High court, cannot be summoned and compelled to appear and no process for the purpose could be executed in a foreign territory, and that there is no purpose in issuing a summons under Section 195 as it cannot be enforced by this court be any process which is available and that therefore this court cannot exercise jurisdiction knowing that the exercise of it would not be effective. It is also argued that this court has no jurisdiction to issue a summons under Section 195 since proceedings under Sections 195 and 235 do not relate to any properties which the non-resident foreigner is possessed of and no proceeding against him can be initiated in the High Court and that therefore this court has no jurisdiction. This company being an unregistered company and carrying on its business within the jurisdiction of the High Court can be would up under the provisions of Part IX of the Indian Companies Act and for the purposes of winding up, an unregistered company in deemed to be a company registered in the Province, and the provisions of the Act with respect to winding up are held to apply to unregistered companies which have been would up with certain exceptions enumerated under Section 201. Therefore the applicant maintains that since all the provisions relating to winding up are made applicable to the winding up of an unregistered company, Sections 195 and 235 which are ordinarily applicable in cases of winding up of companies registered in the Indian Union can be made applicable and therefore the application is maintainable. Therefore the applicant maintains that since all the provisions relating to winding up are made applicable to the winding up of an unregistered company, Sections 195 and 235 which are ordinarily applicable in cases of winding up of companies registered in the Indian Union can be made applicable and therefore the application is maintainable. Further, it is pointed out that even in respect of companies which are registered outside British India, Part IX of the Companies Act is made applicable to them and such companies which are incorporated outside the India Union shall comply with certain requisitions of the Registrar to file certified copies of the Charter or articles of the company, the full address of the registered or principal office of the company, a list of directors and managers of the company, the names and particulars of persons resident within India authorised to accept on behalf of the company process and any notices required to be served on the company etc. This company has complied with the provisions of Section 277 and it is therefore argued that there has been a submission to jurisdiction of the courts of this State and that therefore even if initially the court had no jurisdiction they have acquired jurisdiction by virtue of the foreign company submitting itself to the jurisdiction of the Indian courts.Jurisdiction over persons and property, apart from principles of international law where foreign subjects are involved, is governed by legislation passed in the country where it is sought to be exercised. In so far as suits are concerned the Civil Procedure Code and the Letters Patent apply. Section 20 of the Civil Procedure Code provides the forum in which suits can be instituted. Section 19 of the Civil Procedure Code provides that where a suit is for compensation for wrong done to a person or to movable property, if the wrong was done within the local limits of the jurisdiction of one court and the defendant resides, or carries on business, or personally works for gain, within the local limits of the jurisdiction of another court, the suit may be instituted at the option of the plaintiff in either of the said courts. There are rules for service of summons on persons who are residing outside the jurisdiction of such courts and even in foreign territories. There are rules for service of summons on persons who are residing outside the jurisdiction of such courts and even in foreign territories. It is therefore open to the plaintiff to institute a suit in the court within the limits of which the cause of action arises even though the defendant resides outside the limits of the jurisdiction of the court in which the suit is instituted and where the cause of action arose. Service is made usually by registered post, if the defendant who is in a foreign territory accepts summons but does not appear, the suit could be proceeded with and a decree passed if the plaintiff establishes his claim. This position was considered in Maistry Rajabai Narain v. Haji Karim Mamood, where on an objection taken that a local court is not entitled to exercise jurisdiction over a non-resident foreigner where the cause of action arises within the jurisdiction of the court, it was observed by Krishnan, J., as follows at page 193 : "This objection is not valid, as a municipal court is entitled to exercise jurisdiction over a non-resident foreigner where the cause of action arises within its jurisdiction. The question whether its decree could be enforced against him in the foreign State is a question for disposal of that State." * In Neelakanda Pillai v. Kunju Pillai, Venkatasubba Rao, J., considered the question whether the application of Section 20 was excluded by reason of the fact that the defendant is a non-resident foreigner. After referring to the following passage in the Faridkot case (Gurdayal Singh v. Raja of Faridkot), namely, "It (the foreign decree) must be regarded as a mere nullity by the courts of other nations except (when authorised by special local legislation) in the country of the forum by which it was pronounced", it was observed : "That shows that though by international law such a decree is a nullity, in other words, will not be recognised by courts of other nations, it is nevertheless valid, when authorised by special local legislation, in the country of the forum by which that decree was pronounced." * The learned Judge later on observes as follows : "This distinction is very clearly brought out in the judgment of Sterling, J., in Girdhar Damodar v. Kassigar Hiragar. The learned Judge observes that it would be the duty of the courts acting in the execution of a statutory enactment, to give effect to it, it being immaterial whether the judgment rendered would in the circumstances be recognised by foreign tribunals as being consistent with international law and the general principles of justice, and in support of this view he cites the observations of James, L.J., and Cotton, L.J., in Ex parte Blain, In re Sawers." * It is therefore not necessary to consider what would be the effect of an order or decree which is passed by this court provided it is authorised by local legislation empowering the court to entertain proceeding for the purpose and pass an order or decree as is provided and whether that order or decree would be treated as a nullity, whether the person against whom the order or decree is passed would comply with it or whether it could be exercised. These are all matters which do not arise in order to enable a court to exercise jurisdiction, to receive and adjudicate upon matters which it is competent to do by virtue of the legislation authorising the court to act.It is argued that these are matters in personam and direction against an individual compelling him to do certain things should not be given if the court could not enforce the same and it would be futile to pass such orders directing the non-resident foreigner to submit himself for examination and such ineffective orders should not be passed. There is force in this contention, but that does not mean that the court has no power to pass an order under Section 195 directing the non-resident foreigner to appear before the court and submit himself for examination though more often it is likely to be ignored and in such circumstances the court will be helpless. The question is whether in such circumstances it is advisable, knowing that such an order would be ineffective, to use its discretion and not pass the order which it cannot possibly enforce. This principle is enunciated in Vocalics (Foreign) Ltd., In re, by Maugham, J., where he observes as follows" "The court in general is very reluctant to exercise a jurisdiction is personam against a foreigner in relation to a matter in which there cannot be an effective order. This principle is enunciated in Vocalics (Foreign) Ltd., In re, by Maugham, J., where he observes as follows" "The court in general is very reluctant to exercise a jurisdiction is personam against a foreigner in relation to a matter in which there cannot be an effective order. It may be added that the court ought to be satisfied before making the order that it will not hesitate, if the order is disobeyed, to commit or sequestrate the property of the person or company in default." * I therefore consider that the objection to this court issuing an order under Section 195 directing respondent 3 to 11 to submit themselves for public examination has undoubtedly great force. Such an order will be ineffective and the court should naturally be reluctant in passing such an order though the court may have power under Section 195 to make an order in terms of that section. I am therefore of opinion that the applicants will not be entitled to an order against the respondents 3 to 11 under Section 195 directing them to submit themselves for public examination, on the ground that it is inadvisable to pass such an order.But the application under Section 235 stands on a different footing altogether. In respect of certain acts of the directors amounting to misfeasance and breach of trust, the case is they are liable to account and bring back certain sums of money and for that purpose the court is asked to examine into the conduct of those directors and compel them to pay the amount in respect of which they have committed breach of trust. This proceeding is in the nature of a suit for recovery of monies wrongfully converted by a person who happens to be a non-resident foreigner. If this proceeding is instituted by way of a suit, the provisions of Sections 19 and 20 of the Civil Procedure Code would be applicable and since the cause of action arose within the local limits of the jurisdiction of this court, though the defendants for the the persons who are liable to account - reside in a foreign territory, a suit can very well be laid and summons served in the manner provided by the rules and a decree could be passed. How and in what manner the decree would be treated by the foreign court is immaterial, for the decree is nevertheless valid though it may be treated as a nullity by the foreign court. It is also equally unnecessary to consider whether such a decree could be enforced against him. The court is competent to pass such a decree by virtue of the local or municipal law governing the exercise of such jurisdiction. Section 235 provides only a summary remedy to the applicants who agitate this question by way of Judge's summons, which otherwise should be way of a suit, by virtue of the rules framed under the Indian companies Act enabling applications of this nature to be brought by way of Judge's summons. In so far as service of notices of such summons is concerned, rule 4 of the rules framed under the Companies Act makes the rules of the Original Side as amended from tine to time applicable to all proceeding under the Act. Order IV, rule 6(c) of the Original side Rules contemplates service of summons on a defendant residing beyond the limits of India. So there is no question of there being no provision of nay kind to enable notice of summons being served on the defendant who is residing in a foreign territory. Unlike an application under Section 195, a proceeding under Section 235 is not for public examination of the non-resident director but it is for the court to enquire into his conduct and ascertain whether he is liable to repay or restore any monies or property or contributes any sum to the assets of the company by way of compensation in respect of misfeasance breach of trust on the evidence that may be placed before it. This does not necessarily involve any process to compel his attendance in order to submit himself for examination. This does not necessarily involve any process to compel his attendance in order to submit himself for examination. If on the receipt of notice served in the manner provided under the rules, the concerned director does not choose to appear, the court can come to a conclusion on the material placed before it on behalf of the applicant as to the conduct of the director in the matter and decide about his liability to the applicant or to the company and an order could be made directing the particular director to bring in any amount which he has misapplied, retained or in respect of which he has committed breach of trust or misfeasance which order would be in the nature of a decree. If the concerned director has any properties within the jurisdiction of the State such an order could very well be executed against those properties and if there are no such properties, the order will have the same force and effect as a decree passed in a suit against a non-resident foreigner. I am therefore of opinion that whatever may be the position as regards the application under Section 195, an application under Section 235 is maintainable and the court has jurisdiction to entertain such application and consider the same on its merits. In the view I am taking it is unnecessary to consider whether there is jurisdiction conferred on this court by reason of the foreign company having complied with the requisitions in the Companies Act under Part X, Section 277.The claim for preferential payment is made on the ground that the sum deposited was trust money since a trust was created in respect of this amount in favour of the applicants. In order to arrive at a decision whether a particular deposit constituted a trust or not, it is necessary to consider the particular terms under which the monies were deposited. Exhibit P. is the agreement which is in the form of a letter written by the company to the applicants. It is as follows :- "Dear Sirs, We have pleasure in confirming you as our distributors for all our productions, commencing from Sri Kumara Guru for a period of five years, for the territory comprising Mysore State, Coorg, South Canara and Bombay Presidency, excluding Bombay City proper, on the following terms :- 1. You shall deposit with us a sum of Rs. 50, 000 (Rs. You shall deposit with us a sum of Rs. 50, 000 (Rs. fifty thousands) in the manner following : Rs. 15, 000 to be paid today, balance Rs. 10, 000 to be paid against delivery of the copies of Sri Kumara Guru and the Balance Rs. 25, 000 to be paid on or before the 22nd October, 1946. This sum of Rs. 50, 000 shall be a permanent deposit with us for a period of five years and shall be refunded at the end of the above period or on prior determination of the distribution agency. This amount shall not carry any interest whatsoever." * There are other terms also whereby the applicants were to be entitled to a commission of 15% on the takings of the films and the company was to supply two new pictures every year, the film called Sir Kumara Guru having been one of the pictures supplied in the first instance. There is also a provision for terminating the distribution agency by giving three calendar months' notice in writing. Three receipts were granted by the company for payment by the applicants of the sum of Rs. 15, 000 and Rs. 10, 000 respectively on the 7th and 15th September, and 17th October, 1946. The receipts are stated to be as "being part deposits against distribution agency". Another film known as "Thai Nadu" was sent by the company but the same not having been censored by the Mysore Cinematograph Board, the applicants wrote on the 3rd October, 1947, to the company, Ex. R. 1, that since the stipulation as to the supply of two new pictures every year not having been complied with, the company has intimated that the agreement stood cancelled and the applicants asked for the return of the deposit intimating that whatever prints and publicity materials lying with them will be immediately returned on the return of the deposit. There is a further demand made by the applicants under Ex. R. 2 dated 5th February, 1948, for the return of the deposit followed by a further demand dated 5th March, 1948, Ex. P. 4, which the company replied on the 10th March, 1948, Ex. There is a further demand made by the applicants under Ex. R. 2 dated 5th February, 1948, for the return of the deposit followed by a further demand dated 5th March, 1948, Ex. P. 4, which the company replied on the 10th March, 1948, Ex. R. 3, asking the applicants to censor the picture "Thai Nadu" at an early date and "adjust the collections against the deposit given to us with a view to reduce the balance" and mentioning that the agreement of the 7th September, 1946, still holds goods and also expressing the company's readiness to entrust all their productions to the applicants for distributions. The applicants finally sent a notice of demand through their Advocate, Ex. R. 4, in which while demanding the return of the deposit amount of Rs. 50, 000, it was observed as follows : "You requested my clients to exploit "Thai Nadu' and adjust the collections against the deposit, which could not be done for the obvious reason that the said picture was not passed by the censors here and you never moved in the matter to have it censored here".The applicants filed a petition for winding up on the 30th December, 1948, and in the petition the applicants stated that they are entitled to the repayment of Rs. 50, 000 paid to the company as preferential payment and a further sum of Rs. 30, 000 as damages for non-fulfillment of the agreement dated 7th September, 1946, amounting in all to Rs. 80, 000 less Rs. 7, 698-5.3 by realisations leaving a balance of Rs. 72, 301-11-3 due by the company to the applicants. It may be stated here that in the balance sheet of the company for the year ending 31st December, 1946, Ex. P. 3, a sum of Rs. 68, 932.29 cents is shown as "Distribution' deposits" under the column "Sundry creditors". There are also entries relating to deposits called "representative' deposits" and "producers' deposits". Relying on the decisions, In re Travancore Quilon Bank Ltd. and Kshetra Mohan Dass v. Basu, it is contended on behalf of the applicants that the sum of Rs. 50, 000 paid as distribution deposit is a trust fund and therefore the applicants are entitled to preferential payment. Relying on the decisions, In re Travancore Quilon Bank Ltd. and Kshetra Mohan Dass v. Basu, it is contended on behalf of the applicants that the sum of Rs. 50, 000 paid as distribution deposit is a trust fund and therefore the applicants are entitled to preferential payment. In In re Travancore Quilon Bank Ltd., where an employee was required to deposit a certain amount as security for the post he held, and the amount was returnable to him at the end of his service, it was held that the amounts were to be held by the bank in trust for the employee until termination of his services as a security for his good behaviour so that in case he is found guilty of any act or omission in discharge of his duties and loss should result therefrom the bank might recoup such loss and pay the balance. In that case a separate account was kept for such deposit and receipts were granted to the employee in respect of it and the amounts so deposited were however to carry interest. It was held in that case that as the amounts were received by he bank on a specific understanding to be applied by the bank for a specific purpose, such amounts constituted trust money in the hands of the bank did not form part of the assets of the bank divisible among its creditors and the fact that these amounts were to carry interest did not alter its character.Section 282B (1) of the Indian Companies Act makes the position as regards such moneys or securities deposited by employees in pursuance of their contract of service clear and it is provided that such moneys should be kept or deposited by the company in a special account in a scheduled bank and that no portion thereof shall be utilised by the company except for the purposes agreed to in the contract of service and any director or other officer of the company contravening the provisions of that section is liable on conviction to a fine not exceeding Rs. 500. 500. Since the bank in which the deposit was made in the decision cited was governed by the provision of the Travancore regulations, where there was no corresponding provision to Section 282B (1), the learned Judge, Venkataramana Rao, J., had to consider the law bearing on the subject exhaustively and he came to the conclusion that there is a relationship of trustee and cestui que trust between the company and the employee. The decision in Kshetra Mohan Dass v. Basu, is a decision on the point raised in this application. The question that arose for consideration there was about the nature of a deposit made by a selling agent of the company's goods. The contract of agency provided for a security deposit of Rs. 10, 500 carrying interest at the rate of 3% per annum. There was a provision in the agreement that the company would be entitled to appropriate any damage or any amounts for which the selling agent did not account for from and out of the security deposit. It was held that the security deposit of the agent in the hands of the company must be regarded as impressed with a trust or held in a fiduciary capacity by such company and that the agent is entitled to get back the whole of the security deposit even after such company goes to liquidation. Both in In re Travancore Quilon Bank Ltd. and in Kshetra Mohan Dass v. Basu, there was in particular a stipulation as to provision for payment of interest by the company which implied that the company could utilise the monies. It was argued that it could not therefore have been intended that he deposit should be kept separate or must be deemed to be paid into the hands of the company to be held by them in a fiduciary capacity. In the present case, there is no provision as to payment of interest. The language of the document here is simple. It is provided that the sum of Rs. 50, 000 shall be a permanent deposit with the company for a period of five years and shall be refunded at the end of the above period or on prior determination of the distribution agency and that the amount shall not carry any interest whatsoever. It is provided that the sum of Rs. 50, 000 shall be a permanent deposit with the company for a period of five years and shall be refunded at the end of the above period or on prior determination of the distribution agency and that the amount shall not carry any interest whatsoever. There is therefore nothing to distinguish this case from the decision in Kshetra Mohan Dass v. Basu that there was a provision for payment of interest which could be argued as a circumstances to be taken into consideration in favour of the company that the depositor never intended the amount to be kept as a separate fund, but permitted it to be used just as any kind of deposit and that therefore it would only be a creditor and not a cestui que trust. I agree with the reasoning of the learned Judges in Kshetra Mohan Dass v. Basu, and hold that the amount of Rs. 50, 000 in the hands of the company is impressed with a trust.It is contended on behalf of the director by Mr. Lakshmayya that the elements of a trust as are required for the creation of a trust laid down by Section 6 of the Trusts Act are absent in this case. Section 3 defines trust as follows :- "A 'trust' is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner." * Under section 6 a trust is created when the author of the trust indicates with reasonable certainty the intention to create a trust, the purpose of the trust, the beneficiary and the trust property and transfer the trust property to the trustee. I fail to see how any of these elements are absent with reference to the deposit made by the applicants. The purpose of the trust is for the fulfilment of the obligations under the agreement. The beneficiaries are the applicants and the company under certain circumstances. So long as the applicants fulfill their obligations under the agreement they are the sole beneficiaries; but failure to fulfill to any extent would deprive them of the full benefit of the trust, the company being entitled to withhold such monies. The beneficiaries are the applicants and the company under certain circumstances. So long as the applicants fulfill their obligations under the agreement they are the sole beneficiaries; but failure to fulfill to any extent would deprive them of the full benefit of the trust, the company being entitled to withhold such monies. It is pointed out that in so far as the intention of the depositee, that is, the company, is concerned, it can be seen from the way in which the amount was utilised for the purpose of the company, that the company never intended that the amount should be a fund entrusted to them for a specific purpose and should not be utilised by them and will be returnable to the applicants in specie subject to such deductions as may arise in case the applicants did not fulfill their obligations and that therefore the applicants would only be entitled to rank as any other creditor. Further, that the intention to treat the amount as not a trust is also shown by the circumstances that this deposit was not kept as a separate fund but was mixed the funds of the company and subsequently utilised by the company for its own purpose and the fact that such utilisation was made by the company shows that the intention must have been otherwise.In support of his contention the learned counsel relied on the Full Bench decision in Maheshwari Bros v. Official Liquidator Indra Sugar Works Ltd. In that case the managing agent of the company under liquidation entered into an agreement of agency whereby they deposited a sum of Rs. 50, 000 with the company as security for the fulfilment of their obligations. The company being ordered to be wound up, the agents claimed a preferential payment of the sum of Rs. 50, 000 with interest and also claimed a charge on the machinery and other goods of the company, since under the agreement a charge was created. It was contended the agents that the money deposited with the company was the money and as such was not part of the assets of the company and should be returned to them. 50, 000 with interest and also claimed a charge on the machinery and other goods of the company, since under the agreement a charge was created. It was contended the agents that the money deposited with the company was the money and as such was not part of the assets of the company and should be returned to them. On the facts and circumstances of the case, having regard to the creation of a charge on the company's assets and to the provisions for payment of interest by the company and to the fact that the money was deposited by the agents of the company into the general assets of the company and was subsequently utilised by the company for their general purposes, the; earned Judges held that no trust was created, and they observed that every case of this kind will fall to be considered on it own facts and circumstances. The circumstances referred to above weighed with the learned Judges and they observed as follows : "We think that a fair test of whether a sum of money of this kind is to be held as a trust fund or not is to ask whether, in the circumstances, it was intended that it should remain a segregated fund, or whether it should, on payment, become the property of the company and be compensated for by the company's express or implied convent to repay it in exactly the same way as the customer's deposit in a bank creates the relationship of debtor and creditor. We think that the circumstances that it passed into the general assets of the company and was utilised by them for their general purposes is strong indication that the latter view is the correct one, as the first duty of a 'trustee' is to avoid mixing the trust funds with his won or to use them for other than trust purposes".This decision, as observed by the learned Judges, is a decision on the facts and circumstances of that case. But in so far as the provision for interest is concerned, I prefer to agree with the view of the learned Judges expressed in In re Travancore Quilon Bank Ltd. and Kshetra Mohan Dass v. Basu, that the provision for payment of interest need not necessarily militate against the case that a trust was created. But in so far as the provision for interest is concerned, I prefer to agree with the view of the learned Judges expressed in In re Travancore Quilon Bank Ltd. and Kshetra Mohan Dass v. Basu, that the provision for payment of interest need not necessarily militate against the case that a trust was created. But with respect to the learned Judges in Maheshwari Bros v. Official Liquidators, Indra Sugar Works Ltd., I do not think that the test as laid by them, namely, the circumstance that the money passed into the general assets of the company and was utilised by them for their general purposes is a strong indication that the amount was not deposited as a trust, is a correct one. The intention to create the trust should primarily be that of the author of the trust first which must be accepted by the person in whose favour the confidence is reposed as a trustee. If the company, who should be in the position of a trustee, without reference to the consent of the person who deposited, utilised the funds for general purposes and failed to carry out the intention of the trust by mixing the fund with the funds of the company or using the same for purposes other than for which it was deposited that could not be taken as a test to find out whether a trust has been created. It may be that the intention on the part of the author of the trust is not expressed. The subsequent conduct of the company in utilising the fund might throw a light on whether the intention of the parties was to create a trust. But that cannot be a conclusive or a safe test in such cases, since even in a case where a deposit has been made for a specific purpose, as in the present case, if the person who has received the deposit applies it for purposes other than for which it is deposited, that would amount to a breach of the conditions of the deposit and would not be taken as a consideration in arriving at the intention as to the nature of the deposit. I am therefore unable to agree with the decision in Maheshwari Bros v. Official Liquidators, Indra Sugar Works Ltd.An argument is advanced in behalf of the directors that the statement made by the applicants in the petition for winding up namely, that they deduct a sum of Rs. 7, 698-5-3, being the realisations and claim only the balance due by the company, must be taken to proof positive that the applicants never intended to create a trust in respect of the sum of Rs. 50, 000 since they agreed to the deduction out of it, of the sums accountable by the applicants to the company and that the intention was not that this sum of Rs. 50, 000 should be kept separate and returned. But his argument loses sight of the terms under which and the specific purposes for which the deposit has been made. This deposit has been made or demanded by the company and agreed to by the applicants as security for the fulfilment of the obligations under the agreement by the applicants and one of the obligations is to render an account of the collections and realisation from the films entrusted to them and therefore such a deduction is only in pursuance of the terms of the trust and not in derogation of it. There is nothing incompatible or foreign to the terms under which the deposit was made that this deduction has been agreed to made by the applicants. I have therefore no hesitation in holding that a trust has been created in respect of this deposit under the agreement dated 7th September, 1946, and that the applicants are entitled to a preferential payment from the company. The next question that arises for decision in this case is as to the rights inter se between the Madura Bank Ltd. and the applicants with reference to the assets of the company. The Madura Bank Ltd. hold a mortgage decree against the properties of the company in O.S. No. 49 of 1949 on the file of the Subordinate Judge's Court, Madura. They advanced a sum of Rs. 3 lakhs on the pronote executed by the directors and on the security of the movable and immovable properties of the company particulars of which are given in the schedule to the decree. The machinery and other movable and immovable properties have been mortgaged. They advanced a sum of Rs. 3 lakhs on the pronote executed by the directors and on the security of the movable and immovable properties of the company particulars of which are given in the schedule to the decree. The machinery and other movable and immovable properties have been mortgaged. The applicants claim priority over that of the decree in favour of the Madura Bank on the ground that the amount deposited by them is a trust amount which could not be subjected by the company to any charge, or in any event be held liable to any charge or mortgage created by the company and that the bank had notice that this amount of Rs. 50, 000 was a deposit amount and not the assets of the company, as could be seen from the balance sheet Ex. P. 3.An ex-director of production of the company was examined on behalf of the applicants to establish that the agent of the Madura Bank and an accountant came to the company's premises, looked into the statement of affairs of the company and the balance sheet, and they questioned the management as to where this deposit was kept, checked the securities and it was only thereafter that the loan was granted. But, a witness on behalf of the Madura Bank denies that either the Bank's agent or anyone went and inspected the accounts and other papers of the company. He states that they did not look into the balance sheet and they were not aware that there was such a balance sheet and that they came to know of it only after the mortgage was executed. Whatever may be the real truth as regards whether the bank had knowledge of this deposit of Rs. 50, 000 by the applicants with the company and whether it was with the knowledge that the deposit amount has to be repaid, the bank advanced this amount on the hypothecation of the properties of the company, it is not likely that the Madura Bank would have failed to look into the balance sheet, as no businessman of ordinary prudence would have agreed to given an advance of 3 lakhs without knowing the affairs of the company, which can be ascertained only from the last balance sheet of the company. If they had looked into the balance sheet, they could have founded that a sum of Rs. If they had looked into the balance sheet, they could have founded that a sum of Rs. 68, 932 and 29 cents was kept by the company as "distributors' deposits". But, it was however unnecessary for them to make further investigation as regards the deposit since what they were taking as security was not the entire assets of company, but only the movable and immovable properties specified in the schedule to the document creating the mortgage. Unless it could be the case of the applicants that by reason of he deposit being in the nature of a trust, a charge was created on all the properties of the company on the date of such deposit, it does not matter whether the deposit, which was with the company, as other deposits, is in the nature of trust or otherwise. Since the bank was concerned only with the securities that were offered to them, which were specific movable and immovable properties, and in so far as these properties were concerned, the bank were given a charge, it cannot be stated that the applicants would be entitled to a charge over these specific properties, which are the subject matter of hypothecation and the subsequent mortgage decree in favour of the bank. I do not think that the bank's rights are in any way affected and they are entitled to enforce the charge against the company by reason of the fact that they are secured creditors, being mortgage decree-holders. The remedy of the applicants in respect of this deposit of Rs. 50, 000 would be to proceed against the other assets of the company and not against these specific movable and immovable properties so as to deprive the Madura Bank of their right of proceeding against the same and recovering the amount due to them.The question that remains for determination is whether respondents 3 to 11, the directors of the company, or any of them, are liable for misfeasance in respect of the deposit amount and whether they should be personally directed to pay the amount to the applicants. The allegations in the affidavit regarding this prayer is very vague and except stating that the directors of the respondent company should also be made to pay for breach of trust or misfeasance, there is nothing alleged as to what the misfeasance or breach of trust that the directors had committed and in what manner they had become responsible and what is the failure of their duty which would make them liable to the applicants. The joint Official Liquidator has filed an affidavit where in he states that from the records available there are not sufficient materials to come to the conclusion that there has been any act of fraud or misfeasance by the directors. The directors while denying their liability state through their Chairman that the deposit money of the petitioners has been made use of in the running of the company and the money has been properly accounted for. The contention on behalf of the applicants is that the director misapplied the amount and committed a wrong in utilising the amount, which was a trust fund, for purposes other than for which it was intended and therefore committed a breach of trust. The contention on behalf of the applicants is that the director misapplied the amount and committed a wrong in utilising the amount, which was a trust fund, for purposes other than for which it was intended and therefore committed a breach of trust. The section in the Indian Companies Act as regards the liability of the directors for misfeasance in Section 235 (1), which is in the following terms :- "Where, in the course of winding up of a company it appears that any person who has taken part in the formation or promotion of the company, or any past of present director, manager or liquidator, or any officer of the company has misapplied, or retained or become liable or accountable for any money or property of the company, been guilty of any misfeasance or breach of trust in relation to the company, the court may on the application of the liquidator, or of any creditor or contributory made within three years from the date of the first appointment of a liquidator in the winding up of the misapplication, retainer, misfeasance or breach of trust, as the case may be, whichever is longer, examine into the conduct of the promoter, director, manager, liquidator, or officer, and compel him to repay or restore the money or property or any part thereof respectively with interest at such rate as the court thinks just, or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance or breach of trust as the court thinks just".Certain English and Indian decisions bearing on the subject have been referred to and it will be useful to refer to some of them to understand as to what is the precise nature of liability which the statute imposes upon the directors in respect of wrongs committed by them. In In re Canadian Land Reclaiming and Colonizing Co., known as Coventry and Dixon's case, where two gentlemen were appointed, and for sometime acted, as directors of the company without the necessary qualification of holding a certain number of shares, a charge was made against them by the liquidator under Section 165 of the Companies Act of 1862 for misfeasance in acting as directors without qualifications. It was held in that case that Section 165 (corresponding to Section 235 of the Indian companies Act) creates no new right, but merely provides a summary mode of calling directors to account for acts of impropriety for which they are liable to an action; that to make a person liable under it, he must be shown to have been guilty of some misconduct by which the company has suffered loss; and the application must therefore be dismissed. In that case the Master of the Rolls was of opinion that the directors by acting as such without the necessary qualification had been guilty of misfeasance; but on appeal the judgment was set aside. James, L.J., states as follows at page 670 : "In order to enable the court to apply that section, the liquidator, as it seems to me, must show something which would have been the ground of an action by the company if it had not been wound up. I am of opinion also that the word 'misfeasance' in that section means misfeasance in the nature of a breach of trust, that is to say, it refers to something which the officer of such company has done wrongly by misapplying or retaining in his own hands any monies of the company, or by which the company's property has been wasted, or the company's credit improperly pledged. It must be some act resulting in actual loss to the company".Bramwell, L.J., at page 673 observes : "It seems to me that the sole object of the clause is to give a summary remedy for that for which there would be a remedy without that section in the courts of law. Then again it seems to me that the amount with which these gentleman have been charged cannot be justified. The section authorises the court to direct persons chargeable under it to pay a sum of money by way of compensation. Therefore the Official Liquidator has to show, first of all, the misfeasance, and then the damages in respect of which the company is to be compensated. To my mind the liquidator has failed to show any damage at all. This is not a section for punishing a man who has been guilty of misfeasance, but for compensating the company in respect of the loss occasioned by his misfeasance. To my mind the liquidator has failed to show any damage at all. This is not a section for punishing a man who has been guilty of misfeasance, but for compensating the company in respect of the loss occasioned by his misfeasance. It is not shown that there was any loss, and indeed, if the burden of proof were upon the appellants to show there was not any loss, I should say they had succeeded in doing it." * In the same report there is another decision of Hall, V.C., In re British Guardian Life Assurance Co. In that case, the company which was an insurance company, was formed in 1869 and was registered under the Companies Act in 1871 and on 3rd June, 1876, it was ordered to wound up. In 1872 a resolution was passed by the company as follows : "that for the better security of the policy holders 50% of the premium paid on whole life policies on and after September 29, 1872, shall be invested in British Government securities in the names of the trustees of the company." * Prospectuses were issued thereafter stating that 50% of the premiums paid upon whole life policies is invested in the names of the trustees in British Government securities. It was discovered that after 6th August, 1875, no investment was made by the trustees and that the sums which had before that time been invested were gradually sold out, and the proceeds applied to the general purpose of the company before the company went into liquidation. On summons by the Liquidator and a whole life policy holder jointly for a declaration that the directors were liable to account to the company for a moiety of the premiums received, it was held that the summons was maintainable as against the surviving directors, that the directors were liable, as for a breach of trust, for a moiety of the premiums which ought to have been invested. Hall, V.C., observations as follows at page 346 :-"I cannot say that there might not be questions raised as to the application of the funds which were to be invested in the manner specified, but as regards the investment a clearer clause than this I never saw, and I see no difficulty in construing the words, viz., that 50 per cent. of the premiums on the whole life policies shall be invested in Government securities. The addition of the words 'for the better security of the policy holders' does not create an ambiguity which reduces the clause to a nullity. As to any question that may have to be decided between the policy holders and the whole life policy holders, because the amount to be invested is 50 per cent. of the premiums paid on the latter, I abstain from expressing any opinion. Should there be any question as to the application of the funds, there can be none either as to the amount to be set apart and invested, or that the clause created an obligation on the part of those who had the management of the company to see that effect was given to it. It was submitted that the funds had been properly applied for purposes of the company. As to that, there is no ambiguity or vagueness in the clause, and I have not the least doubt that it was meant as a protection to those entitled under the trust as policy holders, and that there would have been no difficulty whatever, if the persons entitled to the benefit of the funds had taken proceedings for the purpose of preventing them being applied towards the general purposes of the company. I now come to the question of Mrs. Williamson's liability - whether or not he is under any, and I hold that the having been a director during the whole of the time in which investments ought to have been made - having been a most active member of the board, constantly attending, and rarely absent from the meetings of the directors, is, in common with his co-directors, liable. It was his duty to see that the investments were made in accordance with the resolution and clauses of the partnership contract, and his not attending to it was a breach of trust to the company for which he was acting as a director; a breach of trust in respect of which, after the order made for winding up the company, he can be charged and made liable."In In re Exchange Banking Co., the directors of a limited company for several years presented to the general meeting of shareholders reports and balance sheets in which various debts known by the directors to be bad were entered as assets, so that an apparent profit was shown though in fact there was none. The shareholders, relying on these documents, passed resolution declaring dividends which the directors accordingly paid. An order having been made to wind up the company the liquidator applied, under Section 165 of the Companies Act, 1862, for an order on the directors to replace the amount of dividends thus paid out of capital. It was held in that case that the directors were liable and that the fact that the capital thus improperly applied was distributed pro rata among the whole body of shareholders did not protect the directors, for that the shareholders were not the corporation, and that payment to them would not prevent the corporation before winding up, or the liquidator after winding up, from compelling the directors to replace the money that it might be applied to proper purposes. Jessel, M.R., observes as follows at page 533 : "A limited company by its memorandum of association declares that its capital is to be applied for the purpose of the business. It cannot reduce its capital except in the manner and with the safeguards provided by statute, and looking at the Act 40 and 41 Vict. C. 26, it clearly is against the intention of the Legislature that any portion of the capital should be returned to the shareholders without the statutory conditions being complied with. A limited company cannot in any other way make a return of capital, the sanction of a general meeting can give no validity to such proceeding, and even the sanction of every shareholder cannot bring within the powers of the company an act which is not within its powers. A limited company cannot in any other way make a return of capital, the sanction of a general meeting can give no validity to such proceeding, and even the sanction of every shareholder cannot bring within the powers of the company an act which is not within its powers. If, therefore, the shareholders had all been present at the meetings, and had all known the facts, and had all concurred in declaring the dividends, the payment of the dividends would not be effectually sanctioned." * The reasoning of the decision is that the capital of the company was utilised for purpose not authorised by the memorandum of associations, that the directors were quasi trustee for the company and not for the individual shareholders in respect of this capital and therefore the acts of the directors amounted to a breach of trust, and accordingly they would be liable. Lord Macnaghten in Cavendish Bentinck v. Fenn summarises the scope of Section 165 of the Companies Act of 1862. At page 669 he observes as follows : "The 165th section of the Act of 1862 has often come under discussion and it has been settled, and I think rightly settled, that that section creates no new offence, and that it gives no new rights, but only provides a summary and efficient remedy a respect of rights which apart from that section might have been vindicated either at law or in equity. It has also been settled that the misfeasance spoken of in that section is not misfeasance in the abstract, but misfeasance in the nature of a breach of trust resulting in a loss to the company." * In that case, a director purchased for the company a property in which, before he became director, he had acquired an interest. The director having been proceeded against after liquidation on he ground of misfeasance or breach of trust for having allowed the company to make the purchase without disclosing his own interest and at a price far exceeding the value it was held that the evidence adduced by the applicant failed to show either that the director had not disclosed his interest or that the purchase price was above the value. Lord Herschell in that case was of opinion "that assuming that a breach of duty such as is suggested would be of a misfeasance giving rise to an application under the 165th section such an application could only succeed where it could be shown that the breach of duty had resulted in loss to the funds and assets of the company".All these cases are referred to by Kekewich, J., in In re Liverpool Household Stores Association Ltd. The directors in this case were charged with misfeasance on several grounds. This decision lays down : "Section 165 of the Companies Act, 1862, enables a creditor of a company to obtain by summary process and relief to which he is entitled in respect of damages incurred through the misfeasance of an officer of the company, but the remedy afforded by the section is only for the recovery of damages for losses incurred. The misfeasance to which the section in directed is not restricted to acts of commission, but extends to all breaches of trust in relation to a company through which loss is incurred. Misfeasance is not to be imputed to a director unless he has dishonestly acted, or abstained from acting, in conflict with his plain duty and the burden of proof lies on the party making the charge; but in considering the question of the director's liability, there must be imputed to him a special knowledge of the business which he has undertaken. Directors are liable for losses occasioned through acts done by them as directors in matters which are ultra vires the company, and this liability is not dependent upon any question of honesty of intention." * The Indian decisions that are cited are : Gopalaswami v. Krishnaswami; National Bank of Upper India, Lucknow v. Dina Nath Sapru; Connell v. The Himalaya Bank Ltd. and Bhim Singh v. Liquidator, Union Bank of India. The Indian Courts uniformly hold that misfeasance must be such as would amount to breach of trust in relation to the company and must result in loss to the company. The Indian Courts uniformly hold that misfeasance must be such as would amount to breach of trust in relation to the company and must result in loss to the company. It is necessary that in all cases, loss to the company must be established and as observed by Edge, C.J., and Banerji, J., being in the nature of damages, it is necessary that the loss to the company in respect of which compensation is asked for should be the direct, and not a remote and more or less speculative, consequence of the misfeasance or neglect of duty on the part of the director or other officer of the company from whom such compensation is sought.In the present case, the amount which was paid by the applicants was received as a deposit under the agreement and referred to as "distribution' deposit". There was no direction by the applicants that this amount should not be utilised for any other purpose and must be kept in a separate account to be returned to the applicants or adjusted to the collections in terms of the agreement between the applicants and the company. There was likewise no resolution of the company as to the manner in which this amount was to be dealt with and whether it should be invested separately. There was neither by agreement not by way of resolution of the company anything to indicate that the amount should not be utilised for the purposes of the ordinary business of the company. There is no provision even in the memorandum and articles of association governing such amounts received as deposits either from employees or from agents. In the absence of any such direction, if the directors had utilised the amount for the legitimate purpose of the company in the course of their management and not appropriated any portion of the same for their personal use and not utilised it for any purpose not authorised by the memorandum and articles of association, could it be said that they had misapplied the funds of the company or committed a breach of trust in relation to the company ? The word 'misapplication ' in Section 235 has been argued to be an application for purposes other than for which the funds were intended. Prima facie, this argument sounds plausible. The word 'misapplication ' in Section 235 has been argued to be an application for purposes other than for which the funds were intended. Prima facie, this argument sounds plausible. But, as pointed out already, there is no allegation that the applicant desired that the amount should be invested and kept separately. Misapplication by a director of the funds of the company was intended to mean application of the funds belonging to the company for his won purposes, or application for purposes other than that of the company, or for purpose not sanctioned by the memorandum and articles of association or applying the funds in contravention of any specific provision of law, or direction, or resolution of the company. If the director bona fide believes that the fund, which has come into the company, such as the applicants' deposit, being the funds of the company, could be legitimately applied for the bona fide needs of the company, it cannot be said that the director was doing something wrong by so applying. It is not a case of retention of the amount in his hands and not accounting for it. The use of the monies for the business of the company by the director would not also amount to an act said to be ultra vires. In In re British Guardian and Life Assurance Co., and In re Exchange Banking Co., the acts of the directors were held to be ultra vires and acts done in contravention of the memorandum and articles of association. I am therefore unable to hold that the directors in this case have misapplied the applicants' amounts and that therefore they are liable to account. There is no case as to any breach of trust. The breach of trust that is contemplated under Section 235 is a breach of trust in relation to the company and it is not suggested that any monies of the company have been misappropriated by the directors or that any duty was imposed on the directors by the company in respect of which the directors have committed a breach. In order to make the directors personally liable under Section 235 for misfeasance, it is necessary to show that the directors have dishonestly acted, or abstained from acting, in conflict with their plain duty and that by reason of the act of the directors, the company has incurred a loss. In order to make the directors personally liable under Section 235 for misfeasance, it is necessary to show that the directors have dishonestly acted, or abstained from acting, in conflict with their plain duty and that by reason of the act of the directors, the company has incurred a loss. But this dishonest intention need not be shown in cases where the directors have been responsible for acts which were ultra vires of the company and losses have therefore been occasioned to the company by such ultra vires acts.for the applicants endeavoured to show that in this case loss has occurred to the company since the disappearance of the money, which should have been there, has created a liability on the company which can be said to be a loss which the company has incurred. The argument is that if the fund had been there, the same could have been paid over to the applicants and the company would not be made liable to the applicants now. I am unable to follow this argument as no new liability has been created by reason of the disappearance of the money. The liability, if any, had always been there and that liability should, in any event, have been discharged, the difference being that if the sum was there as a deposit it could have been paid now. But since the company is always liable, I consider that no new liability has arisen and therefore it could not be said that the company has sustained a loss by reason of the utilisation of these monies. It is also argued that by reason of the directors not having kept this amount separately and made it available to the applicants, it would become necessary for the liquidators to make a call on the contributories for the unpaid capital to that extent, which means that the shareholders have suffered a loss, since they have to pay uncalled for share capital. The liability of the shareholders to pay unpaid calls is again a liability which existed at the inception, when they became shareholders and has not been created by reason of any subsequent event including the disappearance of money and its having been utilised for the purpose of the company. The liability of the shareholders to pay unpaid calls is again a liability which existed at the inception, when they became shareholders and has not been created by reason of any subsequent event including the disappearance of money and its having been utilised for the purpose of the company. In any event, the loss alleged to have been sustained by the company appears to be rather speculative than real and too remote that it cannot be said that the company has sustained a loss as a direct consequence of the acts of the director in spending the amount admittedly for the legitimate business of the company. The directors have acted bona fide and have not contravened any provision of law, or any direction or injunction of the company in utilising the amounts for the company's business. I therefore hold that they are not liable for any misfeasance, or misapplication or breach of trust under Section 235 of the Indian Companies Act.The result is : Prayers (a) and (b) are rejected. Prayer (c). The applicants will be entitled to rank as preferential creditors, but not in preference to the claim of the second respondent against the company out of the properties mortgaged and hypothecated to the bank. No orders as to costs. Orders accordingly.