Kachara and Bros v Official Receiver and Liquidator of the Exchange Bank of India and Africa Limited (Civil Appeal No. 69 of 1950) [1951] EACA 33 (1 January 1951)

#### COURT OF APPEAL FOR EASTERN AFRICA

Before SIR BARCLAY NIHILL, President, SIR NEWNHAM WORLEY, Vice-President, and LOCKHART-SMITH, J. of A.

# SHAH DEVCHAND KACHARA & BROS., Appellants (Original Applicants)

## THE OFFICIAL RECEIVER AND LIQUIDATOR OF THE EXCHANGE BANK OF INDIA AND AFRICA, LIMITED, Respondents (Original Respondents)

#### Civil Appeal No. 69 of 1950

(Appeal from decision of H. M. Supreme Court of Kenya—Modera, J.)

Liquidation—Percentage marginal credit—Relationship between bank and customers.

The appellant firm requested the bank to open letters of credit to enable the firm to pay for consignments of goods which it had purchased from overseas traders. The firm offered the goods as collateral security for the acceptance and payment of the drafts and undertook, in addition to accepting and paying in due course the amount of the drafts, to meet all the usual charges for collection of inward bills. The bank accepted the application and informed the firm that its account with the bank would be debited with a 15 per cent margin together with commission stamp and postage charges. The firm having an account with the bank could not withdraw from its account the moneys earmarked as<br>percentage margins whilst the letters of credit remained open. The appropriation of a portion of the appellants' account was a condition imposed by the bank. On the bank closing its doors the appellant firm contended that the bank held such percentage margin deposits as a trustee and not as a debtor. The liquidator opposed this on the ground that the relationship between the Bank and the appellant was one of debtor and creditor. The Supreme Court of Kenya held that the liquidator was correct.

Held (29-5-51).—The action of the Bank in making a separate entry in its books by debiting the firm's current account in respect of each letter of credit did not create any trust or agency. The listing of the marginal deposits in a special account showing them as debits against the customer's current account did not mean that the money had been withdrawn for their general use.

The appeal was dismissed.

Bryson for appellants.

### Spry, Official Receiver, in person.

JUDGMENT (delivered by SIR BARCLAY NIHILL).—This appeal from a judgment of the Supreme Court arises out of the liquidation of the Exchange Bank of India and Africa Ltd. The appellant firm was a customer of the bank and claimed from the Official Receiver, who is the liquidator in the winding up, the return to them in full of certain moneys which at the date on which the bank closed its doors were being held by the bank as percentage margin deposits against certain letters of credit. The liquidator refused the appellant's request on the ground that as regards these moneys the relationship between the bank and the appellant was one of debtor and creditor so that the claim was not entitled to preference. The appellant by motion appealed to the Supreme Court of Kenya against this decision but the learned Judge supported the liquidator on the ground that nothing had been adduced to his satisfaction to make him think

that any relationship other than that of creditor and debtor existed between the parties. There is no dispute as to the facts, and the issue before this Court is whether the learned Judge was right in concluding from the facts that the bank did not hold these marginal deposits as a trustee or agent for the appellant. Neither is there any uncertainty as to the law to be applied. It is not disputed by the Official Receiver, who has appeared in person to argue this appeal, that in the case where a customer instructs a bank to make a specific appropriation of money paid in by him and the bank has applied it as directed, that money belongs to him and not to the general creditors (*Farley v. Turner* (1857) 26 L. J. Ch. 710 and Massey's case (1870) 39 L. J. 635). Conversely, a customer's general account with a bank represents money lent by him to the bank and the banker commits no breach of trust in employing such money for his own purposes (Foley v. Hill (1848) 9 E. R. 1002). The banker remains the debtor to his customer for the amount standing to the customer's account and on a liquidation the customer can prefer a claim which will rank pari passu with the other creditors for any dividend payable. Our task then is to discover by an analysis of facts. the true nature of the transaction in the present case. From the documents, it emerges that the appellant firm requested the bank to open letters of credit in order to enable them to pay for certain consignments of goods which they had purchased from overseas traders. The firm offered the goods themselves as collateral security for the due acceptance and payment of the drafts, and undertook also, in addition to accepting and paying in due course the amount of the drafts, to meet all the usual charges for collection of inward bills (see paragraph 6 of exhibit 1). In reply the bank accepted the application and informed the appellant that the firm's account with them would be debited with a 15 per cent margin together with commission and stamp and postage charges. The appellant firm had an account at the bank and so the position was that whilst these letters of credit remained open it could not withdraw from their account the moneys which had been earmarked as percentage margins or, to put it in another way, its effective balance at the bank had been reduced by that amount. I should add that the bank made a separate entry in its books (exhibit 3) showing the amounts debited against the firm's current account in respect of each letter of credit. My first observation is that these facts show that this appropriation of a portion of the appellant's account was not done pursuant to any instructions from the appellant but was a condition imposed by the bank in consideration for the grant of the credits. In other words the bank said to its creditor "Yes we will give you credit on your undertaking to repay and with the goods as a collateral security but to safeguard us further against certain contingent risks we must reserve the right to withhold from the sum standing to your credit in our books, which sum we are bound by banking law to repay you on demand, a sum equal to 15 per cent of the amount of each letter of credit". If this is a correct analysis of the position then it seems to me that this was not a specific appropriation which brings the transaction within Farley v. Turner supra but merely a notice to the appellant that out of the firm's moneys which had been lent to the bank for its general use, a certain percentage would under certain eventualities not be returned on demand. I cannot see how, because the bank took this precaution and made it a condition of the grant of credit its action in doing so can be construed as placing the bank in a fiduciary position towards the appellant, nor do I think that it can be argued that in this respect the bank was acting as an agent, for agency can only flow from the instructions of a principal. It is not difficult to imagine cases where the credit and prestige of a customer might stand so high that a bank might well dispense with a marginal deposit altogether knowing that any excess expenditure on contingencies would always be covered by the amount standing in the customer's current account. Conversely in other cases a bank might ask much more than 15 per cent. Mr. Bryson has instanced the case of the non-customer getting a letter of credit and

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putting up cash to meet an excess margin. I agree that in such a case it might be argued that the bank would stand in a position of a trustee or agent for the sum advanced, but here the appellant firm was a customer of the bank and no sum of money had been advanced to the bank for a specific purpose. It is not disputed that a customer's current account lying in a bank at the date of a liquidation can only rank as a debt without preference. It would be an odd result if the law was that, because the bank in order to meet a customer's request for credit had imposed a certain condition affecting, the operation of his current account, the customer was thereby placed in a better position on a liquidation in respect of that portion of his current account so affected than he would stand in relation to the rest of his unaffected balance. I do not think this is the law because I do not think that the action of the bank in this case created anything in the nature of a trust or agency.

Several Indian decisions have been cited to us during the course of the argument but I do not think it is necessary for me to refer to them because no principle of law emerges from them. In each case I have studied, the point at issue was whether the money was received by the bank in such a way that it could be mixed with its own moneys, or whether, because of the instructions accompanying the money, the bank held it in a fiduciary capacity. Each case was of course decided on its own facts and nowhere did the Courts of India dispute the principle in Foley $v$ . Hill: they could hardly do so for it is on this principle that the whole edifice of modern banking rests.

One other matter occurs to me. It is not in dispute that the money earmarked by the bank to meet contingencies which might arise from the issue of the letters of credit was money which the bank had in their possession from the appellant for their general use. Does the fact that the bank may have listed their marginal deposits in a special account showing them as debits against the customer's current account, mean that they had withdrawn this money from their general use? I do not see how this can be so. I regard this as nothing more than a memorandum to show the bank's officers the true position of the appellant's current account; that is the sum up to which amount the firm was entitled to draw.

For these reasons I feel no doubt at all in my mind that the learned Judge in the Court below came to the right conclusion and that this appeal should be dismissed with costs.

SIR NEWNHAM WORLEY, V. P.-I have had the advantage of reading the judgment of the learned President and am in entire agreement with it. I agree that this appeal must be dismissed with costs.

LOCKHART-SMITH, J. of $A$ —I also agree.