BANKER AS TRUSTEE :
Ordinarily, a banker is a debtor of his customer in respect of the deposits made by the latter, but in certain circumstances he acts as a trustee also. A trustee holds money or assets and performs certain functions for the benefit of some other person called the beneficiary. For example, if the customer deposits securities or other valuables with the banker for safe custody, the latter acts as a trustee of his customer. The customer continues to be the owner of the valuables deposited with the banker. The legal position of the banker as a trustee, therefore, differs from that of a debtor of his customer. In the former case the money or documents held by him are not treated as his own and are not available for distribution amongst his general creditors in case of liquidation.
The position of a banker as a trustee or as a debtor is determined according to the circumstances to the each case. If he does something in the ordinary course of his business, without any specific direction from the customer, he acts as a debtor (or creditor). In case of money or bills, etc., deposited with the bank for specific purpose, the bankers’ position will be determined by ascertaining whether the amount was actually debited or credited to the customer’s account or not. For example, in case of a cheque sent for collection from another banker, the banker acts as a trustee till the cheques is realized and credited to his customer’s account and thereafter he will be the debtor for the same account. If the collecting banks fails before the payment of the cheque is actually received by it from the paying bank, the money so realized after the failure of the bank will belong to the customer and will not be available for distribution amongst the general creditors of the bank.
On the other hand, if a customer instructs his bank to purchase certain securities out of his deposit with the latter, but the bank fails before making such purchase, the bank will continue to be a debtor of his customer (and not a trustee) in respect of amount which was not withdrawn from or debited to his account to carry out his specific instruction.
The relationship between the banker and his customer as a trustee and beneficiary depends upon the specific instructions given by the latter to the farmer regarding the purpose of use of the money or documents entrusted to the banker. In New Bank of India Ltd. v. Pearey Lal ( AIR 1962, Supreme Court 1003), the Supreme Court observed in the absence of other evidence a person paying into a bank, whether he is a constituent of the bank or not, may be presumed to have paid the money to be held as banker ordinarily held the money of their constituent. If no specific instructions are given at the time of payment or thereafter and even if the money is held in a Suspense Account the bank does not thereby become a trustee for the amount paid.
In case the borrower transfers to the banker certain shares in a company as a collateral security and the transfer is duly registered in the books of the issuing company, no trust is created in respect of such shares and the banks’ position remains that of a pledge rather than as trustee. Pronouncing the above verdict, in New Bank of India vs. Union of India (1981) 51 Company Case p. 378, the Delhi High Court observed that a trustee is generally not entitled to dispose of or appropriate trust property for his benefit. “In the present case the banker was entitled to dispose of the shares and utilize the amount thereof for adjustment to the loan amount if the debtor defaults. The banker’s obligation to transfer back the shares can arise only when the debtor clears dues of the bank was not considered as trustee.