Bank of Maharashtra v. Morning Star Travels

Facts

• Morning Star Travels deposited cheques with Bank of Maharashtra for collection
• The bank collected the proceeds but did not immediately credit them to the customer's account
• A dispute arose about the bank's liability for the period between collection and crediting

Issue

1. Whether the collecting bank holds cheque proceeds as trustee or debtor between the time of collection from the paying bank and crediting to the customer's account.

Held

• The Court held that when a bank collects a cheque on behalf of its customer, the relationship during the collection process is that of trustee and beneficiary. The bank holds the collected proceeds in a fiduciary capacity for the customer. This trust subsists until the amount is credited to the customer's account. Once credited, the relationship immediately converts to the ordinary debtor-creditor relationship.

Ratio Decidendi

A collecting bank holds cheque proceeds as trustee for the customer from the moment of collection until actual crediting to the account. The trust converts to debtor-creditor upon credit entry.