Bank’s Lien

Bank’s Lien

One of the important rights enjoyed by a banker is the right of general lien. Lien means the right of the creditor to retain the goods and securities owned by the debtor until the debt due from him is repaid. It confers upon the creditor the right to retain the security of the debtor and not the right to sell it . Such right can be exercised by the creditor in respect of goods and securities entrusted to him by the debtor with the intention to be retained by himas security for a debt due by him (debtor). 

Lien may be either (i) a general lien or, (ii) a particular lien. A particular lien can be exercised by a craftsman or a person who has spent his time, labour and money on the goods retained. In such cases goods are retained for a particular debt only. For example, a tailor has the right to retain the clothes made by him for his customer until his tailoring charges area paid by the customer. So is the case with public carriers and the repair shops.

 A general lien, on the other hand, is applicable in respect of all amounts due from the debtor to the creditor. Section 171 of the Indian Contract Act, 1872, confers the right of general lien on the bankers as follows: 

“Bankers… may, in the absence of a contract to the contrary, retain as a security for a general balance of account, any goods bailed to them.” 

Special Features of a Banker’s Right of General Lien 

(i) The banker possesses the right of general lien on all goods and securities entrusted to him in his capacity as a banker and in the absence of a contract inconsistent with the right of lien. Thus, he cannot exercise his right of general lien if – 

(a) the goods and securities have been entrusted to the banker as a trustee or an agent of the customer; and

 (b) a contract – express or implied – exists between the customer and the banker which is inconsistent with the banker’s right of general lien. In other words, if the goods or securities are entrusted for some specific purpose, the banker cannot have a lien over them. These exceptional cases are discussed later on.

(ii) A banker’s lien is tantamount to an implied pledge: As noted above the right of lien does not confer on the creditor the right of sale but only the right to retain the goods till the loan is repaid. In case of pledge8 the creditor enjoys the right of sale. A banker’s right of lien is more than a general lien. It confers upon him the power to sell the goods and securities in case of default by the customer. Such right of lien thus resembles a pledge and is usually called an ‘ implied pledge’. The banker thus enjoys the privileges of a pledge and can dispose of the securities after giving proper notice to the customer. 

(iii) The right of lien is conferred upon the banker by the Indian Contract Act: No separate agreement or contract is, therefore, necessary for this purpose. However, to be on the safe side, the banker takes a letter of lien from the customer mentioning that the goods are entrusted to the banker as security for a loan—existing or future—taken from the banker and that the latter can exercise his right of lien over them. The banker is also authorized to sell the goods in case of default on the part of the customer. The latter thus spells out the object of entrusting the goods to the banker so that the same may not be denied by the customer later on.

(iv). The right of lien can be exercised on goods or other securities standing in the name of the borrower and not jointly with others. For example, in case the securities are held in the joint names of two or more persons the banker cannot exercise his right of general lien in respect of a debt due from a single person. 

(v) The banker can exercise his right of lien on the securities remaining in his possession after the loan, for which they are lodged, is repaid by the customer, if no contract to contrary exists. In such cases it is an implied presumption that the customer has re-offered the same securities as a cover for any other advance outstanding on that date or taken subsequently. The banker is also entitled to exercise the right of general lien in respect of a customer’s obligation as a surety and to retain the security offered by him for a loan obtained by him for his personal use and which has been repaid. In Stephen Manager North Malabar Gramin Bank vs. ChandraMohan and State of Kerala, the loan agreement authorized the bank to treat the ornaments not only as a security for that loan transaction, but also for any other transaction or liability existing or to be incurred in future. As the liability of the surety is joint and several with that of the principal debtor, such liability also came within the ambit of the above provision of the agreement. 

Section 171 of the Contract Act entitles a banker to retain the goods bailed to him for any other debt due to him, i.e., any debt taken prior to the debt for which the goods were entrusted as security. But in a lien there should be a right of possession because, lien is a right of one man to retain that which is in his possession belonging to another. Possession of the goods by the person claiming right of lien, is anterior to the exercise of that right and for which possession whether actual or conductive is a must. (Syndicate Bank Vs. Davander Karkare (A.I.R. 1994 Karnataka 1)

A banker cannot exercise his right of lien in following situations: 

1. In case when goods and securities are not obtained by him in the ordinary course of business 

2. In case of Safe Custody, when a banker accepts goods/securities of a customer to be kept in safe custody. In this case the relationship of banker and customer is that of the bailee and bailer. Here the banker acts as a trustee and not as a lender/creditor.

 3. When the goods or security are left inadvertently or through oversight in the bank premises, the banker cannot exercise his right of lien on them.

 4. When money is deposited by a customer with a request to transfer to another branch, the banker cannot exercise the right of lien. This is applicable even the applicant for the transfer of funds is a borrower as well.

5. The banker cannot have the right of lien and right of set off at the same time.