Banker’s Right of General 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 him as 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)
Exceptions to the Right of General Lien
As already noted the right of lien can be exercised by a banker on the commodities entrusted to him in his capacity as a banker and without any contract contrary to such right. Thus the right of lien cannot be exercised in the following circumstances:
(a) Safe custody deposits. When a customer deposits his valuables – securities, ornaments, documents, etc. – with the banker for safe custody, he entrusts them to the banker s a bailee or trustee with the purpose to ensure their safety from theft, fire, etc. A contract inconsistent with the right of lien is presumed to exist. For example, if he directs the banker to collect the proceeds of a bill of exchange on its maturity and utilize the same for honouring a bill of exchange on his behalf, the amount so realized will not be subject to the right of general lien.
Similarly, if a customer hands over to the banker some shares with the instruction to sell them at or above a certain price and the same are lying unsold with the banker, the latter cannot exercise his right of lien on the same, because the shares have been entrusted for a specific purpose and hence a contract inconsistent with the right of lien comes into existence.
But if no specific purpose is mentioned by the customer, the banker can have lien on bills or cheques sent for collection or dividend warrants, etc. If the security comes into the possession of the banker in the ordinary course of business, he can exercise his right of general lien.
(c) Right of General Lien becomes that of Particular Lien. Banker’s right of general lien is displaced by circumstances which show an implied agreement inconsistent with the right of general lien. In Vijay Kumar v. M/s. Jullundur Body Builders, Delhi, and Others (A.I.R. 1981, Delhi 126), the Syndicate Bank furnished a bank guarantee for ` 90,000 on behalf of its customer. The customer deposited with it as security two fixed deposit receipts, duly discharged, with a covering letter stating that the said deposits would remain with the bank so long on any amount was due to the Bank from the customer. Bank made an entry on the reverse of Receipt as “Lien to BG 11/80.” When the bank guarantee was discharged, the bank claimed its right of general lien on the fixed deposit receipt, which was opposed on the ground that the entry on the reverse of the letter resulted in the right of a particular lien, i.e., only in respect of bank guarantee.
The Delhi High Court rejected the claim of the bank and held that the letter of the customer was on the usual printed form while” the words written by the officer of the bank on the reverse of the deposit receipt were specific and explicit. They are the controlling words, which unambiguously tell us what was in the minds of the parties of the time. Thus the written word which prevail over the printed “word”. The right of the banker was deemed that of particular lien rather than of general lien.
(d) Securities left with the banker negligently. The banker does not possess the right of lien on the documents or valuables left in his possession by the customer by mistake or by negligence.
(e) The banker cannot exercise his right of lien over the securities lodged with him for securing a loan, before such loan is actually granted to him.
(f) Securities held in Trust. The banker cannot exercise his right of general lien over the securities deposited by the customer as a trustee in respect of his personal loan. But if the banker is unaware of the fact that the negotiable securities do not belong to the customer, his right of general lien is not affected.
(g) Banker possesses right of set-off and not lien on money deposited. The banker’s right of lien extends over goods and securities handed over to the banker. Money deposited in the bank and the credit balance in the accounts does not fall in the category of goods and securities. The banker may, therefore, exercise his right of set –off rather the right of lien in respect of the money deposited with him. The Madras High Court expressed this view clearly as follows:
The lien under Section 171 can be exercised only over the property of someone else and not own property. Thus when goods are deposited with or securities are placed in the custody of a bank, it would be correct to speak of right of the bank over the securities or the goods as a lien because the ownership of the goods or securities would continue to remain in the customer. But when moneys are deposited in a bank as a fixed deposit, the ownership of the moneys passes to the bank and the right of the bank over the money lodged with it would not be really lien at all. It would be more correct speak of it as a right to set-off or adjustment.