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eBAPTEB II
BANKER’S GENERAL LIEN
CHAPTER II
BANKER’S GENERAL LIEN
Definitions
Lien has been defined by John Bouvier as the "Right which one
person possesses, in certain cases, of detaining property placed in his
possession belonging to another, until some demand which the former has
be satisfied"1.
A particular lien is a right to retain the property of another on
account of labour employed or money expended on that property.
A general lien is a right to retain the property of another on account
of a general balance due from the owner.
Bankers have general lien on all securities left with them by their
customers2.
Lien is the right to retain property belonging to another until a debt
due from the latter is paid. A banker’s lien is a special form of general lien,
for it includes a right of sale after reasonable notice. It is the right of the
banker to retain such of his customer’s property as comes into his hands in
the ordinary course of business as a banker; it is an implied pledge3.
Bouvier’s Law Dictionary, Third Revision (being 8th Edn), 1914, Vol.2, p.1978
Ibid
Thomson’s Dictionary of Banking, 12th Edn, 1974 p.361
24
Lien is the right to retain property belonging to another until a debt
due from the owner of the property to the possessor of the property is paid.
The ownership of the property is left undisturbed - that is, the borrower
continues as owner, but the lender has possession. In general the lender has
no right to sell the property. A banker’s lien is a general lien enjoyed by the
banker over any borrowing customer’s property that comes into his hands
in the ordinary course of business as banker. It is an exceptional lien in
that it has a right of sale after reasonable notice to the customer. A
banker’s lien has been described as an implied pledge4.
A lien is a legal right or interest that a creditor has in another’s
property lasting usually until a debt or duty that it secures is satisfied.
Banker’s lien is the right of a bank to satisfy a customer’s matured debt by
seizing the customer’s money or property in the bank’s possession5.
Informal Security
A banker who has granted an advance to a customer may, by virtue of his right of lien, obtain a legal claim to securities of the customer which pass through his hands in the ordinary course of his business as banker. No special arrangement or agreement is necessary to create the right of lien; it arises out of course of dealings between the parties. Nevertheless, the right of lien may be expressly conferred by agreement, or it may be definitely excluded either by arrangement between the parties or by the existence of a contract or of circumstances inconsistent with the exercise of
the right of lien.
4 Dictionary of Banking by F.E.Perry & G.Klein, 3rd Edn, 1978, p.174 & 16
Black’s Law Dictionary, 7th Edn, 1999, p.9335
25
The practical test of banker’s lien is whether the securities were
received and handled by the bank in its ordinary course of business, there
being no express or implied agreement between the customer and the bank
inconsistent with lien.
Davis v Bowsher6 is an important judicial recognition of banker’s
general lien. Lord Kenyon CJ in this case said "wherever a banker has
advanced money to another, he has a lien on all the paper securities which
come into his hands for the amount of his general balance".
The securities must have come into the banker’s hands in the
capacity as banker in the course of banking business; they must not have
been deposited for some special purpose inconsistent with the existence of
the lien, and they must be securities which a banker ordinarily deals with
for his customer when indebtedness on the part of the customer is not in
contemplation7.
Law Merchant (Lex Mercatoria)
The law merchant "is neither more nor less than the usages of
merchants and traders in the different departments of trade, ratified by
decisions of courts of law, which, upon such usages being proved before
them, have adopted them as settled law"8.
6 (1794) 5 Term Rep 488, Court of King’s Bench.
7 Ibid
8 Goodwin v Robarts (1875), L.R. 10 Exch 337
26
In 1846 the Hojise of Lords regarded the existence of banker’s lien as
indispensable in Brandao v Barnetf where Lord Campbell said:
"Bankers have most undoubtedly have a general lien on all securities
deposited with them as bankers by a customer, unless there be an express
contract, or circumstances that show an implied contract, inconsistent with
lien".
It was further stated by Lord Campbell that the banker’s lien is part
of the law merchant, which courts of justice are bound to know and
recognise. Lord Lyndhurst in the same case laid down that there in no
doubt that, by the law - merchant, a banker has a lien for his general
balance on securities deposited with him. Consequently the existence of the
general lien need not normally be pleaded or proved. It must be
remembered that the law merchant is not fixed and stereotyped. It is
capable of being expanded and enlarged so as to meet the wants and
requirements of trade in the varying circumstances of commerce9 10.
Therefore if a bank relies upon some aspect of the lien which is not clearly
established on the authorities, it is open to it to plead and adduce evidence
of a general usage, and it is open to the court to recognise such usage as
establishing the right relied upon.
9 (1846) 12 Cl & Fin 787
10 Goodwin v Robarts (1875) LR 10 Exch 337 at 346
27
Banker’s Lien as an Implied Pledge
In Brandao v Barnett, a classical and landmark judgment on
banker’s general lien, Lord Campbell stated that the right acquired by a
general lien is an implied pledge11. This observation was made in support
of a ruling that the banker’s lien exists if the banker has acted in good
faith, eventhough the subject of the lien turns out to be the property of a
stranger.
Distinction between Pledge and Lien
Pledge Lien1. Power of sale conferred on the
bankerNo such power; power to retain the goods
2. Defined in section 172 of the Indian Contract Act, 1872
Defined in section 171 of the Indian Contract Act, 1872
3. Pledge is in relation to the particular goods bailed to the banker as security
Lien is available for the banker in relation to all the securities of the customer with the banker
4. On customer’s default, the banker can sell the pledged goods without resort to courts
The banker has to move a court to attach the liened goods and then sell.
5. Consensual security since the customer himself transfers the possession of goods to the banker.
Non - consensual security since banker suo motu retain the goods of the customer even in the absence of the customer’s consent
6. Formal security because it is created by the customer
Informal security because it is exercised by banker without the concurrence of the customer
7. Express contract No express contract but statutory right of the banker
u (1846) 12 Cl & Fin at 806
28
The essential difference between a lien and a pledge is that a lien
confers a mere right of retention, whereas a pledge confers an implied
authority to sell12. The words "implied pledge" mean that in the event of
default by the customer the bank has a power of sale without resort to
courts.
When securities deposited to secure a specific loan remain in the
possession of the bank after it has been repaid they will be subject to the
bank’s lien for the other debts due to the bank by the depositor13.
Where securities are deposited without a formal charge but expressly
to cover an indebtedness of a customer, the bank normally obtains an
equitable mortgage by deposit.
Pledge is also an express contract for security, but lien arises quite
informally from the normal course of business irrespective of any express
intention by the borrower.
Matters Excluding Lien
Particular purpose
A Bank cannot have any lien over items left with it for a specific
purpose because there is then an express or implied contract inconsistent
with lien. Thus articles deposited for safe custody are not probably subject
to general lien. Moreover, if securities are deposited for a particular loan or
12 The Odessa (1916) 1 AC 145 at 159, PC
13 Re London & Globe Finance Corporation (1902) 2 Ch 416
29
an advance never granted, the right of lien cannot be exercised. For
example, it was decided in Wylde v Radford14 that where a conveyance
of two separate properties was deposited and a charge created on only one
of them, the bank had no general lien over the remaining property.
Any property which is handed to a banker for an express purpose
cannot be subject to lien, even when the subject itself has failed. In the case
Lucas v Dorrien15 deeds were left with a banker as security for an
advance. The advance was not granted, but the deeds were not picked up
by the depositor; and it was held that they could not be subject to lien in
the banker’s hands.
The rule is reasonably clear that banker’s lien can only attach to
property that comes to the banker in the course of banking business.
Securities Subject To Lien - Legal Controversy
It is difficult to define exactly what securities are subject to the
banker’s lien and it is of interest to compare the opinions expressed by two
of our leading authorities. To quote Paget’s "Law of Banking". "The better
view would seem to be that lien only attaches to such securities as a banker
ordinarily deals with for his customer, otherwise than for safe custody,
when there is no question or contemplation of indebtedness on the part of
the customer. Collection is no doubt the primary idea of the banker’s
functions with regard to securities subject to lien".
14 (1863) 33 L.J. Ch 51
15 (1817) 7 Taunt. 278
30
On the other hand, Hart16 adopts a much wider view by defining
banker’s lien as "the right of retaining things delivered into his possession
as a banker, if and so long as the customer to whom they belong, or who
had the power of disposing of them when so delivered, is indebted to the
banker on the balance of the account between them, provided the
circumstances, in which the banker obtained possession, do not imply that
he has agreed that his right shall be excluded".
The practical test is whether the securities were received and
handled by the bank in the ordinary course of its business, there being no
express or implied agreement between the customer and the bank
inconsistent with lien.
Money and Credit Balances
Notwithstanding that money paid into a bank account becomes the
property of the banker to do with as he likes, there are many statements,
some of high authority,17 to the effect that money paid in is subject to
banker’s lien. This misuse of language was laid to rest finally in
Halesowen Presswork and Assemblies Ltd v Westminster Bank Ltd18
where His Lordships (Buckley LJ and Lord Denning MR) observed that no
man can have a lien on his own property, and that the term "securities"
used in Brandao v Barnett19 does not extend to the banker’s own
indebtedness to the customer.
16 Law of Banking, 4th Edition at p.483
17 Misa v Currie (1876) 1 App Cas 554
18 (1971) 1 QB 1, (1970) 3 All ER 473
(1846) 12 Cl & Fin 78719
31
Customer’s General Balance
The banker’s lien is for the general balance owed by the customer20.
The term "general balance" refers to all sums presently due and payable by
the customer, whether on loan or overdraft or other credit facility21.
Securities belonging to a Third Party
The lien is excluded if, to the knowledge of the banker at the time of
deposit, the securities in question belong to a third party. But the lien is not
excluded if the bank receives the securities in good faith and without
knowledge that they in fact belong to a third party. This is amply
illustrated by Brandao v Barnett22.
Buckley J held in Re London and Globe Finance Corpn23 that
the securities, being consciously left in the banker’s hands after satisfaction
of the specific advances, could be regarded as having come into his hands
anew in the way of business or as impliedly repledged or redeposited. It
might, perhaps, be put another way: that where securities have been
charged for an advance which is repaid and the securities left with the
banker, he will have a lien on them for any other advance allowed
subsequently or existing at the time, unless this is expressly excluded such
as that they were henceforth to be held for safe custody.
20 Ibid & Davis v Bowsher (1794) 5 Term Ref 488
21 Re European Bank (1872) 8 Ch App 41
22 (1846) 12 Cl & Fin 787
[1902] 2 Ch 41623
32
Express Lien
Sometimes a bank may obtain a borrower’s signature to a document
described colloquially as a general letter of lien, whereby the customer
acknowledges that all his securities which may from time to time be
deposited with the bank are held as security for his indebtedness. Such a
letter is a clear evidence that the securities are subject to the banker’s lien
and it cannot later be contended by the customer that they were deposited
for a special purpose inconsistent with lien.
By mercantile usage, a bank has a lien over all securities deposited
by the customer in the ordinary course of banking business. Accordingly,
there is no need for an express agreement between the parties to bring the
lien into existence with power to realise the liened property without court
intervention. It attaches in the absence of an express agreement or of
circumstances evincing an intention to the contrary24.
Lien and the Law of Limitation (English Law)
The object of the Law of Limitation is to afford to the litigant public
that after lapse of a particular period of time prescribed by law, the cause
of action rests. The rules of limitation interpose a statutory bar after a
certain period and give a quietus to suits to enforce an existing right.
Limitation does not affect a court’s jurisdiction. It merely regulates the time
within which a court’s powers are to be invoked and hence it does not take
away any powers of the court.
24 General Produce Co v United Bank Ltd (1979) 2 Lloyd’s Rep 255
33,v><- 51.
The effect of the Limitation Act, 1980 in making a debt statute-
barred is to bar the creditor’s personal remedy against the debtor by action
in the courts, but not to extinguish the debt or prevent the creditor from
obtaining repayment in any other way that is open to him. Limitation of
action does not affect property over which the banker has a lien25. The
banker can continue to hold securities which become subject to lien against
debts which have become statute - barred, since the debts remain legal;
indeed once the right to recover the debt by action has become barred, his
remedy will be to retain the securities.
In this respect the right of set - off differs from that of lien, since the
banker is not entitled to set - off a credit balance against a statute - barred
debt under English Law.
Lien may be particular or general. A particular lien is so called
because it confers the right to retain the goods in connection with which a
particular debt arose, whereas a general lien confers a right to retain goods,
not only in respect of the debt incurred in connection with them, but also
in respect of the general balance due by the owner of the goods to the
person exercising the right of lien. In other words a particular lien applies
only to one transaction, or certain transactions, whereas a general lien
extends to all transactions arising out of the course of dealing between the
parties.
25 London and Midland Bank v Mitchell (1899) 2 Ch 161
34
The principles of law and judicial precedents laid down in the old
cases Davis v Bowsher26 and Brandao v Barnett27 by the English
courts as far back as 1794 and 1846 respectively have become settled law
on the banker’s general lien and the English courts are still quoting these
precedents in their decisions, with particular reference to the banker’s right
to realise the liened property without intervention of court and to the legal
principle of classifying banker’s general lien as "implied pledge".
It is unambiguously established under English Law that banker’s lien
is an implied pledge and it includes a right of sale after reasonable notice.
The principles of English Law and judicial precedents of English ,
Courts discussed supra have to be profusely drawn since there are no .-- ------------- - \ — *
provisions relating to Lien in the Indian Contract Act, 1872 and English
Law is to be applied on grounds of justice, equity and good conscience28.
These principles and decision of English Courts help make an in - depth
analysis of the Indian Law relating to banker’s general lien.
26 (1794) 5 Term Rep 488, Court of King’s Bench
27 (1846) 12 Cl & Fin 787
Superintendence Co. of India v Krishna Narain AIR 1980 SC 1717 & Devendra Kumar Lai Chandji v Gulab Singh Nekhe Singh AIR 1946 Nag 114
28
35
Indian Law on Banker’s Lien
A lien is the right of the creditor in possession of goods, securities or
any other assets belonging to the debtor to retain them until the debt is
repaid, provided that there is no contract, express or implied, to the
contrary. The ownership of the property still vests in the debtor and the
possession remains with the creditor till the debt is discharged.
It was held in Alliance Bank of Simla Ltd v Ghamandi Lai
Gainilal29 that general lien confers only on holder the right to retain the
goods until the payment is made out but it does not carry with it the right
of sale to secure the debt. It is merely a right to retain the goods and does
not create right as in favour of a pledgee. This is not the exhaustive
definition of lien.
Indian Contract Act, 1872 is not exhaustive and deals with only
certain parts of law of contract. In cases where the law in terms is not
applicable the principles of English Law should apply as rules of justice,
equity and good conscience30. The sections of the Indian Contract Act, 1872
relating to lien are not exhaustive, and do not negative the existence of lien 9
in cases not specified therein.
29 AIR 1927 Lah 408
Devendra Kumar Lai Chandji v Gulab Singh Nekhe Singh AIR 1946 Nag 114
30
36
A possessory lien May be either i) Particular or ii) general. A
particular lien is confined to particular transaction in connection with the
property subject to lien. If a watch is given for repair, the repairer has the
right to retain the watch till his . charges are paid. Such type of lien exists
only as a security for the particular debt. On the other hand, general lien
empowers the possessor to retain possession until the whole debt or balance
in the account is paid. So far as the legal requirements are concerned, a lien
does not require any special agreement, written or oral, but it arises only
by operation of law.
Banker’s Lien
Banker’s lien is a general lien recognised by law. So far as the
concept of lien is concerned, it was being nurtured originally in England
with respect to bankers and it came to be known in India as spon as there
was development of the principles as applicable in England.
When the Indian Contract Act was being codified for enactment the
position regarding general lien was stated in the original Bill in the
following words :
"In the absence of any agreement to the contrary, bankers, factors
and wharfingers have no right to retain any goods bailed to them as a
security for a general balance of account".
37
It meant that bankers and others could not, as of right, claim general
lien; the agreement between the parties was required to stipulate such a
right being conferred on the bankers and others. In short, banker’s right of
general lien could be exercised only when the agreement with the borrower-
customers provided for such a right.
The select committee which commented upon the Bill did not favour
this position of conferring right of general lien on bankers and others only
by agreement. The select committee, in clause 22 of its Report, observed:
"No reason is given for the abolition of the general Hen in these cases,
and we think it expedient to alter the section 171 thus :
Bankers, factors, wharfingers, attorneys of a High Court and policy -
brokers 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; but no
other persons have a right to retain, as a security for such a balance, goods
bailed to them, unless there is an express contract to that effect"31.
The recommendation of the select committee was accepted by
incorporating the amendment in the new section 171 of the Indian Contract
Act, 1872. General lien is now available, as of right, to five categories of
persons, namely, bankers, factors, wharfingers, attorneys of High Court and
policy brokers. The special feature of general lien is that it vests in the
above categories of persons an extended right not available to those
exercising only particular lien.
31 Gazette of India, Extraordinary, Calcutta, Thursday, 28th March, 1872
38
So far as Indian Law is concerned, banker’s general lien is covered
by section 171 of the Indian Contract Act, 1872.
If the dictum of Lord Campbell in Brandao v Barnett32 is followed,
then it is more than a general lien. It is an implied pledge. Whereas a lien,
general or particular, does not imply right to sell as a pledge does, the
banker can, in exercising the rights of a pledgee, sell or otherwise dispose
of the said securities to recover the amount which may be due to him and
such a right can be exercised in respect of all the securities that may be in
possession of the banker in the ordinary course of his business unless there
be an express contract or circumstance to show that there was an implied
contract inconsistent with lien.
Letter of Lien
A debtor frequently gives a banker, as security for an advance, a
letter of lien or charge upon goods in the hands of a third party. In the case
of In re Hamilton, Young & Co, ex p Carter,33 where a letter of lien
over goods in the hands of certain bleachers, accompanied by their receipt,
was given, it was held that the letter was a document used in the ordinary
course of business as a proof of the control of goods. The letter should
empower the banker to sell in default of payment of the debt.
32 (1846) 12 Cl & Fin 787
[1905] 2 KB. 77233
39
When an arrangement is made by which a certain amount in a
customer’s credit account is to be regarded as a security for an advance to
him on another account an agreement not to reduce the balance below the
amount agreed upon, should be signed by the customer. The document
should also authorise the banker to refuse payment of any cheques which
would reduce the balance on the credit account below the stipulated amount
and to combine the two accounts at any time without notice.
Negative Lien
A negative lien is a declaration by the borrower that the assets
mentioned therein are free and unencumbered and the said assets shall not
be sold, mortgaged, pledged, hypothecated or in any way encumbered
without the previous consent of the bank in writing.
Nature of Banker’s Lien
In State Bank of India, Kanpur v Deepak Malviya34, Allahabad
High Court held that pledge is only a form of bailment and all pledges are
bailment. The banker’s lien contemplated by section 171 of the Indian
Contract Act, 1872 is a specific provision relating to banker’s lien and has
an overriding effect on general provisions of section 174 which deals with
the relationship of pawnee and pawnor in respect of pledged goods. The
banker’s lien will carry over to such pledges and bank can retain pledged
goods, if the debtor had not cleared his obligation in connection with
34 AIR 1996 All 165
40
another loan. Even if the manager of the bank sent notice to the pledgor to
redeem the ornaments by payment of the amount due and the amount
having been paid by the pledgor, the bank is not estopped from claiming
any lien over the pledged ornaments.
In a recent case KSita v Corporation Bank, Kakinada35 before
the Andhra Pradesh High Court, the short question for decision was
whether the respondent Bank, while exercising Banker’s lien, has right to
retain the pledged gold ornaments, even after discharge of the particular
loan for the purpose of recovery of another loan subsequently advanced to
the petitioner by the respondent. The court followed the decision of
Allahabad High Court in SBI, Kanpur v Deepak Malviya36 and held
that banker’s lien contemplated by section 171 overrides the provisions of
section 174 which deals with pawnee - pawnor relationship in respect of
pledged goods. The bank can retain pledged goods if the debtor had not
cleared his amount in connection with another loan.
Earlier in England also the position was different and in Wilkinson
v London and County Banking Company31, it was assumed that a
customer was entitled to have the securities back from the bank which were
deposited for some specific advances.
35 AIR 1999 AP 367
36 AIR 1996 All 165
37 (1884) 1 TLR 63
41
In Re London and Globe Finance Corporation36, it was held
that securities deposited as cover for specific advances but after discharge
thereof, when left in banker’s hand become liable to general lien. Thus, we
can presume that banker’s general lien attaches to all goods and securities
deposited with them as bankers by a customer or by a third person on a
customer’s account, provided there is no contract, express or implied,
inconsistent with the lien. Reference may be made to Mercantile Bank v
Rochaldas39 in this regard. No separate agreement or contract is
necessary for the purpose. Inspite of this legal position, veiy often the
bankers ask for a letter of lien from the customer by way of abundant
caution enabling them to enjoy the security for all the debtor’s liabilities
arising in any manner, whatsoever, besides conferring a right on them to
sell such securities in case there is a default in the payment of debts. This
is to avoid the risk of a stand being taken by the customer that the
securities were given for a special purpose only.
Leading cases on Banker’s General Lien decided by Indian Courts
Exercise of Banker’s General Lien whether Criminal
breach of trust
Stephen v Chandra Mohan and others40 : The respondent
pledged certain ornaments with the bank as security and also signed an
agreement that the bank could treat the said ornaments as security for any
38 (1902) 2 Ch. 416, Fin 413
39 AIR 1926 Sind 225
(1990) 68 comp. Cas 63640
42
other transactions or liability. He stood a surety for a third person. He
repaid his own loan and asked the bank to return the ornaments. But the
bank refused to return the ornaments on the ground that the principal
debtor for whom he had stood surety had not repaid the loan and so the
bank was keeping the ornaments as security. Thereupon he filed a
complaint against bank under section 409 and 420 (criminal breach of trust
and cheating) of Indian Penal Code. Along with the complaint, the first
respondent made an application for search and seizure of the ornaments
from the bank and without any hesitance the magistrate granted the
prayer. The bank was searched and the ornaments were seized and
produced in court.
The Kerala High Court in this case held that the magistrate has
taken cognizance without due application of mind to the allegations in the
complaint in order to satisfy whether the allegations do constitute any
offence. In order to constitute an offence, there must be some act or
conscious omission which is made penal by any provision of law. Taking
cognizance on the basis of allegations which do not constitute any offence
is illegal. Issue of process and the consequent trial on the basis of such
cognizance will be nothing short of abuse of process of court. The first
respondent has no justification in filing the complaint. He was actuated by
malafides. It is the duty of this court to avoid the harassment by the trial
of such cases.
The High Court further held that under section 171 of the Indian
Contract Act, 1872, in the absence of a contract to the contrary, bankers
could retain, as security for a general balance of account, any goods bailed
43
to them. Even without any agreement executed by the borrower, the banker
could have retained the ornaments as security under section 171 of the
Contract Act without incurring the risk of commission of an offence of
criminal breach of trust because such retention is allowed by law and it
does not involve breach of any term of agreement.
The High Court quashed the complaint and ordered that the
magistrate will return the ornaments to the banker.
Seized Asset - whether Subject to Banker’s Lien
C.R.Narasimha Setty v Canara Bank and another41: This is an
interesting case on banker’s general lien decided by Karnataka High Court.
The appellant purchased a vehicle under a hire - purchase agreement
with the first respondent bank. Despite discharge of loan with interest, the
bank seized the vehicle holding that the appellant was a partner of a firm
which was liable to the bank on an open cash credit account and, the
partners of the firm had given an undertaking that the bank could hold the
vehicle as collateral security for the cash credit account. The trial court
affirmed the right of the bank to retain the vehicle under banker’s lien.
The High Court, on appeal, held that the vehicle was made available
only as a collateral security for the cash credit loan. The deed of
hypothecation of the vehicle did not give the bank a right to seize in the
41 (1992) 74 Comp. Cas. 162
44
event of default in payment of the cash credit loan and there was a contract
to the contrary disentitling the banker from exercising the general lien. The
High Court directed the bank to return the vehicle seized by it.
In this case, the bank probably lost since the vehicle did not come to
the possession of the bank in the course of banking business. It was rather
seized which cannot be termed as the normal course of banking business so
as to exercise right of general lien.
Banker’s Lien - whether Particular or General
Syndicate bank, Appellant v Vijay Kumar and others42: This
case decided by the Supreme Court settled the law as to the banker’s
general lien. In this classic judgment, the Supreme Court referred to
various authorities in English Law. The pertinent question that arose before
the Supreme Court was : what is the meaning of "Banker’s lien" in the legal
terminology and how it is understood and exercised in the banking system;
whether a banker’s lien is particular or general.
A customer having overdraft facilities with the bank obtained a Bank
Guarantee against the security of two fixed deposits. On the reverse of the
fixed deposit receipts, the bank officials noted "Lien to BG 11/80". While
tendering the fixed deposit receipts as security, the customer executed a
covering letter which contained, inter alia, the following clause:
42 AIR 1992 SC 1066
45
"The Bank is at liberty to adjust from the proceeds covered by the
aforesaid Deposit Receipt / Certificate or from proceeds of other receipts /
certificates issued in renewal thereof at any time without any reference to
us, to the said loan / OD account.
We agree that the above deposit and renewals shall remain with the
Bank so long as any amount on any account is due to the Bank from us for
the said M/s. Jullundur Body Builders singly or jointly with others".
The Supreme Court held that the recital in the covering letter as
extracted above established that a general lien was created in favour of the
Bank on the two FDRs. Merely because the two FDRs were also furnished
as security for the issuance of the Bank Guarantee, the general lien thus
created cannot come to an end when the Bank Guarantee is discharged. The
words "Lien to BG 11/80" on the back of the FDRs do not make any
difference. The contention of the customer that the Bank had only a
particular lien due to the words "Lien to BG 11/80" on the back of the FDRs
and on discharge of the Bank Guarantee the Bank lost the particular lien
was not accepted by the Supreme Court. The court held that the Bank can
exercise the right of general lien on these FDRs if there was a liability of
the customer due to the bank. While arriving at the decision, the Supreme
Court referred to the following principles of English Law :
In Halsbury’s Laws of England, Vol 20, 2nd Edition, Page 552,
Para 695, lien is defined as follows :
46
"Lien in its primary sense is a right in one man to retain that which
is in his possession belonging to another until certain demands of the
person in possession are satisfied. In this primary sense it is given by law
and not by contract".
In Chalmers on Bills of Exchange, 13th Edition, Page 91 the
meaning of Banker’s lien is given as follows :
"A Banker’s lien on negotiable securities has been judicially defined
as an implied pledge".
& In Brandao v Barnett (1846) 12 Cl & Fin 787 it was stated as
under :
"Bankers most undoubtedly have a general lien on all securities
deposited with them as bankers by customers, unless there be an express
contract, or circumstances to show an implied contract, inconsistent with
hen".
The above passages go to show that by mercantile system the Bank
has a general lien over all forms of securities or negotiable instruments
deposited by or on behalf of the customer in the ordinary course of banking
business and that the general lien is a valuable right of the banker
judicially recognised.
Eventhough a security is given for a particular loan the banker can
exercise right of general lien over the security for the other liabilities of the
customer. Therefore banker’s lien is general lien.
47
In this judgment, the Apex court has also taken cognisance of the
concept "Banker’s general lien is an implied pledge" by reference to the
English Principles of law and judicial precedents.
The Board of Trustees of the Port of Bombay and others,
Appellants v Sriyanesh Knitters, Respondent®: This case before the
Supreme Court relates to exercise of general lien over goods by Port Trust
claiming classification as "wharfingers" under section 171 of the Indian
Contract Act, 1872.<\ .
The Supreme Court held that the general lien contemplated by
section 171 of the Contract Act enables the retention of the bailed goods as
security. Their retention does not give any power to sell the goods. In a case
where section 171 of the Contract Act applies, the wharfinger can only
retain the goods bailed as security and will have to take recourse to other*
proceedings in accordance with law for securing an order which would then
enable the goods to be sold for realisation of the amounts due to it.
The Supreme Court has commented on the general lien applicable to
a wharfinger in the aforesaid case under section 171 of the Contract Act.
The Branch Manager, Union Bank of India & another v Tele
Surya Rao44 : This case before the National Consumer Disputes Redressal
Commission, New Delhi relates to a consumer complaint under Consumer
Protection Act, 1986.
43 AIR 1999 SC 2947
1997 (3) All India Banking Law Judgments 6644
48
The complainant got a Fixed Deposit Receipt and then took a loan
against this FDR. The bank allowed the complainant encashment of the
FDR on maturity by mistake without recovering the loan. The complainant
obtained another Reinvestment Deposit with the maturity proceeds of the
first FDR. He demanded premature encashment of the Reinvestment
Deposit. The Bank refused to comply on the ground that it had a lien on the
Reinvestment Deposit for the loan advanced against the first FDR (already
encashed). Questions like application of Limitation Act to the right of lien
etc. were advanced.
The National Consumer Commission held that lien is a right of
defence, not right of action and therefore there is no question of bar of
limitation coming to the field of exercise of lien. Lien in its primary sense
is a right in the banker to retain that which is in his possession belonging
to another until certain demands of the person in possession are satisfied.
Where a customer deposited security with a Bank, the Bank is given a
general lien over the security. The banker’s lien gives the Bank a right of
all the moneys of the constituent in its hand so that they may be
transferred to whatever account the Bank chooses, to set - off or liquidate
the debt.
Therefore there is no deficiency in service on the part of the Bank in
declining to make payment of the Reinvestment Deposit without discharge
of the liabilities by the complainant of the earlier loan.
49
The Karnataka High Court in Smt. K.S.Nagalambika v M/s
Corporation Bank, Virajpet45 held that section 171 of the Indian
Contract Act, 1872 gives a general lien to the bank and it has got to be
recognised.
Banker’s Lien - whether an Implied Pledge in India
Lord Campbell in Brandao v Barnett46 said the rights acquired by
a banker by a general hen is an implied pledge. Section 171 of the Indian
Contract Act, 1872 mentions that a banker may retain any goods bailed
to him for general balance of account. In the case of bailment, especially
pledge, the pledgee is vested with the power to sell the pledged goods under
Section 176 of the Contract Act in default of
after giving a reasonable notice to the pledgor
So far as the banker’s power to sell the
is conferred on the banker by section 6(1) (f) of the Banking Regulation Act,
1949, which lays down that the bank may manage, sell and realise any
property which may come into its possession in satisfaction in part or in full
of any of its claims.
The Banker’s lien, in England, is recognised as an implied pledge. In
India, the right is only to retain any goods bailed to the banker but keeping
reliance on the Banking Regulation Act, 1949 which gives the power to sell,
the banker’s lien also amounts to implied pledge.
45 AIR 2000 Kant 201
ay the debt
concerned it
46 (1846) 12 Cl & Fin 787
50
Banker’s Lien and Limitations Act, 1963
In England, the effect of Limitation Act, 1980 is to bar the personal
remedy, not to discharge the debt. It does not affect property over which the
banker has a lien47. Similarly in India, the Supreme Court has held that
when a creditor has a lien over goods by way of security for a loan, he can
enforce the Hen for obtaining satisfaction of the debt even though an action
thereon would be time - barred48.
Circumstances when a Lien is not Available to Banker
Safe custody
Banks generally receive for safe custody, customer’s valuables, such
as securities, documents of title etc. Such articles, being regarded as those
left with the banker for a specific purpose, are not subject to banker’s
general lien either because the banker, in receiving the securities or
valuables for safe custody, is supposed to be acting as a bailee and not in
the capacity of the banker, or because the entrustment is for a special
purpose inconsistent with the assertion of the Hen49.
47 London and Midland Bank v Mitchell [1899]2 Ch. 161
48 Bombay Dyeing & Mfg Co. Ltd v State of Bombay AIR 1958 SC 328
Cuthbert v Roberts [1909] 2 Ch 226 CA49
51
Bills of Exchange or Documents Entrusted for Special Purpose
A good illustration of what is special purpose inconsistent with lien
is found in the case Greenhalgh (W.P.) & Sons v Union Bank of
Manchester50. In that case A sold goods to B and for the price A drew
bills of exchange on B which B accepted. B sold the goods in turn to C,
similarly drawing bills on C which C accepted. B handed C’s bills to the
defendant bank for collection with directions that the proceeds should be
utilised to meet the bills which B had accepted, payable at the defendant
bank. The defendant bank recognising the special purpose for which bills
bearing C’s acceptance were handed over for collection, opened a separate
account for them called the "Provisional Bills Account". The proceeds of the
bill accepted by C after collection were held not to be subject to the banker’s
lien as they were entrusted for a special purpose inconsistent with the lien.
Securities Allowed to Remain in Banker’s Hands after
Repayment of Loan Secured
This is an exceptional circumstance where the banker is allowed lien
on the securities left in the hands of the banker after the loan is repaid. It
was held in Re London and Globe Finance Corporation51 that if the
securities deposited for a particular loan are left with the banker after the
loan secured is cleared, the securities become subject to the banker’s lien as
the customer by leaving them is supposed to have re - deposited them.
50 (1924) 2 KB 153
(1902) 2 Ch 41651
52
Documents or Valuables Left in the Banker’s Hands
Inadvertently
No lien can arise on documents or valuables left inadvertently with
the banker, or on property which is placed in his hands with the object of
covering an advance which is not granted52.
Credit and Liability must be in the Same Rights
No lien arises on the current account balance or the deposit account
of a partner in respect of a debt due from the firm, as the credit on the one
hand and the liability on the other do not exist on the same rights53.
Similarly a banker cannot set - off any credit balance of a partnership
account against moneys due from one or more of its partners on their
individual accounts.
No Lien on Amounts not Due
No lien arises until the due date, in respect of an advance of a
specific amount made for a definite period, as there is not debt owing till
then nor can banker retain moneys of the customer against bills discounted
by him for the customer, but not yet due, except perhaps in the case of the
customer’s bankruptcy. In short, lien can be exercised only when the debt
is due.
52 Lucas v Dorrein (1817) 1 Moore C.P. 29
53 Wolstenholm v Sheffield Bank (1886) 54 LT 746
53
No Lien in Respect of Trust Account
There is also no right of lien in respect of a separate account
maintained by a customer which is known as a trust account54. This is an
exception to the banker’s right of general lien.
Most of these cases, although of English origin, arp Koincr fnlWmri w
the Indian Banking System.
Principles of English Law and a catena of English cases are
frequently referred by our High Courts and the Supreme Court while
adjudicating cases on Banker’s General Lien.
54 O.R.M. v Nagappa Chettiar 43 Bom. LR 440 (PC)
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