Khushboo asrani
In Halsbury’s Laws of England ,it is stated: “Lien is ,in its primary sense ,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 its primary sense, it is given by law and not by contract.”
What is Lien?
The right of a creditor in possession of goods, securities or any other assets belonging to the debtor to retain them until the demand is fulfil the demands of the person in possession, is called lien. The demands could be any- performing a duty or paying a due sum of money. Thus, Lien is a right to retain possession of specific goods or securities or other movables of which the ownership vests in some other person and the possession can be retained till the owner discharges the debt or obligation to the possessor.
Lien was considered as ‘Self-Help’ practice in common law, during the era of development of trade and commerce. The name “self-help” was used as it did not require any intervention of the courts.
With the further progress in trade and commerce, the Courts started recognizing that leaving such primitive remedies freely can lead to every person recklessly holding on whatever they had. And ultimately, it can damage the developmental process of trade and commerce.
Lien was recognised as right as it was in the nature of remedy. The basis of the contract of lien was that it was not between the parties and the party had its rights because it was imposed law by the common law courts.
The Hon’ble Supreme Court explained the nature of the Right of Lien by stating that “Lien in its elementary sense is a right of a person to retain the possession of goods until the demands of the possessor are satisfied. Therefore, the Right of Lien is a right granted by law and is merely not granted by a contract”.
In the Judgment of Diplock in Tappenden V. Artus, the nature of Lien is described. (artificer means skilled manual worker) It reads as the common law lien of an artificer is very ancient in nature as well as its origin, it is dated in the time where remedies by action upon the contract were still considered as an imperfect stage of development. Pertinently, Lien arises because of the consequence of the contract.
It is very tempting for the lawyer who belongs to a 20th-century lawyer to think of a common-law lien as possessing the characteristics of a contractual right, express or implied which has been created by a mutual agreement between parties to a contract.
But it would be a mistake in legal nature as, like a right of action for damages, it is a remedy for breach of contract which actually is conferred by the common law to an artificer to whom the possession of the goods has been lawfully given for the purpose of doing his work in return of money as its consideration.
A common law lien, however, is not enforceable by action and thus it affords as a defence to an action for recovering the possession of the goods, but for the lien, he would be entitled to immediate possession.
The Indian Contract Act, 1872 classifies the Right of Lien into two types:
- Particular Lien and
- General Lien.
Section 170 of the aforesaid Act gives the exact definition of Particular Lien which states that the Bailee is free to hold control of a precise property with position to the charge which is due. For Example, A gives a piece of cloth to B, a tailor, to stitch it into a pant as soon as it is over and to give a three months’ credit for the price. Therefore, according to this instance, B is not entitled to return the pants until he is paid.
The Indian Contract Act, 1872 specifies that the Right of Particular Lien is available to the Bailee, subject to certain conditions. The most important condition among the other conditions is the exercise of skill or labour which is regarding the goods bailed. Further, it has been very often highlighted that the skill or labour exercised by the Bailee must be of such a nature that the mayor will improve the quality of the goods.
Importance of Lien:
The true importance of lien gets only noticed when it is seen in detail and studied in descriptive form. Following are some of the points which state the importance of the lien-
- Protects the Buyer
- It allows the seller or an agent to recover the amount
- Protection while negotiating the business
- Recovering the necessary and extra orbit expenses
Now what does the term “Banker’s Lien” mean?
In Chalmers on Bills of Exchange ,the meaning of the Banker’s Lien is stated:
“A bankers’ lien on negotiable securities has been judicially defined as ‘an implied pledge’. A banker has, in the absence of agreement to the contrary ,a lien on all bills received from a customer in the ordinary course of banking business in respect of any balance that may be due from such customer.” it should be noted that the lien extends only to negotiable instruments which are remitted to the banker from the customer for the purpose of collection. When collection has been made the process may be used by the banker in reduction of the customer’s debit balance unless otherwise earmarked.”
In ‘Peget’s Laws of Banking’ ,8th Edition, at page number 498 the learned author has stated that “apart from any specific security ,the banker can look to his general lien as a protection against loss on loan or overdraft or other credit facility. The general lien of bankers is part of law merchant and judicially recognised as such”.
In ‘Chitty on Contracts’, it is explained that “The lien is applicable to negotiable instruments which are remitted to the banker from the customer for collection. When the collection has been made, the proceeds may be used by the banker in reduction of the customer’s debit balance ,unless otherwise earmarked.”
Where therefore, the customer is indebted to the banker, the lien arises immediately a cheque is paid in for collection -presumably by implication of law. On the other hand, if the banker agrees either impliedly, as the result of a course of action, or expressly, that a customer may draw against uncleared effects, the banker has a lien on those effects –arising from contract.
There is not any legal requirements as to need of any special agreement, written or oral to create the right of lien, but it arises only by operation of law for, under the Indian Law, such an agreement is implied by the terms of Section 171 of the Indian Contract Act, 1872 so long as the same is not expressly excluded .In order that the lien should arise the following requirements are to be fulfilled:
(1) the property must come into the hands of the banker in his capacity as a banker in the ordinary course of business ;
(2) there should be no entrustment for a special purpose inconsistent with the lien
(3) the possession of the property must be lawfully obtained in his capacity as a banker; and
(4)There should be no agreement inconsistent with the lien.
The general lien of the bankers is considered to be as judicially recognized and it mainly deals with the goods and securities deposited by the customers in the bank accounts of the customers, provided by a condition that there is no contract which is implied, inconsistent with such type of lien. When a certain type of gold ornaments was pledged with a particular Bank as a bailee because the lien extends on the borrower and the borrower then paid back the loan amount.
The same bank kept something for the security because the loan of another type was taken by the same borrower. In this case, the bank reserves a right to be held entitled to do so that they are having satisfaction for the other loan also.
The law gives inter alia, a general lien to the bankers – Lloyds Bank v. Administrator General of Burma, AIR 1934 Rangoon 66.
To claim a lien, the banker must be functioning qua banker under Section 6 of the Banking Regulation Act-State Bank of Travencore v. Bhargavan ,1969 Kerela .572.
Relevant Cases:
State Bank of India v/s Javed Akhtar Hussain it was held by the Court that the action of the bank in keeping lien over the TDR and RD accounts was unilateral and high handed and even it is not befitting the authorities of the State Bank of India .The court relied on the ruling Union Bank of India v/s K.V.Venugopalan where it was held by the court that the fixed deposit money lodged with the bank is strictly a loan to the bank.
The banker in connection with the FD is a debtor .The depositor would accordingly cease to be the owner of the money in fixed deposit .The said money becomes money of the bank, enabling the bank to do as it likes, that however, with the obligation to repay the debt on maturity .In the same ruling it was further held that the bank being a debtor in respect of the money in FD, had no right to pass into service the doctrine of banker’s lien and the money in Fixed Deposit.
In the case State Bank of India Kanpur v/s Deepak Malviya (AIR 1996 All 165) it has been held that section 174 of the Act contemplates that in the absence of a contract to the contrary the Pawnee is under an obligation to return the goods pledged for any debt or compromise for which the goods were pledged.
This is a general provision providing for the relationship of a pawnee and a pawner in respect of pledged goods. Section 171 of the Act, providing for banker’s lien, is a specific provision, which has an overriding effect on this general provision, as such, the banker’s lien is also extended to the pledged goods.
In the matter of Firm Jaikishen Dass Jinda Ram v. Central Bank of India Ltd. AIR 1960 two partnership firms with the same set off partners had two separate accounts with the Bank. The Court held that the bank was entitled to appropriate the monies belonging to a firm for payment of an overdraft of another firm.
Because although two separate firms are involved they are not two separate legal entities and cannot be ‘distinguished from the members who compose them. Mutual demands existed between the bank on the one hand and the persons constituting firm on the other. Nor it could be said that these demands did not exist between the parties in the same right.
The court can interfere in the exercise of the Bank’s Lien. In the matter of Purewal & Associates and another v/s Punjab National Bank and others (AIR 1993 SC 954) where the debtor failed to pay dues of the bank which resulted in denial of bank’s services to him, the Supreme Court of India ordered that the bank shall allow the operation of one current account which will be free from the incidence of the Banker’s lien claimed by the bank so as to enable the debtor to carry on its day to day business transactions etc. and the liberty was given to bank to institute other proceedings for the recovery of its dues.
Important Principles in context of Banker’s Lien:
- The banker’s lien is subject to any contract to the contrary and one alleging it must prove the existence of such a contract.
- A bank may not be able to exercise any right of lien over the money deposited by the customer inasmuch as by itself becomes the owner of the money deposited ,but still it has the right to adjust such amounts against any debts due to from the customer. The purpose of lien in such cases is attained by the application of the principle of set off.(AIR 1945 Mad.447)
- It has been held in Chettinad Mercantile Bank Ltd. v/s PL.A.Pichammai Achi AIR 1945 Mad. 445 that banker’s lien is the right of retaining things delivered into his possession as a banker if and so long as the customer to whom they belonged 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 this right shall be excluded .Banker’s lien can properly be said to arise only in respect of any of the securities held by the bank ,the bank has a lien over these securities and it could hold them against the amount due by the customer.
- It is necessary that the ownership of a thing, which is in possession of the bank, must be with the customer and held by the bank as a security otherwise the bank can exercise no right of lien. PNB Ltd.v. Arura Mal Durga Dass (AIR 1960 Pun.632.)
- An insight into the matter of City Union Bank Ltd v/s Thangarajan (2003)46 SCL 237 (Mad) it is pertinent to state certain principles with respect to Banker’s lien that was observed.
- The bank gets a general lien in respect of all securities of the customer including negotiable instruments and FDR s, but only to the extent to which the customer is liable. If the bank fails to return the balance, and the customer suffers a loss thereby, the bank will be liable to pay damages to the customer. In the present matter the Court has based its decision on the principle that in order to invoke a lien by the bank, there should exist mutuality between the bank and the customer i.e. when they mutually exist between the same parties and between them in the same capacity. Retaining the customer’s properties beyond his liability is unauthorized and would attract liability to the bank for damages.
When Is Lien Not Permissible?
Lien is not permissible in the following cases, viz.
(i) Where there is an express contract like by way of counter-guarantee ,providing reimbursement – Krishna Kishore Kar v. United Commercial Bank, AIR 1982 Cal .62.
(ii) Where there is no mutual demand existing between the banker and the customer-firm-Jaikishan Dass Jinda Ram v. Central Bank of India,AIR 1960 Punj.1.
(iii) Where the valuables are received for safe -custody- Cuthbert v. Roberts ,(1909)2 Ch.226 (CA) and Bank of Africa and Cohen,(1902)2 Ch.129. (Paget’s law of Banking (11th Edition)
(iv) Where the entrustment of goods (documents of title) is for a specific purpose stated to banker- Greenhalgh v. Union Bank of Manchester,(1924) 2 K.B.153.
(v) When the deposit with the banker is for a specific purpose, if the banker has implied or express notice of such purpose.
(vi) Where the valuables or documents of title are left in the bankers hands ,inadvertently.
(vii) Where the banker has only a contingent debt .A contingent debt is that “no amount would be due on the date when he wants to exercise lien” Tannans banking Law .
(viii) Where the account is in respect of a trust.
What is set-off?
The combination of accounts is also known right of set off. A bank has a right to set off a debt owing to a customer against a debt due from him.
“A legal set-off is where there are mutual debts between the plaintiff and defendant, or if either party sue or be sued as executor or administrator one debt may be set against the other” (S.13 Insolvent Debtors Relied Act 1728)
From a commercial standpoint, a right of set-off is a form of security for a lender. It is an essential security because its realization does not involve the sale of an asset to a third party.
A set-off must be in the form of a cross claim for a liquidated amount and it can be pleaded only in respect of a liquidated claim. Both the claim and the set-off must be mutual debts, due from and to the same parties, under the same right A claim by a person in a representative capacity cannot be set off against a personal claim. Even a claim against the estate of a deceased customer cannot be set off against a debt, which was due to the customer from his banker, during the former’s lifetime, whether the accounts are with one or more offices of the banker, it does not materially affect the position in any way.
A banker’s right of set off cannot be exercised after the money in his hands has been validly assigned or in any case after he has been notified of the fact of an assignment. (Official Liquidator ,Hanuman Bank Ltd. v. K.P.T. Nadar and Others 26 Comp.Cas .81) Judgments indicating certain essentials to the exercising of the right of set off.
Connection between Lien & Set Off:
The banker’s right of lien can attach to the money so long as it is earmarked. Where it has ceased to be such a separate earmarked sum, the bank has not the right of set off. ( Radha Raman Choudhary v. Chota Nagpur Banking Association Ltd.(1945) 15 Comp.Cas.4(Pat).
There is a distinction between a banker’s lien and the bank’s right to set-off. A lien is confined to securities and property in bank’s custody. Set-off is in relation to money and may arise from a contract or from mercantile usage or by operation of law.
Conclusion:
General Lien is a much more effective tool in securing the outstanding debt. But it is subjected to its own limitations and risks, particularly from a potential liability point of view.
Basically, if there is a general operator who is seeking to exercise a lien and then resolve to see the matter through something which is potentially difficult as a matter of commercial negotiations to a successful conclusion.
A lien can be subjected to many risks, but despite risks liens continue huge assistance and support to operators. A well-drafted Lien clause can be huge assistance and support to the operators. In the terminals of Lien worldwide, the group and subsidiary of a company, and with respect to the matter of debt and liabilities ranging from far wider than traditional terminal services.