Legal Agreements

Banker’s Right to Lien under Section 171 of the Indian Contract Act

A person who is in legal possession of goods or property has a right to lien under section 171 of the Indian Contract Act of 1872. In the context of bankers, the right of lien enables them to keep control of the client’s goods or property until the client pays the Bank their debt. This responsibility can be to repay a loan or settle any unpaid fines or penalties.

The foundation of the Banker’s right to lien is the idea that the Bank has a legitimate stake in the assets or property that are pledged as collateral for a loan or other banking services. This power, which can be used without court approval, enables the Bank to keep control of the asset until the debt is settled.

What is a lien?

As long as there is no express or implied contract to the contrary, a creditor who is in possession of goods, securities, or any other assets belonging to the debtor has the right to keep them until the obligation is paid. It is the ability to continue possessing certain assets, securities, or other movables even after ownership vests in some other person and up to the time the owner has paid off the possessor’s debt or obligation.

It is a formal claim made by one party on another party’s property to secure a debt repayment.

An official claim or attachment made against the property as a guarantee (right) of the fulfilment of paying debt.

Lien, in its primary sense, is a right in one person to retain that which belongs to another until certain demands of the person in possession are satisfied,” according to Halsbury’s Law, not by contract in the broadest meaning. 

Types of Liens

A lien can be divided into a Specific/Particular Lien and a General Lien.

Specific/Particular Lien: A person who has incurred costs by providing labour or other services on a specific item is granted a particular or specific lien, which gives him the right to keep the items in question until the proper remuneration for the services rendered is paid to him. It is given under Section 170 of the Indian Contract Act of 1872.

A bailee may use his right to a specific lien if any of the following conditions are met:

1. Services are being rendered in accordance with the specified service.
2. Involvement of any skills or labour. 
3. The bailor is responsible for making the payment.

General Lien: This is a lien that allows things that have been bailed to be kept as security (in the absence of a contract) if Bailee is owed any money to be paid to the bailor. The following groups of people are granted and restricted with such rights:

1. Policy Brokers
2. Bankers 
3. Factors 
4. Wharfingers are the owner’s dockyards used for parking ships.
5. Attorneys of the High Court.

According to Section 171 of the Indian Contract Act of 1872^[1], the general lien is covered. It’s vital to remember that individuals other than those listed above can only be granted the right to a general lien if a specific agreement is established to that effect. 

Documents pertaining to litigation, contracts, and legal documents are among the banned products. This also applies to lockers since they are used to store valuables like jewellery and critical papers.

Banker’s Right to Lien

It is a requirement that gives lenders the right to recoup their debt by selling the debtor’s goods that are in their possession. The recovery may be made only after giving the debtor sufficient time and notice. In other words, a bank has the authority to hold onto a customer’s goods and securities until the customer settles any outstanding debts. After giving the consumer the required notice required by law, the Bank may sell these items. 

It is strictly limited to securities and properties in the Banker’s possession and items that belong to the customer. It is being held as security by the Bank, whether in the same or other branches. Unless the Banker can demonstrate an agreement to give up his general lien, all valuables deposited with him are subject to his lien for the customer’s general debts to him. As a result, if a bank is owed money in one account, it may keep any movables that are acquired in another account as security, including paying back any later advances.

Apart from any specific collateral, the Banker’s lien serves as protection against losses on loans, overdrafts, and other credit facilities. The general lien of bankers is acknowledged by the law merchant and recognised judicially.

The Banker’s right to lien will not be allowed in the following situations: 

• When a specific contract, such as a counter-guarantee, is in place.
• When valuables are placed in secure custody, such as lockers, with banks.
• The bill of exchange or any other documents given to the Banker for a particular purpose is not subject to any liens. 
• When the customer and the Banker do not share a demand.
• The law of limitations does not apply to the Banker’s claim to the lien. The effect of limitation is restricted to prohibiting only legal remedies; it does not prevent debt forgiveness.
• Liability and credit must be treated equally. For instance, the right to lien is not applicable if a person has a current or deposit account and a debt is owed to a company because the credit and liability do not exist in the same rights. 
• Whenever the account relates to a trust.
• When the obligation is owed solely from one of the depositors, a banker’s lien cannot be placed against a term deposit receipt in joint names.

Case Laws

Two partnership firms with the same set of partners held two distinct accounts with the Bank in the case of Firm Jaikishen Dass Jinda Ram v. Central Bank of India Ltd. The Court determined that the Bank has the right to divert funds from one firm to pay down another firm’s overdraft. Despite the fact that there are two distinct firms engaged, they are not two separate legal entities and cannot be distinguished from the individuals that make up each one. Reciprocal demands between the Bank and the individuals made up the firm. Furthermore, it was impossible to claim that these demands did not exist between the parties in the same legal capacity.

The Bank’s Lien may be exercised with the Court’s interference. The Supreme Court of India ordered the Bank to permit the operation of one current account that will be free from the incidence of the Banker’s lien claimed by the Bank in order to enable the debtor to carry on its day-to-day business transactions, etc., in the case of Purewal& Associates and another v/s Punjab National Bank and others, where the debtor failed to pay dues to the Bank and resulted in the denial of bank services to him.

Guidelines for Banker’s Liens

Below are some of the guidelines for a Banker’s right to lien:

• It was determined in Chettinad Mercantile Bank Ltd. v/s. PL.A.Pichammai Achi that a banker’s lien is the right to keep items delivered into his possession in his capacity as a banker if and only if the client to whom they belonged or who had the authority to dispose of them at the time of delivery is indebted to the Banker on the account balance between them, provided. The Bank has a lien over whatever securities it has and may use those securities as collateral for the amount the client owes. Only those securities fall under the purview of the Banker’s lien.

• A bank may be unable to exercise any lien rights over the money a client deposits because the Bank automatically becomes the owner of that money. Still, it does have the right to deduct those funds from whatever debts the consumer owes. In these situations, the application of the principle of set off serves the objective of lien.

• The Banker’s lien is subject to any contracts to the contrary, and the person asserting it must show that such a contract exists.

• For the Bank to use its power of lien, ownership of the item in its possession must be with the customer and held by the Bank as a security which is held in the case of Arura Mal DurgaDass v. PNB Ltd.

• In the case of City Union Bank Ltd. v. Thangarajan, the Court revealed certain important guidelines for the Banker’s Lien that were upheld.

• The Bank receives a general lien on all of the customer’s securities, including FDRs and negotiable instruments, but only to the degree that the customer is responsible. The Bank will be responsible for compensating the consumer for damages if it fails to refund the balance and the customer subsequently suffers a loss. 

• In this case, the Court based its ruling on the idea that for the Bank to assert a lien, there must be mutuality between the Bank and the consumer, which occurs when they are both present between the same parties and in the same capacity. Retaining the customer’s assets even after payment of his liability is prohibited and exposes the Bank to liability for any resulting harm.

Furthermore, any previous debt or liens placed on the goods or property will affect the Banker’s right to lien. The Banker’s right to lien may be limited or even eliminated if the property has already been pledged to a different party. 

Conclusion

The legal foundation for a banker’s right of lien is mentioned under Section 171 of the Indian Contract Act 1872. This privilege entitles the Bank, subject to certain restrictions and conditions, to maintain the possession of the customer’s goods or property until the debt is settled. They must ensure that only the proper amount is deducted from the borrower’s assets, as per the law.

Read our Article: The Doctrine of Frustration under the Indian Contract Act, 1872