ARTICLE
21 February 2022

Banker's Right To Lien Under Section 171 Of Indian Contract Act

V
VGC Law Firm

Contributor

VGC Law Firm (formerly Vats Gupta & Co.) is a full service Indian law firm with its head office in Delhi, headed by its Managing Partner, Mr. R.P. Vats with over 40 years of special expertise in banking, insolvency, finance, corporate and commercial laws.
Lien is a right of possession of property or goods by a person who is due for payment of any kind.
India Corporate/Commercial Law

Lien is a right of possession of property or goods by a person who is due for payment of any kind.

It is a right under law instead of a contract under the Indian Contract Act. A key component for holding the possession of property or goods is that the bailee or the holder must be of the same skill or labour that the goods are being held for.

There are two types of lien:

  1. Particular Lien: When the holder holds the property which is in connection with the due payment and then releases the property once the due amount is received.
  2. General Lien: When the holder holds a property that might not have a connection to the payment due they can hold off to anything that is of similar value as to the amount due even if the item is not connected to the payment due.

In particular lien in the case of Hatton V. Car Maintenance Company, Ltd.  it was stated by the court that the lien can only be exercised on the goods on which the payment is due when the work on the item is done for its improvement or to make it better. Unlike in this case where the item was supposed to be maintained not improved the right of lien for the repairer never existed in the first place.

Therefore, it was concluded that a lien does not exist for each and every case.

Banker's Lien

Bank's power to practice lien

A banker's lien, when it is not excluded by special contract, express or implied, extends to all bills, cheques, and money entrusted or paid to him, and all securities deposited with him, in his character as a banker. Strictly, it is confined to securities and properties in the custody of the banker; and in respect of things that belong to the customer, and are held by the bank as security; whether they are in the same or different branches. If a thing is in possession of the bank but owned by the customer, has no right of lien over it. A deposit of valuables with a banker is subject to the banker's lien for the customer's general debts to him unless can prove an agreement to give up his general lien. Thus, if a certain sum is due to a bank in one account, it may retain as security or other movable that came into its hand in another account; including repayment of subsequent advances. A banker's lien would also apply to negotiable instruments remitted by the customer for collection. Unless otherwise directed, the proceeds of such collection may be used by the bank for reducing the customer's debit balance.

The Banker's lien, apart from any specific security, the banker can look to his general lien as a protection against loss on loan or overdraft or another credit facility. The general lien of bankers is part of law merchant and judicially recognised as such.1

When is Lien not permissible

Lien is not permissible in the following cases:

  1. Where there is an express contract like by way of counter-guarantee, providing reimbursement. (Krishna Kishore Kar v. United Commercial Bank) 2
  2. Where there is no mutual demand existing between the banker and the customer firm. (Jaikishan Dass Jinda Ram v. Central Bank of India)3
  3. Where the valuables are received for safe custody. (Cuthbert v. Roberts4 and Bank of Africa and Cohen)5
  4. Where the entrustment of goods (documents of title) is for a specific purpose stated to the banker. (Greenhalgh v. Union Bank of Manchester)6
  5. When the deposit with the banker is for a specific purpose if the banker has implied or expressed notice of such purpose.
  6. Where the valuables or documents of title are left in the banker's hands, inadvertently.
  7. 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.
  8. Where the account is in respect of a trust.
  9. Banker's Lien is not available against Term Deposit Receipt in Joint Names when the debt is due only from one of the depositors.

In the matter of Jaikishen Dass Jinda Ram v. Central Bank of India Ltd.,7 two partnership firms with the same set of 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 relation of banker and customer arises as a result of a contract, express or implied, according to which the customer delivers to the bank money, funds or credits constituting the deposit and the bank assumes obligation to pay out on his demand or order a sum equal to the amount deposited. This arrangement is to the advantage of both the parties, for the customer receives the benefit of banking facilities and the bank the benefit of the use of the customer's money with or without interest. The moment the money is deposited in the bank, the relation of debtor and creditor comes into existence, the bank being the debtor of the customer. The deposit becomes a loan which merges in the general fund of the bank and becomes the property of the bank. Two rights flow out of the relationship of debtor and creditor, namely (1) the right of the customer to demand repayment of the amounts due to him if and when he so desires and (2) the right of the bank to appropriate the monies, funds and securities of the customer coming into its possession in the course of their dealings for repayment of the customer's indebtedness. This latter right is known as banker's lien and it rests on the principle of the law-merchant that any credit given by a bank to a customer is given on the faith that sufficient monies and securities belonging to the customer will come into the possession of the bank in the due course of further transactions. This right is akin to the right of set-off which obtains between persons occupying the relation of debtor and creditor and between whom there exist mutual demands. As mutuality is essential to the validity of a set-off, it is necessary that before one demand can be set-off against another both must mutually exist between the same parties and between them in the same capacity. The mutual nature of the debt and not the mutual nature of the parties should be considered. Debts accruing in different rights cannot be set-off against each other. A bank can enforce its lien if mutual demands exist between itself and the customer, that is when they mutually exist between the same parties and between them in the same capacity. 8

Footnotes

1 Peget's Laws of Banking,8th Edn. at page 498

2 AIR 1982 Cal .62.

3 AIR 1960 Punj.1

4 (1909)2 Ch.226 (CA)

5 (1902)2 Ch.129; Paget's law of Banking (11th Edition)

6 (1924) 2 K.B.153.

7   AIR 1960 P&H 1

8   Ibid.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.

Learn More