As according to Dr. Herbert L. Hart, an author on Law of Banking who based on a number of legal decisions, defined the term "banker" as "A banker is one who in the ordinary course of his business, honors cheques drawn upon him by persons from and for whom he receives money on current accounts". A banker and a customer shares multiple relationships, including that of Bailor and Bailee.
The Indian Contract Act, 1872 governing Contracts of Bailment bestows upon the Bailor a particular kind of right, that of lien. Indian Law governs two kinds of lien, that of general lien and of particular lien. Particular lien is exercised over a particular good bailed to the Bailor for a specific purpose, and such right exists over these goods alone. In general lien, the Bailor's right extends over any general god bailed to them. Such right, however is limited to bankers, factors, wharfingers, attorneys and policy brokers unless there is a contract to the contrary.
Bankers have the right of general lien over all securities and properties placed with them in their capacity as a banker-custodian. Much speculation has been made regarding the true nature of a banker's right to lien, but such has come to an end following the decision rendered in
Syndicate Bank v. Vijay Kumar
1 . Multiple questions have also arisen regarding the nature of the goods bailed but the Indian Courts have laid such to rest by virtue of numerous decisions.
Meaning, Nature and Scope of Lien A creditor in possession of a goods, securities or other assets belonging to the debtor possesses a right to retain such until the debt owed to them is fulfilled, and such is the right to lien. 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." It is exclusively a legal claim and thus not one that need be defined in the contract.
The Indian Contract Act, 1872 classifies right of lien into two, General Lien and Particular Lien. Section 170 defines 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.
This right is available to the Bailee subject to certain conditions, among which the most important is the exercise of skill and labor upon the good bailed. Furthermore, it has been very often highlighted that the skill or labor exercised by the Bailee must be of such a nature that the act will improve the quality of the goods. Banker's Right to Lien 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', 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 recognized 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." Therefore, where the customer is indebted to the banker, the right to lien arises immediately by virtue of implication of law.
However, if the banker agrees impliedly or under a course of action that the customer may draw against uncleared effects, the banker's right to lien arises out of such contract. There is no legal requirement that there be some contract for the right of lien to exist since it is an implied right as per Section 171 of the Indian Contract Act, so long as such has not been exclusively excluded.
For the right to lien to arise, the following conditions must be satiated:
- The property must come into the hands of the banker in his capacity as a
banker in the ordinary course of business;
- There should be no entrustment for a special purpose inconsistent with
- The possession of the property must be lawfully obtained in his capacity
as a banker; and
- There should be no agreement inconsistent with the lien.
The banker's right to general lien is judicially recognized and it 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. In the matter of
Lloyds Bank v. Administrator General of Burma
2 Gold ornaments were pledged with a particular Bank as a Bailee, and later the borrower paid back the loan amount.
However the bank retained some of the pledged gold as security for another loan which had been taken by the same borrower. Here, the Court held that 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. In the matter of
State Bank of Travencore v. Bhargavan
3, the court held that to avail the right of lien, a banker must be functioning as a banker under Section 6 of the Banking Regulation Act, 1949.
Effect of Lien In all cases of Lien, two parties are involved, the banker lending the money and the customer who borrows such money in furtherance of which security shall be put forth, and thus both parties are entitled to certain rights in relation to the securities provided. The customer is the legal owner of the securities but once the commodities are transferred to the bank, its possession is also transferred.
The owners are not physically in possession of but remain the true proprietors and so have the obligation to pay off the debt and the right to retrieve their property. At the same time, the banker has the custody of the securities, whereby they are to act as the custodians of its. They have the right to retain the goods only for so long as the debt is not paid in full. Once paid off, the banker's right to lien ends.
Principles of Banker's Right to 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.
- 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 security; otherwise, the bank can exercise no right of lien, as was recognized in PNB Ltd. Arura Mal Durga Dass4.
- 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 alone and it could hold them against the amount due by the customer.
Legislative Framework Regarding Banker's Right to Lien
The legislative framework governing banker's right to lien is encompassed within the Indian Contract Act. 1872.
The provisions are as follows:
- Section 148 - defines bailment and the parties involved, i.e., the Bailor and the Bailee.
This was applied to understand the relationship between the banker and the
- Section 170 - particular lien. It defines the Bailee's right to
particular lien over the goods so bailed to them.
- Section 171 - defines general lien.
This allowed us to comprehend the banker's right to general lien. Along with a banker, factors, wharfingers, policy brokers and attorneys of high court are vested with the right to general lien.
Syndicate Bank v. Vijay Kumar & Ors 5 ; An analysis
FACTS: At the judgement debtor's request, the bank in this case consented to provide a bank guarantee in favour of the High Court of Delhi on the premise that the judgement debtor would deposit the whole amount of Rs. 90,000 in favour of the High Court of Delhi Registrar. The partner of the judgement debtor firm duly discharged them by signing on the reverse of each FDR before depositing two FDRS for Rs. 65,000 and Rs. 25,000, respectively.
This was sent along with a cover letter on the bank's usual form which had the clause, "The Bank is at liberty to adjust from the proceeds covered 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 said bank so long as any account is due to the bank from us for the said M/s Jullundur BodyBuilders singly or jointly with others"
- What was the Banker's right to lien?
The court held that, In the absence of a contrary agreement, a banker has a general lien over such securities or payments obtained from a customer in the ordinary course of banking business and is entitled to use the proceeds in respect of the general lien and all forms of securities or negotiable instruments deposited by or on behalf of the customer in the regular course of business of banking business. This judgment clarified the nature of Banker's lien. Judgments that followed have adopted the same stance to ascertain the existence of the banker's right to lien.
Where Banker's Right to Lien Fails to Apply
There are numerous circumstances which have been recognized wherein the banker's right to general lien does not apply. Rooted in Legal precedents, these circumstances have since then received the status of standard principles.
These are as follows
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- When there is an express contract providing a way of repayment of dues. This was laid down in State Bank of India v. Jayanthi6, where the court held that the securities were provided for a specific purpose, i.e., for a specific loan and cannot be retained by the bank under their claim of general lien.
- When the goods bailed to them are for safety deposit. A clear distinction has been recognized distinguishing between money and goods placed as a deposit and those given to the banker as bailment. In the case of a safety deposit, the bank is a Bailee and must exercise reasonable duty of care towards the deposits. They cannot claim to retain such deposits under their right of general lien for other unfulfilled payments7.
- When the title deed is provided as security but only for a specific purpose. Where the customer has provided a mortgage or security for a particular debt, but the bank exercises their right of lien by retaining the mortgage for a subsequent debt, such is not valid. In a similar case of Firm Jaikishen Dass Junda Ram vs. Central Bank of India8, Karnataka High Court held that in such cases the banker could not exercise their right to lien as the deed was provided for a particular debt only.
- When there a joint party term deposit but only one party's dues are left unpaid. A joint party term deposit is a deposit under the name of two people. In such cases, if one of the parties in the joint account has some unpaid dues left then the securities of the other party cannot be retained by the bank under Section 171 as seen in Lonankutty Antony v. Joint Registrar of Co-Operative Societies9.
- The principle of general lien does not extend to a loan taken by the customer from another branch of the bank.
- When the person is a guarantor for another person's loan.
Perspective on Bankers' Right to lien Firm Jaikishen Dass Junda Ram Vs. Central Bank of India
There were two partnership firms with same people, who had two different cash credit accounts in the same bank. The dues were paid off for the 1st firm's account, but there was some amount due to the bank in the 2nd firm's account. The 1st firm had given the bank Rs.15, 000/- to the bank to be remitted to a mill. The mill refused the money and returned it to the bank. The bank adjusted the money towards the amount due in the 2nd firm's account.
The court held that the bank had the right to appropriate the amount to clear the indebtedness from the customer's securities. Also, though there were two different firms, they cannot be considered as separate legal entities as they were constituted of the same people.
M/s. Shivam Construction Co., Ahmedabad vs. Vijaya Bank
The bank had sanctioned overdraft account to plaintiff on security of FDR. The bank requested the plaintiff to pay the dues from the fixed deposit. Their request was not replied to, so they appropriated the fixed deposit sum towards the unpaid dues. The defendant then filed a suit for recovery of the remaining amount.
The plaintiff's plea was dismissed on the basis that the defendant bank had the right to lien over the goods or securities deposited.