Open Access Research Article
CRITICAL ANALYSIS OF BANKERS RIGHT OF GENERAL LIEN
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Article Details
CRITICAL ANALYSIS OF BANKERS RIGHT OF
GENERAL LIEN
AUTHORED BY
- ALISHA KHALID BHENDWADE
DEPRATMENT OF
L.L.M 2023-2024
P.E. SOCIETYS
MODERN LAW COLLEGE
GANESHKHIND,
UNIVERSITY CIRCLE, PUNE
Abstract-
The Indian Contract Act is a
classical model of contract law that covers various codes that govern general contracts as well as specific
contracts. Contract of Bailment, one such type of contract
under Indian laws of contract, talks about the delivery
of goods from one person to another for a purpose. Under this contract, the bailee is given a right to lien. Right to lien is defined
under Section 171 of the Indian
Contract Act, 1872 which, talks about the general right to the lien of bankers, wharfingers, factors, attorneys
of high courts and policy brokers. The general right to the lien of a Banker is provided
in Section 171. It
is a possessory right
which allows the bank to have temporary possession of the goods until the customer’s outstanding debt is so paid.
The landmark judgement of Syndicate Bank v/s Vijay Kumar and Others dealt with the issue
of whether or not a banker’s right to lien and set off was a general and customary right
guaranteed to them.
In furtherance of Halsbury’s laws of England,
this judgement recognized the banker’s right to
the general lien was a right guaranteed by the law and not the contract.
This paper aims to understand the extent and applicability of a banker’s
lien in India in accordance with the Indian Contract Act, 1872. Further,
it delves deeper to comprehend
instances wherein a banker’s right to the lien is not permissible and goes on to draw a critical analysis
of the current stance of law.
Keywords: Bailment, Lien, Banker’s Lien, Indian
Contract Act, General Lien.
Introduction-
The
Indian Contract Act has multiple provisions that encapsulate the legal framework for varied contracts. Once
such is the contract of bailment. It is defined
under section 148 as the “delivery of goods by one person to another for some purpose, upon a contract
that they shall, when the purpose is accomplished, be returned or otherwise disposed of
according to the directions of the person delivering them”. It further
goes on to enumerate that the person who is handing over the goods is called the bailor and
the person accepting them is the bailee. Sections
149 – 171 further defines the various rights, duties, and responsibilities of bailor
and bailee.
The Indian laws cover two kinds of
lien – particular and general. Particular lien
is exercised by a bailee over a particular good bailed to them for a
specific purpose. They do not have
the right to lien over any other goods of the bailor. General Lien, however, grants the right to lien to the bailee
over any general goods bailed to them
by the bailor. This right however is limited to bankers, factors, wharfingers, attorneys
and policy brokers
unless there is a contract
to the contrary.
Bankers have general lien over all
securities and properties with them in their
capacity as a custodian banker. Speculations on the exact nature of
banker’s lien have been made but
much of it was put to rest after the landmark judgement of Syndicate Bank v. Vijay Kumar[1]. There have been instances where the
nature of the goods bailed is questioned along with the purpose for their pledge or bailment. But Indian courts through their judgements have laid the
questions arisen before them to rest.
Meaning Nature and Scope-
Right to lien is the right to
possession of property until the dues with respect to that property are not paid off. It is a legal claim and not one
that needs to be specified under the
contract. General lien of banker as defined in the Indian Contract
Act gives the right to lien over all goods bailed to the bank as securities unless there is a contract to the
contrary. However, there was speculation on the exact meaning of scope of the banker’s right. In Firm Jaikishen
Dass Junda Ram Vs. Central
Bank of India[2], the court held that bank could retain the security given for one account for the unpaid
dues of the second
account of the same
person.
The
uncertainty revolving the nature and scope of a banker’s right to lien was uncovered
in Syndicate Bank v. Vijay Kumar & Ors. In this case, 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 Body Builders singly or jointly with others”. So,
the issue that arose was to determine the meaning of banker’ 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. Since this judgement, the nature of
banker’s lien has been clarified and well founded. Subsequent judgements have followed
the stance and accordingly varied
from this point of law when the right to lien of the banker is not present[3].
Circumstances Where a Bankers Lien Not Applicable-
Although it is understood that
bankers have the right of general lien, there are some instances where they forfeit their right to lien over the
securities or goods bailed to them.
These instances have been developed through legal precedents and since then, accorded
as standard principles to be
abided by.
1. When there is an express contract
providing a way of repayment of dues. This
was seen in the case of State Bank of India v. Jayanthi,
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.
2.
When the goods
bailed to them are for safety deposit
A
distinction has been drawn between money or goods deposited as a deposit and
given to the banker as bailment. So, in 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 payments.
3. When the title deed is provided as
security but only for a specific purpose. Although, bankers are entitled
to the right of ‘general’
lien, there are limitations to the extent
that they can exercise this right. This is seen in instances 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. In a similar case of Firm Jaikishen Dass Junda Ram Vs. Central
Bank of India[4], 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.
4. 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
1. The principle of general lien does
not extend to a loan taken by the customer
from another branch of the bank.
The right to lien of a banker only
extends to the property of the customer mortgaged against
their loan and the bank cannot hold the property
documents for another
loan taken by a company
in which he was the director.
2.
When the person
is a guarantor for another person’s loan.
For if an individual pledges gold
ornaments against their personal loan and the same person is a guarantor for another person’s
loan default then, they can claim
their goods back on repayment of their personal loan[6]
Effect Of Lien-
Generally, two parties are involved.
The banker who lends the money to the borrower
or the customer, who then provides a security in exchange for the loan. Both of the parties are entitled to
some of the rights that are associated with
the securities that were provided. The client who issues the security is the legal owner of the items; nevertheless, when the commodities are offered as security for a loan, the customer
transfers possession of the assets to the banker.
Therefore, they are not physically in possession of it at the moment, but they are still the true proprietors of
it. Therefore, individuals have the authority to have the obligation discharged and to
retrieve their property. Also included
in this category is the banker[7] who currently has custody of the securities. The banker has the right to act as the trustee
of the property as long as
they are acting within their powers as the custodian and do not sell the property
without giving notice to the customer. This only applies if the
banker is acting within their
rights as the custodian. When the property belongs to a third party, the bank may use its right to lien to the extent
of the customer's title. This
demonstrates that bankers do not enjoy a comprehensive right to liens, contrary to what was previously
believed. They will be permitted to keep
the property so long as the debt is not paid in full as a result of this. If the debt is not paid in full, the bank has
the authority to sell the customer's property,
either with the customer's permission or with a court order.
Legislative Framework
With Respect Of Bankers Right To Lien-
Indian Contract Act-
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 customer
Section 170 particular lien. It defines
the bailee’s right to partiailed 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 liencular lien over the goods[8]
Judicial Precedents In 18th And 19th
Century-
1.
Firm Jaikishen Dass Junda Ram Vs. Central Bank of India,
AIR 1960 Punjab
Facts –
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
Held – the court held that the bank
had the right to appropriate the amount to clear
the indebtedness from the customers
securities. Also, though there were two different
firms, they cannot be considered as separate legal entities as they
were constituted of the same people.
Facts – defendant customer, opened two accounts
one deposit and another loan account and had instructed the
plaintiff bank to transfer money from deposit account
to loan account. But later defendant denied
any such claim and
moved the court.
Held
– on appeal, it was held that the defendant had instructed the bank to transaction and the plaintiff
was well within
their rights under general
lien to do so.
3.
M/s. Shivam Construction Co., Ahmedabad Vs. Vijaya Bank, Ahmedabad, AIR 1997 Gujrat 24
Facts – 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 remaining amount.
Held
– In appeal of the plaintiff’s
plea was dismissed on the basis that the
defendant bank had the right lien over the goods or securities deposited with them.
4.
Alekha Sahoo
v. Puri Urban Co-operative Bank Ltd. And Anr, AIR 2004 ORISSA 142
Facts – petitioner
took loan of Rs. 12,000/- from respondent, bank against a pledge of gold ornaments. The petitioner was also a guarantor
for a cash loan to a third party by the
respondent. The bank said that they were exercising
their right of general lien and retained the petitioner’s gold ornaments.
Held – General lien by banker can be
exercised on the deposits and general
account balance and securities of the principal debtor and not the guarantor.
Facts – Plaintiff took loan from
bank. But he had rented his premises to another
branch of the bank. In spite of multiple notices
from bank, he did not
repay the loan so, the bank deduced the loan amount from his arrears of
monthly rent.
Held – trial court and District court
held that the defendant bank may pay full arrears to the plaintiff. High Court of Bombay held that bank was well within its rights of general lien
as under section 171 of the Indian Contract Act to adjust
plaintiff’s arrears. Appeal
was allowed.
Judicial Veiw Of 21st Century-
1.
State Bank of India v. Jayanthi,
2011 SCC OnLine
Mad 269
Facts – Respondent’s deceased husband
had given property deed to secure
loan which had since been paid off and account was closed. But the bank continued to retain the property
deed for a loan account for which the respondents’ husband
had not given a guarantee.
Held – Since the property deed was
given only for a specific loan, the agreement
between bank and borrower can be seen as a contract to contrary. So, it was held that the bank could not retain the
documents under general
lien. Also, bank cannot exercise
lien over a different account
created by the same
borrower with different purpose.
2.
Sree Vadivambigai Ginning Industries Pvt. Ltd v. Tamil Nadu Mercantile Bank Limited,
2015 SCC OnLine Mad 441)[11]
Facts – title
deeds were deposited by the petitioner for a specific purpose, i.e., the loan but,
the bank retained the security for unpaid dues
Held – Bank does not have right to
general lien over title deeds as they were
deposited for specific purpose and an express contract was made where the
titled deeds were given as collateral for loan
3.
Lonankutty
Antony v. Joint Registrar of Co-Operative Societies, 2016 SCC OnLine Ker
481
Facts – Petitioner took a loan after
mortgaging a property deed, after which he
repaid the loan. But the bank retained the deed as a security for his wife’s debt under general lien.
Held – unless there is a contract to
contrary, banker cannot exercise general lien over husband’s property
for wife’s unpaid dues.
4.
M. Shanthi
v. Bank of Baroda, 2017 SCC OnLine
Mad 37703
Facts – petitioner had submitted property
deeds to the bank as security against
the loan account.
There were some irregularities in payment for a while.
Later the petitioner approached the bank to repay the dues and redeem the mortgage. The bank refused
to redeem the mortgage even on repayment
as the petitioner is also a guarantor
for another loan and
said they had right of general
lien.
Held – the writ petition was allowed,
and the bank was directed to give the documents back as the petitioner was a guarantor and not the principal debtor.
Facts – the
petitioner applied for a loan to the bank and provided title deeds as security.
He was also the guarantor for a loan taken by the company where he is the director.
On complete repayment of his personal loan, the bank continued to retain the title
deeds under the claim that it was a security for the loan by the company.
Held – the writ petition was partly
allowed, and the bank was directed to release
the title deeds of the petitioner but, it was also held the bank was free to take
appropriate steps for the debt
recovery[13].
Critical Analysis-
Substantive findings under the
banker’s right to general lien is that the law is an effective tool to safeguard the bank’s interests. The Indian banking industry is expanding rapidly,
anincreasing number of individuals are seeking banks
to expand the scope of their particular businesses. The right to lien is a prerogative
for the bank since it protects its interests. The section 171 of the Indian Contract Act, 1872 only enables the
bank to safeguard its interests but the
client receives no substantive protection under the same provision. Thus, the contract act should be amended to provide equal protection to both parties.
When a customer feels empowered and their rights are protected, they, it
will not only facilitate a harmonious agreement between the parties,
but it will also reduce chances of dispute caused due to
lack of clarity of rights against a banker’s right to
lien.
The judgement
of Syndicate Bank v. Vijay Kumar & Ors, the court ruled that, in the
absence of a contract to the contrary, the banker has a general lien over securities
or payments acquired from a customer in the conduct of its business and is
permitted to use the proceeds from the general lien and all types of securities
deposited by or on the customer's behalf in the normal course of banking
business.
This has not only put to rest all the
ambiguity surrounding the nature and scope
of a banker’s right to lien but also paved the way for a future series of judgements that have utilized the court’s
sound opinion to pass their respective judgements as a notable
precedent. Because these judgements have dealt with scenarios
in which the negotiable instruments or the purpose of the loan or deposit in the case has been the question
at hand, they have also provided a deeper
understanding on the extent of the banker's right to lien. Therefore, it is plausible to deduce that a banker possesses a "general" right to lien.
However, even this is subject to legal constraints, which the courts, with the help
of these precedents, have laid
down.
Suggestions And Conclusions-
So, it is well understood that the
right to lien while being effective does have
some drawbacks as analysed. The effect of this must be considered by all stakeholders involved i.e., the
government, regulatory authorities, the banker, and the customers. The government should advance the legal
instruments in order to close the few loopholes in the present
rules that benefit
the banker but restrict
the growth of the client or ordinary person who desires to do business with the bank. They should ensure that
the enforcement mechanism is well regulated
and the laws governing these institutions throughout the entire process of granting loans and acquiring
securities, restraining of securities, and sale of these securities are consistent, and that any violations are appropriately
punished.
Moreover, they should recommend an
alternate method for obtaining a bank loan. It is no secret that the majority
of people need a loan to launch
or expand their company, but as understood, there
are numerous limits, such as the necessity
for collateral, high rates of interest and loan classes, among others. Therefore, the government should offer
alternatives, such as low-interest or no-interest loans, so that even people who do not meet the bank's
requirements may get a loan.
Also, they should ensure that the
statute requiring notification before a bank
proceeds with the sale of secured or encumbered property
is properly applied,
and the sale should be fair based on the property's worth. Further,
efforts can be made to approach
alternate methods of dispute resolution such as negotiations and mediations so as to
mitigate any probable loss of resources the
parties may bear. Right to lien, a
well establish legal right must be effectively shaped
further so as to act not only as a privilege to the banker
but to also ensure that it does not mean a definite
loss to the customer.
Referances-
A. Articles-
1. Nandini Verma,
analyzing general lien of banker as enshrined in ICA in 21st Century, Indian Journal
of law and legal research, Vol II, Issue II, ISSN 2582 8878, 2021, available at
(https://articles.manupatra.com/article- details/Analysing-General-Lien-ofBanker-as-Enshrined-in-ICA-in-the-21st-
Century)
2. Mattuba
Nyerembe, Bankers right to lien customer deposits, it’s legal implications and
challenges, available at (https://www.academia.edu/19762763/Bankers_right_to_lien_
customers_deposit_its_legal_implication_challenges_and_applicability)
3. Chakraborty,
Atish and Chakraborty, Aurin, Law Relating to Lien: A Legislative &
Judicial Analysis (July 04, 2019), DOI (10.2139/ssrn.4196628), Available at
SSRN( https://ssrn.com/abstract=4196628 or http://dx.doi.org/10.2139/ssrn.4196628)
4. Combest, Christopher.
“Keeping Current: Lien ‘Strip Down’ vs. Lien ‘Strip Off’: Dewsnup v. Timm Is Still
the Law – Isn’t It?” Business Law Today, 2013, 1–2, ISSN 10599436, available at
(http://www.jstor.org/stable/businesslawtoday.2013.05.04.)
5. O’Donovan, J.
(1994), The Banker's lien and right of combination. Int. Insolv. Rev. Vol 3,
Issue 1, pp 1-13, ISSN 1099-1107, (https://doi.org/10.1002/iir.3940030102)
B. Books –
1. Avtar
Singh, Law of Contract (a study of Indian Contract Act, 1872) and Specific
Relief (10th ed.), ISBN 9839388206044, Lucknow, Eastern Book Co, 2008
2. Cheshire,
Fitfoot, Furmston, Cheshire, Fitfoot, Furmston’s book on contracts, 17th ed., ISBN
9780198747383, Oxford University Press, 2017
3. Pollock &
Mulla, Pollock & Mulla on Indian Contract and Specific Relief Acts, 14th
Ed, ISBN 9788180388965, N.M Tripathi, 1972
4. Anson,
William Reynell, Anson’s Law of Contract, 31st Ed, ISBN 9780198829973, Oxford University
Press, 1988 5. Chitty Joseph and Hugh G Beale. Chitty on Contracts. Vol. 1
General Principles. 31st ed. ISBN 9780414097827, Sweet & Maxwell: Thomson
Reuters, 2012
C. Case laws-
1. Alekha Sahoo
v. Puri Urban Co-operative Bank Ltd. And Anr, AIR 2004 ORISSA 142
2. Firm Jaikishen
Dass Junda Ram Vs. Central Bank of India, AIR 1960 Punjab
3. Lonankutty Antony
v. Joint Registrar of Co-Operative Societies, 2016 SCC OnLine Ker 481
4. Syndicate Bank
v/s Vijay Kumar and Others, AIR 1992 SC 1066
5. Sunil v. Union
Bank of India, 2022 SCC OnLine Bom 1224
6. M. Shanthi v.
Bank of Baroda, 2017 SCC OnLine Mad 37703
7. Sree Vadivambigai
Ginning Industries Pvt. Ltd v. Tamil Nadu Mercantile Bank Limited, 2015 SCC OnLine
Mad 441)
8. State Bank of
India v. Jayanthi, 2011 SCC OnLine Mad 269
9. The Central
Bank of India v. Keshaorao Narayanrao Patil, 2004(3) ALL MR 633
10. Devendrakumar
Lalchandji v. Gulabsingh Nekhesingh, AIR 1964 Nag 114
11. M/s. Shivam
Construction Co., Ahmedabad Vs. Vijaya Bank, Ahmedabad, AIR 1997 Gujrat 24
D. Website databases -
[1]
Avtar Singh, Law of Contract
(a study of Indian Contract Act, 1872) and Specific Relief (10th ed.), ISBN 9839388206044,
Lucknow, Eastern Book Co, 2008
Cheshire,
Fitfoot, Furmston, Cheshire, Fitfoot, Furmston’s book on contracts, 17th ed., ISBN
9780198747383, Oxford University Press, 2017
[2]
Firm Jaikishen Dass Junda
Ram Vs. Central Bank of India, AIR 1960 Punjab
[3]
Firm Jaikishen Dass Junda
Ram Vs. Central Bank of India, AIR 1960 Punjab
[4]
Lonankutty Antony v. Joint
Registrar of Co-Operative Societies, 2016 SCC OnLine Ker 481
[5]
State Bank of India v.
Jayanthi, 2011 SCC OnLine Mad 269
[6]
Alekha Sahoo v. Puri Urban
Co-operative Bank Ltd. And Anr, AIR 2004 ORISSA 142
[7]
Indian Contract Act, 1872,
Section 170, No.9, Act of Parliament, 1872 (India)
[8]
Devendrakumar Lalchandji
v. Gulabsingh Nekhesingh, AIR 1964 Nag 114
M/s.
Shivam Construction Co., Ahmedabad Vs. Vijaya Bank, Ahmedabad, AIR 1997 Gujrat 24
[9]
Devendrakumar Lalchandji
v. Gulabsingh Nekhesingh, AIR 1964 Nag 114
M/s.
Shivam Construction Co., Ahmedabad Vs. Vijaya Bank, Ahmedabad, AIR 1997 Gujrat 24
[10]
The Central Bank of India
v. Keshaorao Narayanrao Patil, 2004(3) ALL MR 633 Supra 30
Sree
Vadivambigai Ginning Industries Pvt. Ltd v. Tamil Nadu Mercantile Bank Limited,
2015 SCC OnLine Mad 441
[11]
The Central Bank of India
v. Keshaorao Narayanrao Patil, 2004(3) ALL MR 633 Supra 30
Sree
Vadivambigai Ginning Industries Pvt. Ltd v. Tamil Nadu Mercantile Bank Limited,
2015 SCC OnLine
[12]
M. Shanthi v. Bank of Baroda,
2017 SCC OnLine Mad 37703
[13]
M. Shanthi v. Bank of Baroda,
2017 SCC OnLine Mad 37703
Article Information
CRITICAL ANALYSIS OF BANKERS RIGHT OF GENERAL LIEN
Authors: ALISHA KHALID BHENDWADE
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/03/19
- Issue 7
About Journal
International Journal for Legal Research and Analysis
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- ISSN 2582-6433
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