eBAPTEB II

BANKER’S GENERAL LIEN

CHAPTER II

BANKER’S GENERAL LIEN

Definitions

Lien has been defined by John Bouvier as the "Right which one

person possesses, in certain cases, of detaining property placed in his

possession belonging to another, until some demand which the former has

be satisfied"1.

A particular lien is a right to retain the property of another on

account of labour employed or money expended on that property.

A general lien is a right to retain the property of another on account

of a general balance due from the owner.

Bankers have general lien on all securities left with them by their

customers2.

Lien is the right to retain property belonging to another until a debt

due from the latter is paid. A banker’s lien is a special form of general lien,

for it includes a right of sale after reasonable notice. It is the right of the

banker to retain such of his customer’s property as comes into his hands in

the ordinary course of business as a banker; it is an implied pledge3.

Bouvier’s Law Dictionary, Third Revision (being 8th Edn), 1914, Vol.2, p.1978

Ibid

Thomson’s Dictionary of Banking, 12th Edn, 1974 p.361

24

Lien is the right to retain property belonging to another until a debt

due from the owner of the property to the possessor of the property is paid.

The ownership of the property is left undisturbed - that is, the borrower

continues as owner, but the lender has possession. In general the lender has

no right to sell the property. A banker’s lien is a general lien enjoyed by the

banker over any borrowing customer’s property that comes into his hands

in the ordinary course of business as banker. It is an exceptional lien in

that it has a right of sale after reasonable notice to the customer. A

banker’s lien has been described as an implied pledge4.

A lien is a legal right or interest that a creditor has in another’s

property lasting usually until a debt or duty that it secures is satisfied.

Banker’s lien is the right of a bank to satisfy a customer’s matured debt by

seizing the customer’s money or property in the bank’s possession5.

Informal Security

A banker who has granted an advance to a customer may, by virtue of his right of lien, obtain a legal claim to securities of the customer which pass through his hands in the ordinary course of his business as banker. No special arrangement or agreement is necessary to create the right of lien; it arises out of course of dealings between the parties. Nevertheless, the right of lien may be expressly conferred by agreement, or it may be definitely excluded either by arrangement between the parties or by the existence of a contract or of circumstances inconsistent with the exercise of

the right of lien.

4 Dictionary of Banking by F.E.Perry & G.Klein, 3rd Edn, 1978, p.174 & 16

Black’s Law Dictionary, 7th Edn, 1999, p.9335

25

The practical test of banker’s lien is whether the securities were

received and handled by the bank in its ordinary course of business, there

being no express or implied agreement between the customer and the bank

inconsistent with lien.

Davis v Bowsher6 is an important judicial recognition of banker’s

general lien. Lord Kenyon CJ in this case said "wherever a banker has

advanced money to another, he has a lien on all the paper securities which

come into his hands for the amount of his general balance".

The securities must have come into the banker’s hands in the

capacity as banker in the course of banking business; they must not have

been deposited for some special purpose inconsistent with the existence of

the lien, and they must be securities which a banker ordinarily deals with

for his customer when indebtedness on the part of the customer is not in

contemplation7.

Law Merchant (Lex Mercatoria)

The law merchant "is neither more nor less than the usages of

merchants and traders in the different departments of trade, ratified by

decisions of courts of law, which, upon such usages being proved before

them, have adopted them as settled law"8.

6 (1794) 5 Term Rep 488, Court of King’s Bench.

7 Ibid

8 Goodwin v Robarts (1875), L.R. 10 Exch 337

26

In 1846 the Hojise of Lords regarded the existence of banker’s lien as

indispensable in Brandao v Barnetf where Lord Campbell said:

"Bankers have most undoubtedly have a general lien on all securities

deposited with them as bankers by a customer, unless there be an express

contract, or circumstances that show an implied contract, inconsistent with

lien".

It was further stated by Lord Campbell that the banker’s lien is part

of the law merchant, which courts of justice are bound to know and

recognise. Lord Lyndhurst in the same case laid down that there in no

doubt that, by the law - merchant, a banker has a lien for his general

balance on securities deposited with him. Consequently the existence of the

general lien need not normally be pleaded or proved. It must be

remembered that the law merchant is not fixed and stereotyped. It is

capable of being expanded and enlarged so as to meet the wants and

requirements of trade in the varying circumstances of commerce9 10.

Therefore if a bank relies upon some aspect of the lien which is not clearly

established on the authorities, it is open to it to plead and adduce evidence

of a general usage, and it is open to the court to recognise such usage as

establishing the right relied upon.

9 (1846) 12 Cl & Fin 787

10 Goodwin v Robarts (1875) LR 10 Exch 337 at 346

27

Banker’s Lien as an Implied Pledge

In Brandao v Barnett, a classical and landmark judgment on

banker’s general lien, Lord Campbell stated that the right acquired by a

general lien is an implied pledge11. This observation was made in support

of a ruling that the banker’s lien exists if the banker has acted in good

faith, eventhough the subject of the lien turns out to be the property of a

stranger.

Distinction between Pledge and Lien

Pledge Lien1. Power of sale conferred on the

bankerNo such power; power to retain the goods

2. Defined in section 172 of the Indian Contract Act, 1872

Defined in section 171 of the Indian Contract Act, 1872

3. Pledge is in relation to the particular goods bailed to the banker as security

Lien is available for the banker in relation to all the securities of the customer with the banker

4. On customer’s default, the banker can sell the pledged goods without resort to courts

The banker has to move a court to attach the liened goods and then sell.

5. Consensual security since the customer himself transfers the possession of goods to the banker.

Non - consensual security since banker suo motu retain the goods of the customer even in the absence of the customer’s consent

6. Formal security because it is created by the customer

Informal security because it is exercised by banker without the concurrence of the customer

7. Express contract No express contract but statutory right of the banker

u (1846) 12 Cl & Fin at 806

28

The essential difference between a lien and a pledge is that a lien

confers a mere right of retention, whereas a pledge confers an implied

authority to sell12. The words "implied pledge" mean that in the event of

default by the customer the bank has a power of sale without resort to

courts.

When securities deposited to secure a specific loan remain in the

possession of the bank after it has been repaid they will be subject to the

bank’s lien for the other debts due to the bank by the depositor13.

Where securities are deposited without a formal charge but expressly

to cover an indebtedness of a customer, the bank normally obtains an

equitable mortgage by deposit.

Pledge is also an express contract for security, but lien arises quite

informally from the normal course of business irrespective of any express

intention by the borrower.

Matters Excluding Lien

Particular purpose

A Bank cannot have any lien over items left with it for a specific

purpose because there is then an express or implied contract inconsistent

with lien. Thus articles deposited for safe custody are not probably subject

to general lien. Moreover, if securities are deposited for a particular loan or

12 The Odessa (1916) 1 AC 145 at 159, PC

13 Re London & Globe Finance Corporation (1902) 2 Ch 416

29

an advance never granted, the right of lien cannot be exercised. For

example, it was decided in Wylde v Radford14 that where a conveyance

of two separate properties was deposited and a charge created on only one

of them, the bank had no general lien over the remaining property.

Any property which is handed to a banker for an express purpose

cannot be subject to lien, even when the subject itself has failed. In the case

Lucas v Dorrien15 deeds were left with a banker as security for an

advance. The advance was not granted, but the deeds were not picked up

by the depositor; and it was held that they could not be subject to lien in

the banker’s hands.

The rule is reasonably clear that banker’s lien can only attach to

property that comes to the banker in the course of banking business.

Securities Subject To Lien - Legal Controversy

It is difficult to define exactly what securities are subject to the

banker’s lien and it is of interest to compare the opinions expressed by two

of our leading authorities. To quote Paget’s "Law of Banking". "The better

view would seem to be that lien only attaches to such securities as a banker

ordinarily deals with for his customer, otherwise than for safe custody,

when there is no question or contemplation of indebtedness on the part of

the customer. Collection is no doubt the primary idea of the banker’s

functions with regard to securities subject to lien".

14 (1863) 33 L.J. Ch 51

15 (1817) 7 Taunt. 278

30

On the other hand, Hart16 adopts a much wider view by defining

banker’s lien as "the right of retaining things delivered into his possession

as a banker, if and so long as the customer to whom they belong, 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 his right shall be excluded".

The practical test is whether the securities were received and

handled by the bank in the ordinary course of its business, there being no

express or implied agreement between the customer and the bank

inconsistent with lien.

Money and Credit Balances

Notwithstanding that money paid into a bank account becomes the

property of the banker to do with as he likes, there are many statements,

some of high authority,17 to the effect that money paid in is subject to

banker’s lien. This misuse of language was laid to rest finally in

Halesowen Presswork and Assemblies Ltd v Westminster Bank Ltd18

where His Lordships (Buckley LJ and Lord Denning MR) observed that no

man can have a lien on his own property, and that the term "securities"

used in Brandao v Barnett19 does not extend to the banker’s own

indebtedness to the customer.

16 Law of Banking, 4th Edition at p.483

17 Misa v Currie (1876) 1 App Cas 554

18 (1971) 1 QB 1, (1970) 3 All ER 473

(1846) 12 Cl & Fin 78719

31

Customer’s General Balance

The banker’s lien is for the general balance owed by the customer20.

The term "general balance" refers to all sums presently due and payable by

the customer, whether on loan or overdraft or other credit facility21.

Securities belonging to a Third Party

The lien is excluded if, to the knowledge of the banker at the time of

deposit, the securities in question belong to a third party. But the lien is not

excluded if the bank receives the securities in good faith and without

knowledge that they in fact belong to a third party. This is amply

illustrated by Brandao v Barnett22.

Buckley J held in Re London and Globe Finance Corpn23 that

the securities, being consciously left in the banker’s hands after satisfaction

of the specific advances, could be regarded as having come into his hands

anew in the way of business or as impliedly repledged or redeposited. It

might, perhaps, be put another way: that where securities have been

charged for an advance which is repaid and the securities left with the

banker, he will have a lien on them for any other advance allowed

subsequently or existing at the time, unless this is expressly excluded such

as that they were henceforth to be held for safe custody.

20 Ibid & Davis v Bowsher (1794) 5 Term Ref 488

21 Re European Bank (1872) 8 Ch App 41

22 (1846) 12 Cl & Fin 787

[1902] 2 Ch 41623

32

Express Lien

Sometimes a bank may obtain a borrower’s signature to a document

described colloquially as a general letter of lien, whereby the customer

acknowledges that all his securities which may from time to time be

deposited with the bank are held as security for his indebtedness. Such a

letter is a clear evidence that the securities are subject to the banker’s lien

and it cannot later be contended by the customer that they were deposited

for a special purpose inconsistent with lien.

By mercantile usage, a bank has a lien over all securities deposited

by the customer in the ordinary course of banking business. Accordingly,

there is no need for an express agreement between the parties to bring the

lien into existence with power to realise the liened property without court

intervention. It attaches in the absence of an express agreement or of

circumstances evincing an intention to the contrary24.

Lien and the Law of Limitation (English Law)

The object of the Law of Limitation is to afford to the litigant public

that after lapse of a particular period of time prescribed by law, the cause

of action rests. The rules of limitation interpose a statutory bar after a

certain period and give a quietus to suits to enforce an existing right.

Limitation does not affect a court’s jurisdiction. It merely regulates the time

within which a court’s powers are to be invoked and hence it does not take

away any powers of the court.

24 General Produce Co v United Bank Ltd (1979) 2 Lloyd’s Rep 255

33,v><- 51.

The effect of the Limitation Act, 1980 in making a debt statute-

barred is to bar the creditor’s personal remedy against the debtor by action

in the courts, but not to extinguish the debt or prevent the creditor from

obtaining repayment in any other way that is open to him. Limitation of

action does not affect property over which the banker has a lien25. The

banker can continue to hold securities which become subject to lien against

debts which have become statute - barred, since the debts remain legal;

indeed once the right to recover the debt by action has become barred, his

remedy will be to retain the securities.

In this respect the right of set - off differs from that of lien, since the

banker is not entitled to set - off a credit balance against a statute - barred

debt under English Law.

Lien may be particular or general. A particular lien is so called

because it confers the right to retain the goods in connection with which a

particular debt arose, whereas a general lien confers a right to retain goods,

not only in respect of the debt incurred in connection with them, but also

in respect of the general balance due by the owner of the goods to the

person exercising the right of lien. In other words a particular lien applies

only to one transaction, or certain transactions, whereas a general lien

extends to all transactions arising out of the course of dealing between the

parties.

25 London and Midland Bank v Mitchell (1899) 2 Ch 161

34

The principles of law and judicial precedents laid down in the old

cases Davis v Bowsher26 and Brandao v Barnett27 by the English

courts as far back as 1794 and 1846 respectively have become settled law

on the banker’s general lien and the English courts are still quoting these

precedents in their decisions, with particular reference to the banker’s right

to realise the liened property without intervention of court and to the legal

principle of classifying banker’s general lien as "implied pledge".

It is unambiguously established under English Law that banker’s lien

is an implied pledge and it includes a right of sale after reasonable notice.

The principles of English Law and judicial precedents of English ,

Courts discussed supra have to be profusely drawn since there are no .-- ------------- - \ — *

provisions relating to Lien in the Indian Contract Act, 1872 and English

Law is to be applied on grounds of justice, equity and good conscience28.

These principles and decision of English Courts help make an in - depth

analysis of the Indian Law relating to banker’s general lien.

26 (1794) 5 Term Rep 488, Court of King’s Bench

27 (1846) 12 Cl & Fin 787

Superintendence Co. of India v Krishna Narain AIR 1980 SC 1717 & Devendra Kumar Lai Chandji v Gulab Singh Nekhe Singh AIR 1946 Nag 114

28

35

Indian Law on Banker’s Lien

A lien is the right of the creditor in possession of goods, securities or

any other assets belonging to the debtor to retain them until the debt is

repaid, provided that there is no contract, express or implied, to the

contrary. The ownership of the property still vests in the debtor and the

possession remains with the creditor till the debt is discharged.

It was held in Alliance Bank of Simla Ltd v Ghamandi Lai

Gainilal29 that general lien confers only on holder the right to retain the

goods until the payment is made out but it does not carry with it the right

of sale to secure the debt. It is merely a right to retain the goods and does

not create right as in favour of a pledgee. This is not the exhaustive

definition of lien.

Indian Contract Act, 1872 is not exhaustive and deals with only

certain parts of law of contract. In cases where the law in terms is not

applicable the principles of English Law should apply as rules of justice,

equity and good conscience30. The sections of the Indian Contract Act, 1872

relating to lien are not exhaustive, and do not negative the existence of lien 9

in cases not specified therein.

29 AIR 1927 Lah 408

Devendra Kumar Lai Chandji v Gulab Singh Nekhe Singh AIR 1946 Nag 114

30

36

A possessory lien May be either i) Particular or ii) general. A

particular lien is confined to particular transaction in connection with the

property subject to lien. If a watch is given for repair, the repairer has the

right to retain the watch till his . charges are paid. Such type of lien exists

only as a security for the particular debt. On the other hand, general lien

empowers the possessor to retain possession until the whole debt or balance

in the account is paid. So far as the legal requirements are concerned, a lien

does not require any special agreement, written or oral, but it arises only

by operation of law.

Banker’s Lien

Banker’s lien is a general lien recognised by law. So far as the

concept of lien is concerned, it was being nurtured originally in England

with respect to bankers and it came to be known in India as spon as there

was development of the principles as applicable in England.

When the Indian Contract Act was being codified for enactment the

position regarding general lien was stated in the original Bill in the

following words :

"In the absence of any agreement to the contrary, bankers, factors

and wharfingers have no right to retain any goods bailed to them as a

security for a general balance of account".

37

It meant that bankers and others could not, as of right, claim general

lien; the agreement between the parties was required to stipulate such a

right being conferred on the bankers and others. In short, banker’s right of

general lien could be exercised only when the agreement with the borrower-

customers provided for such a right.

The select committee which commented upon the Bill did not favour

this position of conferring right of general lien on bankers and others only

by agreement. The select committee, in clause 22 of its Report, observed:

"No reason is given for the abolition of the general Hen in these cases,

and we think it expedient to alter the section 171 thus :

Bankers, factors, wharfingers, attorneys of a High Court and policy -

brokers may, in the absence of a contract to the contrary, retain, as a

security for a general balance of account, any goods bailed to them; but no

other persons have a right to retain, as a security for such a balance, goods

bailed to them, unless there is an express contract to that effect"31.

The recommendation of the select committee was accepted by

incorporating the amendment in the new section 171 of the Indian Contract

Act, 1872. General lien is now available, as of right, to five categories of

persons, namely, bankers, factors, wharfingers, attorneys of High Court and

policy brokers. The special feature of general lien is that it vests in the

above categories of persons an extended right not available to those

exercising only particular lien.

31 Gazette of India, Extraordinary, Calcutta, Thursday, 28th March, 1872

38

So far as Indian Law is concerned, banker’s general lien is covered

by section 171 of the Indian Contract Act, 1872.

If the dictum of Lord Campbell in Brandao v Barnett32 is followed,

then it is more than a general lien. It is an implied pledge. Whereas a lien,

general or particular, does not imply right to sell as a pledge does, the

banker can, in exercising the rights of a pledgee, sell or otherwise dispose

of the said securities to recover the amount which may be due to him and

such a right can be exercised in respect of all the securities that may be in

possession of the banker in the ordinary course of his business unless there

be an express contract or circumstance to show that there was an implied

contract inconsistent with lien.

Letter of Lien

A debtor frequently gives a banker, as security for an advance, a

letter of lien or charge upon goods in the hands of a third party. In the case

of In re Hamilton, Young & Co, ex p Carter,33 where a letter of lien

over goods in the hands of certain bleachers, accompanied by their receipt,

was given, it was held that the letter was a document used in the ordinary

course of business as a proof of the control of goods. The letter should

empower the banker to sell in default of payment of the debt.

32 (1846) 12 Cl & Fin 787

[1905] 2 KB. 77233

39

When an arrangement is made by which a certain amount in a

customer’s credit account is to be regarded as a security for an advance to

him on another account an agreement not to reduce the balance below the

amount agreed upon, should be signed by the customer. The document

should also authorise the banker to refuse payment of any cheques which

would reduce the balance on the credit account below the stipulated amount

and to combine the two accounts at any time without notice.

Negative Lien

A negative lien is a declaration by the borrower that the assets

mentioned therein are free and unencumbered and the said assets shall not

be sold, mortgaged, pledged, hypothecated or in any way encumbered

without the previous consent of the bank in writing.

Nature of Banker’s Lien

In State Bank of India, Kanpur v Deepak Malviya34, Allahabad

High Court held that pledge is only a form of bailment and all pledges are

bailment. The banker’s lien contemplated by section 171 of the Indian

Contract Act, 1872 is a specific provision relating to banker’s lien and has

an overriding effect on general provisions of section 174 which deals with

the relationship of pawnee and pawnor in respect of pledged goods. The

banker’s lien will carry over to such pledges and bank can retain pledged

goods, if the debtor had not cleared his obligation in connection with

34 AIR 1996 All 165

40

another loan. Even if the manager of the bank sent notice to the pledgor to

redeem the ornaments by payment of the amount due and the amount

having been paid by the pledgor, the bank is not estopped from claiming

any lien over the pledged ornaments.

In a recent case KSita v Corporation Bank, Kakinada35 before

the Andhra Pradesh High Court, the short question for decision was

whether the respondent Bank, while exercising Banker’s lien, has right to

retain the pledged gold ornaments, even after discharge of the particular

loan for the purpose of recovery of another loan subsequently advanced to

the petitioner by the respondent. The court followed the decision of

Allahabad High Court in SBI, Kanpur v Deepak Malviya36 and held

that banker’s lien contemplated by section 171 overrides the provisions of

section 174 which deals with pawnee - pawnor relationship in respect of

pledged goods. The bank can retain pledged goods if the debtor had not

cleared his amount in connection with another loan.

Earlier in England also the position was different and in Wilkinson

v London and County Banking Company31, it was assumed that a

customer was entitled to have the securities back from the bank which were

deposited for some specific advances.

35 AIR 1999 AP 367

36 AIR 1996 All 165

37 (1884) 1 TLR 63

41

In Re London and Globe Finance Corporation36, it was held

that securities deposited as cover for specific advances but after discharge

thereof, when left in banker’s hand become liable to general lien. Thus, we

can presume that banker’s general lien attaches to all goods and securities

deposited with them as bankers by a customer or by a third person on a

customer’s account, provided there is no contract, express or implied,

inconsistent with the lien. Reference may be made to Mercantile Bank v

Rochaldas39 in this regard. No separate agreement or contract is

necessary for the purpose. Inspite of this legal position, veiy often the

bankers ask for a letter of lien from the customer by way of abundant

caution enabling them to enjoy the security for all the debtor’s liabilities

arising in any manner, whatsoever, besides conferring a right on them to

sell such securities in case there is a default in the payment of debts. This

is to avoid the risk of a stand being taken by the customer that the

securities were given for a special purpose only.

Leading cases on Banker’s General Lien decided by Indian Courts

Exercise of Banker’s General Lien whether Criminal

breach of trust

Stephen v Chandra Mohan and others40 : The respondent

pledged certain ornaments with the bank as security and also signed an

agreement that the bank could treat the said ornaments as security for any

38 (1902) 2 Ch. 416, Fin 413

39 AIR 1926 Sind 225

(1990) 68 comp. Cas 63640

42

other transactions or liability. He stood a surety for a third person. He

repaid his own loan and asked the bank to return the ornaments. But the

bank refused to return the ornaments on the ground that the principal

debtor for whom he had stood surety had not repaid the loan and so the

bank was keeping the ornaments as security. Thereupon he filed a

complaint against bank under section 409 and 420 (criminal breach of trust

and cheating) of Indian Penal Code. Along with the complaint, the first

respondent made an application for search and seizure of the ornaments

from the bank and without any hesitance the magistrate granted the

prayer. The bank was searched and the ornaments were seized and

produced in court.

The Kerala High Court in this case held that the magistrate has

taken cognizance without due application of mind to the allegations in the

complaint in order to satisfy whether the allegations do constitute any

offence. In order to constitute an offence, there must be some act or

conscious omission which is made penal by any provision of law. Taking

cognizance on the basis of allegations which do not constitute any offence

is illegal. Issue of process and the consequent trial on the basis of such

cognizance will be nothing short of abuse of process of court. The first

respondent has no justification in filing the complaint. He was actuated by

malafides. It is the duty of this court to avoid the harassment by the trial

of such cases.

The High Court further held that under section 171 of the Indian

Contract Act, 1872, in the absence of a contract to the contrary, bankers

could retain, as security for a general balance of account, any goods bailed

43

to them. Even without any agreement executed by the borrower, the banker

could have retained the ornaments as security under section 171 of the

Contract Act without incurring the risk of commission of an offence of

criminal breach of trust because such retention is allowed by law and it

does not involve breach of any term of agreement.

The High Court quashed the complaint and ordered that the

magistrate will return the ornaments to the banker.

Seized Asset - whether Subject to Banker’s Lien

C.R.Narasimha Setty v Canara Bank and another41: This is an

interesting case on banker’s general lien decided by Karnataka High Court.

The appellant purchased a vehicle under a hire - purchase agreement

with the first respondent bank. Despite discharge of loan with interest, the

bank seized the vehicle holding that the appellant was a partner of a firm

which was liable to the bank on an open cash credit account and, the

partners of the firm had given an undertaking that the bank could hold the

vehicle as collateral security for the cash credit account. The trial court

affirmed the right of the bank to retain the vehicle under banker’s lien.

The High Court, on appeal, held that the vehicle was made available

only as a collateral security for the cash credit loan. The deed of

hypothecation of the vehicle did not give the bank a right to seize in the

41 (1992) 74 Comp. Cas. 162

44

event of default in payment of the cash credit loan and there was a contract

to the contrary disentitling the banker from exercising the general lien. The

High Court directed the bank to return the vehicle seized by it.

In this case, the bank probably lost since the vehicle did not come to

the possession of the bank in the course of banking business. It was rather

seized which cannot be termed as the normal course of banking business so

as to exercise right of general lien.

Banker’s Lien - whether Particular or General

Syndicate bank, Appellant v Vijay Kumar and others42: This

case decided by the Supreme Court settled the law as to the banker’s

general lien. In this classic judgment, the Supreme Court referred to

various authorities in English Law. The pertinent question that arose before

the Supreme Court was : what is the meaning of "Banker’s lien" in the legal

terminology and how it is understood and exercised in the banking system;

whether a banker’s lien is particular or general.

A customer having overdraft facilities with the bank obtained a Bank

Guarantee against the security of two fixed deposits. On the reverse of the

fixed deposit receipts, the bank officials noted "Lien to BG 11/80". While

tendering the fixed deposit receipts as security, the customer executed a

covering letter which contained, inter alia, the following clause:

42 AIR 1992 SC 1066

45

"The Bank is at liberty to adjust from the proceeds covered by 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

Bank so long as any amount on any account is due to the Bank from us for

the said M/s. Jullundur Body Builders singly or jointly with others".

The Supreme Court held that the recital in the covering letter as

extracted above established that a general lien was created in favour of the

Bank on the two FDRs. Merely because the two FDRs were also furnished

as security for the issuance of the Bank Guarantee, the general lien thus

created cannot come to an end when the Bank Guarantee is discharged. The

words "Lien to BG 11/80" on the back of the FDRs do not make any

difference. The contention of the customer that the Bank had only a

particular lien due to the words "Lien to BG 11/80" on the back of the FDRs

and on discharge of the Bank Guarantee the Bank lost the particular lien

was not accepted by the Supreme Court. The court held that the Bank can

exercise the right of general lien on these FDRs if there was a liability of

the customer due to the bank. While arriving at the decision, the Supreme

Court referred to the following principles of English Law :

In Halsbury’s Laws of England, Vol 20, 2nd Edition, Page 552,

Para 695, lien is defined as follows :

46

"Lien in its primary sense is 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 this primary sense it is given by law

and not by contract".

In Chalmers on Bills of Exchange, 13th Edition, Page 91 the

meaning of Banker’s lien is given as follows :

"A Banker’s lien on negotiable securities has been judicially defined

as an implied pledge".

& In Brandao v Barnett (1846) 12 Cl & Fin 787 it was stated as

under :

"Bankers most undoubtedly have a general lien on all securities

deposited with them as bankers by customers, unless there be an express

contract, or circumstances to show an implied contract, inconsistent with

hen".

The above passages go to show that by mercantile system the Bank

has a general lien over all forms of securities or negotiable instruments

deposited by or on behalf of the customer in the ordinary course of banking

business and that the general lien is a valuable right of the banker

judicially recognised.

Eventhough a security is given for a particular loan the banker can

exercise right of general lien over the security for the other liabilities of the

customer. Therefore banker’s lien is general lien.

47

In this judgment, the Apex court has also taken cognisance of the

concept "Banker’s general lien is an implied pledge" by reference to the

English Principles of law and judicial precedents.

The Board of Trustees of the Port of Bombay and others,

Appellants v Sriyanesh Knitters, Respondent®: This case before the

Supreme Court relates to exercise of general lien over goods by Port Trust

claiming classification as "wharfingers" under section 171 of the Indian

Contract Act, 1872.<\ .

The Supreme Court held that the general lien contemplated by

section 171 of the Contract Act enables the retention of the bailed goods as

security. Their retention does not give any power to sell the goods. In a case

where section 171 of the Contract Act applies, the wharfinger can only

retain the goods bailed as security and will have to take recourse to other*

proceedings in accordance with law for securing an order which would then

enable the goods to be sold for realisation of the amounts due to it.

The Supreme Court has commented on the general lien applicable to

a wharfinger in the aforesaid case under section 171 of the Contract Act.

The Branch Manager, Union Bank of India & another v Tele

Surya Rao44 : This case before the National Consumer Disputes Redressal

Commission, New Delhi relates to a consumer complaint under Consumer

Protection Act, 1986.

43 AIR 1999 SC 2947

1997 (3) All India Banking Law Judgments 6644

48

The complainant got a Fixed Deposit Receipt and then took a loan

against this FDR. The bank allowed the complainant encashment of the

FDR on maturity by mistake without recovering the loan. The complainant

obtained another Reinvestment Deposit with the maturity proceeds of the

first FDR. He demanded premature encashment of the Reinvestment

Deposit. The Bank refused to comply on the ground that it had a lien on the

Reinvestment Deposit for the loan advanced against the first FDR (already

encashed). Questions like application of Limitation Act to the right of lien

etc. were advanced.

The National Consumer Commission held that lien is a right of

defence, not right of action and therefore there is no question of bar of

limitation coming to the field of exercise of lien. Lien in its primary sense

is a right in the banker to retain that which is in his possession belonging

to another until certain demands of the person in possession are satisfied.

Where a customer deposited security with a Bank, the Bank is given a

general lien over the security. The banker’s lien gives the Bank a right of

all the moneys of the constituent in its hand so that they may be

transferred to whatever account the Bank chooses, to set - off or liquidate

the debt.

Therefore there is no deficiency in service on the part of the Bank in

declining to make payment of the Reinvestment Deposit without discharge

of the liabilities by the complainant of the earlier loan.

49

The Karnataka High Court in Smt. K.S.Nagalambika v M/s

Corporation Bank, Virajpet45 held that section 171 of the Indian

Contract Act, 1872 gives a general lien to the bank and it has got to be

recognised.

Banker’s Lien - whether an Implied Pledge in India

Lord Campbell in Brandao v Barnett46 said the rights acquired by

a banker by a general hen is an implied pledge. Section 171 of the Indian

Contract Act, 1872 mentions that a banker may retain any goods bailed

to him for general balance of account. In the case of bailment, especially

pledge, the pledgee is vested with the power to sell the pledged goods under

Section 176 of the Contract Act in default of

after giving a reasonable notice to the pledgor

So far as the banker’s power to sell the

is conferred on the banker by section 6(1) (f) of the Banking Regulation Act,

1949, which lays down that the bank may manage, sell and realise any

property which may come into its possession in satisfaction in part or in full

of any of its claims.

The Banker’s lien, in England, is recognised as an implied pledge. In

India, the right is only to retain any goods bailed to the banker but keeping

reliance on the Banking Regulation Act, 1949 which gives the power to sell,

the banker’s lien also amounts to implied pledge.

45 AIR 2000 Kant 201

ay the debt

concerned it

46 (1846) 12 Cl & Fin 787

50

Banker’s Lien and Limitations Act, 1963

In England, the effect of Limitation Act, 1980 is to bar the personal

remedy, not to discharge the debt. It does not affect property over which the

banker has a lien47. Similarly in India, the Supreme Court has held that

when a creditor has a lien over goods by way of security for a loan, he can

enforce the Hen for obtaining satisfaction of the debt even though an action

thereon would be time - barred48.

Circumstances when a Lien is not Available to Banker

Safe custody

Banks generally receive for safe custody, customer’s valuables, such

as securities, documents of title etc. Such articles, being regarded as those

left with the banker for a specific purpose, are not subject to banker’s

general lien either because the banker, in receiving the securities or

valuables for safe custody, is supposed to be acting as a bailee and not in

the capacity of the banker, or because the entrustment is for a special

purpose inconsistent with the assertion of the Hen49.

47 London and Midland Bank v Mitchell [1899]2 Ch. 161

48 Bombay Dyeing & Mfg Co. Ltd v State of Bombay AIR 1958 SC 328

Cuthbert v Roberts [1909] 2 Ch 226 CA49

51

Bills of Exchange or Documents Entrusted for Special Purpose

A good illustration of what is special purpose inconsistent with lien

is found in the case Greenhalgh (W.P.) & Sons v Union Bank of

Manchester50. In that case A sold goods to B and for the price A drew

bills of exchange on B which B accepted. B sold the goods in turn to C,

similarly drawing bills on C which C accepted. B handed C’s bills to the

defendant bank for collection with directions that the proceeds should be

utilised to meet the bills which B had accepted, payable at the defendant

bank. The defendant bank recognising the special purpose for which bills

bearing C’s acceptance were handed over for collection, opened a separate

account for them called the "Provisional Bills Account". The proceeds of the

bill accepted by C after collection were held not to be subject to the banker’s

lien as they were entrusted for a special purpose inconsistent with the lien.

Securities Allowed to Remain in Banker’s Hands after

Repayment of Loan Secured

This is an exceptional circumstance where the banker is allowed lien

on the securities left in the hands of the banker after the loan is repaid. It

was held in Re London and Globe Finance Corporation51 that if the

securities deposited for a particular loan are left with the banker after the

loan secured is cleared, the securities become subject to the banker’s lien as

the customer by leaving them is supposed to have re - deposited them.

50 (1924) 2 KB 153

(1902) 2 Ch 41651

52

Documents or Valuables Left in the Banker’s Hands

Inadvertently

No lien can arise on documents or valuables left inadvertently with

the banker, or on property which is placed in his hands with the object of

covering an advance which is not granted52.

Credit and Liability must be in the Same Rights

No lien arises on the current account balance or the deposit account

of a partner in respect of a debt due from the firm, as the credit on the one

hand and the liability on the other do not exist on the same rights53.

Similarly a banker cannot set - off any credit balance of a partnership

account against moneys due from one or more of its partners on their

individual accounts.

No Lien on Amounts not Due

No lien arises until the due date, in respect of an advance of a

specific amount made for a definite period, as there is not debt owing till

then nor can banker retain moneys of the customer against bills discounted

by him for the customer, but not yet due, except perhaps in the case of the

customer’s bankruptcy. In short, lien can be exercised only when the debt

is due.

52 Lucas v Dorrein (1817) 1 Moore C.P. 29

53 Wolstenholm v Sheffield Bank (1886) 54 LT 746

53

No Lien in Respect of Trust Account

There is also no right of lien in respect of a separate account

maintained by a customer which is known as a trust account54. This is an

exception to the banker’s right of general lien.

Most of these cases, although of English origin, arp Koincr fnlWmri w

the Indian Banking System.

Principles of English Law and a catena of English cases are

frequently referred by our High Courts and the Supreme Court while

adjudicating cases on Banker’s General Lien.

54 O.R.M. v Nagappa Chettiar 43 Bom. LR 440 (PC)