General Lien of Bankers: An overview

General Lien
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Introduction

Section 171 of the Indian Contract Law stipulates the right of “General lien”. The ordinary lien basically refers to the right to own property and securities provided by any balance payable by the bailor. Even if the principal debt has been repaid, the banker can hold securities for another account receivable from the customer. For example, “A” is customer in the bank having two accounts, one current and one savings account. He has an overdraft of Rs.1,000 in the current account but have a credit balance of Rs.10,000 in the savings accounts. The bank can exercise the rights of General Lien to hold savings account to get its money due on current account.

Principles        

Some of the basic principles governing the general lien of banker can be seen in the case City Union Bank Ltd v. Thangarajan[1].

  • The banker can exercise the right of general lien on all collaterals including negotiable instruments only to the extent of amount due by customer.
  • The bank has to repay the balance without any fail and should compensate the customer in case of loss suffered by him.

In the case of PNB ltd. V. Arura Mal Durga Dass[2], the court held that the ownership of the goods must be with the customer and the goods must be put as collateral with the bank to exercise general lien.

In Chettinad Mercantile Bank Ltd. v. PL.A. Pichammai Achi[3] the court held that the bank does not have general lien for the amount deposited by customer in the bank. However, principle of set off is applicable in this scenario.

Exceptions

There are some exceptional situations when general lien of banker is not applicable:

  •  When the amount payable is due from only one person, his term deposits with joint names cannot be held.
  •  When the amount due is withdrawn/taken from the other branch of the bank which does not have the securities directly.[4]
  •  When the securities are deposited for any specific purpose, the bank cannot exercise lien on it. In Brandao v. Barnett[5], securities were to be exchanged with new bills, hence it was for a specific purpose and bank cannot exercise general lien against it. However, the interest on securities is open against general lien.
    • Items kept for safe custody are also considered as deposited for a specific purpose (Bank of Africa and Cohen[6]).

Customer as a Surety

When the customer is a surety for someone else’s loan, banker’s lien works as:

  • In the case of Title Deeds: It was stated in the case of  Mangalore Catholic Coop Bank Ltd. v. M. Sundra Shetty[7] that if a property or title deed is mortgaged for a loan, bank cannot exercise general lien and cannot hold the property for someone else’s loan repayment. Karnataka High Court citing Paget’s Law of Banking said that “the lien should be for customers own securities”.
  • In the case of Goods: The customer shall be permitted to take back the securities after his repayment of amount due even if he is the surety to someone else’s loan which is due at that time. The same was stated in Vijay Bank v. Naveen Mechanized Constriction[8].

SARFAESI ACT 2002

According to The Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, the banker cannot exercise his rights of general lien in the case of pre-deposits made for an appeal. Unless and until the bank has consent from the depositor, they have to refund that pre-deposits on disposal of the appeal.

Other Aspects

  • Since the Contract act provides the right of lien to the bankers, bank does not need to make any agreement. Its upto the choice of the bank to get the agreement signed by the customer.
  • To exercise the right of general lien, goods or securities should be owned solely by the customer and should not be jointly named with others.
  • The right of general lien permits the bank to hold the securities even after the repayment. The bank will assume that the same property are to be taken as collateral for any other amount due by him.
  • If the customer has multiple accounts, the bank can use it interchangeably. In the case of Devendra Kumar v. Gulab Singh[9], the court held that the bank can use his deposit account to adjust his loan account.

References


[1] City Union Bank Ltd v. Thangarajan, (2003) 46 SCL 237 (Mad).

[2]  PNB ltd. v. Arura Mal Durga Dass, AIR 1960 Pun.632.

[3] Chettinad Mercantile Bank Ltd. v. PL.A. Pichammai Achi, AIR 1945 MAD.447.

[4] Syndicate Bank v. Devendra Karkera,  AIR 1994 Kant 1.

[5] Brandao v. Barnett, (1846) 12 CI & Fin 787.

[6] Bank of Africa and Cohen, (1902)2 Ch.129.

[7] Mangalore Catholic Coop Bank Ltd v. M. Sundra Shetty, (1987) 3 Kant LJ 21.

[8] Vijay Bank v. Naveen Mechanized Construction (P) Ltd, AIR  2004 Kant 199.

[9] Devendrakumar v. Gulabsingh , AIR 1946  Nag 114.

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