Final Bankerr's Lien

7/31/2019 Final Bankerr's Lien

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BANKING LAW-I

BANKERS LIEN

Submitted to: Submitted by:

Ms. Seema Siddiqui Siddhant Jaiswal

Faculty Law Roll No. 135

B.A.LL.B(Hons)

V Semester


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ACKNOWLEDGEMENT

I would like to take this opportunity to express my gratitude and sincere thanks to Miss. Seema Siddiqui

faculty of Banking Law, Dr. Ram Manohar Lohiya National Law University, whose immense knowledge

about the subject and guidance helped me to complete this project successfully. Also her valuable

suggestions were fruitful in giving the shape to this project.

Siddhant Jaiswal


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INDEX

Introduction.4

Concept & Source ofBankersLien..5-8

Types of Lien.9

Indian Law & Bankers Lien..10-11

Matters Out of The Purview of Lien12-13

Indian Contract Act 1872Section 17114-15

Lien overMoney..16

The Right To Set Off...17

The Relationship Between Lien and Set Off18-19

Conclusion.20 -21

Bibliography22


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INTRODUCTION

Initially when the banking sector was expanding, it was noticed that many of them were unwilling to loan

amounts for a longer duration of time period or to certain class of people who are unable to provide

securities so as to make sure that the banker does not incur loss. As the trends changed, the banking sector

was opening up and agreeable to granting loans for long period and which extended to all classes of the

society. However, the banks skepticism in lending has transformed itself into a new form, where the banks

require very strong and safe securities which the banker would retain till the loan was paid off by the

customer. The banks have a varied range of customers and it is obvious that the securities received by it to

act as a guarantee against the loan would also be varied. Some kinds of securities are considered better than

the other kinds of securities for the obvious reason that the title of the borrower on such securities is very

clear and when such title is handed over to the bank it protects the banks interest against any loss due to

non-payment of loans taken against these securities1.

These securities can be taken in form of lien, pledge and mortgage, in all the three cases, the banker merely

creates a charge on the property and does not own right in or on the property. His rights are only extended

till the time the borrower does not discharge his debt2. However, unlike in case of pledge, in order to

exercise lien, the title of the security must clearly vest with the borrower.

The general rule regarding lien is that the creditor through the duration of lien is the position of a

constructive trustee or actual trustee, which means that he holds the security for the borrower till the

borrower pays off his debt. By the general rule of lien, the ownership of the security still vests in the owner

and the creditor cannot sell it. The securities which are accepted by the banks are those which are accepted

in the ordinary course of the business by him, these include negotiable instruments which may be endorsed

to the banker and subsequently he may collect from the person who issued the instrument.

In lay mans term, this taking of security in order to protect the interest of the bank for the loan it granted

could be loosely called as lien.

1Sheldon and Filders Practice and Law of Banking, (11

th Edn., P.J.M.Fidler Ed., McDonald & Evans: London, 1982) at 292

2Ibidat 293


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CONCEPT & SOURCE OF BANKERS LIEN

The concept of bankers lien stems from the general section of liens according to which the right of the lien

is limited to the debt of the debtor and does not extend to the property itself. Therefore it is clear that once

the debtor clears his debt, his property is no longer subject to the lien of the creditor. This was also laid

down in case as old as theAlliance Bank of Simla Ltdv. Ghamandi Lal Gaini Lal3

The origins of bankers lien can be traced back to the England, the bankers lien was originally lex

mercatoria , this means that the concept was initially a trade practice which after years was deemed to be a

part of the common law remedy. The earliest case to recognise that the merchants created this law is

Brandao v. Barnett4, it was here that the Court addressed the issue of bankers lien directly to say that

Bankers most undoubtedly have a general lien on all securities deposited with them as bankers by a

customer, unless there is express contract or circumstances that show an implied contract, inconsistent

with the lien5

The same case also saw Lord Campbell stating that When a general usage has been judicially ascertained

and recognised, it becomes part of the law merchant, which courts of justice are bound to know and

recognise.

With respect to the Indian context, the concept of bankers lien is codified under the Indian Contract Act

1872, Section 171. The section deals with general lien and the different people who can execute the general

lien under this section.

NATUREUnder the general lien, the creditor does not have a right in or on the property or security in this case, and

the right of lien is limited in the sense that once the debt is discharged, the creditor has no right over the

property. More importantly, the creditors limited right in property does not extend to him selling the

3AIR 1927 Lah 408 at 410

4(1846) 12 Cl & Fin 787

5Halsburys Laws of England, Vol. 28, (4th Edn., Lord Mackey Ed., Lexis Nexis: London, 2008)at 221


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security. However, the case of bankers lien is an interesting exception which allows the banker to sell the

security. By this it can be concluded that the nature of the bankers lien is that of an implied pledge6.

The distinction between ordinary lien and implied pledge does not matter if the securities under the

bankers custody are bills, notes, cheques because by virtue of Section 43 of the Negotiable Instruments

Act 1881, the banker is deemed to be holder of the instrument and can claim the amount due under lien

upon realisation of these securities7. Although, if the banker is dealing in bearer bonds, coupons or share

warrants as security for lien, the nature of lien is that of pledge which entitles the banker to sell them if the

customer defaults in payment. Default is to be understood in two situations, first, if the transaction has a

condition that stipulates the customer to discharge the debt within specific time period and the customer

does not do that within time specified; second, if there is no time condition then whenever the banker

demands from the customer to repay and if the customer is unable to pay. However for the second situation

the banker has to comply with the reasonable notice requirement without which the banker cannot sell

the securities.

The case which serves as an example is Vijay Kumarv. Jullunder Body Builders and Others8, here the

Plaintiff had to pay certain amount to the Registrar of Court and for that his banker gave him a guarantee

letter against the fixed deposit receipts which act as security for the guarantee. Subsequently, executing

proceedings are initiated against the Plaintiff and during the attachment the fixed deposits are also attached.

The bank raised an objection and the Court ruled in their favour saying that the by custom, the bank has the

right over all the securities that the customer deposits with the banker in the due course of business and

hence the bank has the right to sell these securities as there is default on behalf of the banker.

SCOPEThe bankers lien is based on the practice of merchants which later turned into law due to usage. Hence

while exercising the bankers lien there is no specific agreement required which allowing the banker to

give him the right to lien. Therefore one can say that in normal circumstances, banker has the right to

execute lien on the security without there being agreement. In fact, so strong is the usage that, if a customer

wants to be exempt of this customary trade practice, he must effect an agreement with the banker

6 P. Ramanatha Aiyar,Advanced Law Lexicon, Book 3,(3rd Edn., Justice Y.V. Chandrachud Ed., Wadhwa and Co: Nagpur,

2005) at 2736

7 M.L.Tannan, Tannans Banking Law and Practice in India, (21st Edn., Wadhwa & Co: Nagpur: 2005) at 281

8(1983) 54 Comp Cas 125


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specifically prohibiting the banker from exercising any lien on the security or show that there exists an

intention which proves that the customer does not want the banker to exercise his right to lien on the

securities. To determine the question of intention, one has to look at the facts of the case and the decision is

arrived upon keeping in mind the circumstances of the transaction between the banker and customer.

The condition to execute the lien is that the banker must have procured the securities due to his position of

being a banker and in the due course of the business. In the case ofDavis v.Bowshel9

the Courts held that

if the securities were deposited with the banker for a specific reason, then the banker cannot exercise a lien

on it. In order to determine whether the banker has acted in course of his business, it is not possible for the

Courts to lay down a test; this determination depends on the facts and circumstances of each case. The facts

are to be read in light of general practice of bankers, agreement drawn between banker and customer and

lastly, the way in which the transactions have been held between the banker and customer must also be

examined.

InBank of New South Wales v.Ross, Stuckey and Morawa, the Courts held that lien is executed to secure

the debt incurred by the customer at any one time. But it is the ubiquitous view that by virtue of express

contract or by implied circumstances showing intention to negate the right to lien, the customer can limit

the applicability of lien.

The concept of bankers lien is implemented on collaterals, i.e. documents, securities etc which are

deposited by the customer to the banker in due course of business.

For the purpose of the bankers lien, it is established that the lien can only be exercised on property when

the borrower has clear title on the securities and has possession. Hence if the securities are actually owned

by a third party but are deposited with the banker by the customer and if the banker is aware that the

securities belong to a third party, then he cannot exercise lien on it.

The right to execute lien started from customary usage and today it has gained statutory basis. It has alsobeen established that in order to exercise a lien, a specific agreement is not needed. The rule is that general

lien can be executed if there is a debt to be paid. The exception is that to limit the right to lien, certain type

of action is required on behalf of the customer. The requirements to be satisfied for lien are brought out in

the case of Firm Jaikishen Dass Jinda Ram v. Central Bank of India10, the facts of the case are, there

9(1794) 5 Term Rep 488

10 AIR 1960 Pun 1


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existed two partnership firms managed by the same partners, and however for purpose of business, they

had separate bank accounts. The bank drew a lien on accounts of one firm for the debt of another. The

Court allowed this practice because in law these firms seemed to be one entity and could not be

distinguished from the firms partners. The court also said that the nature of relationship between the

banker and customer is that of mutual dependency which means that the customer can demand which has

been deposited by him in bank and other side of coin the banker also has right to keep securities with him

for the loans forwarded to the customer by the bank. Hence we see mutual demand of banker and customer

is an essential prerequisite for bankers lien. In this case, we see the facts show that there was mutual

dependency and hence banker can draw lien on the firms accounts.

In case the customer is unable to pay the debt we have seen that the uniqueness of bankers lien allows the

banker to sell the securities to realise the debt. The lien also protects the banker if these are competing

claims with regard the same securities. However, these aspects have certain restrictions. Firstly, if the

customer deposits securities to which he does not own good title, then the bankers lien cannot be executed.

However, if the securities are negotiable instruments, then the bankers lien may apply if the banker can

prove that he obtained the securities in good faith and paid adequate consideration. Secondly, the law

protects the honest third party over the banker if the money is loaned to customer after the security has

been sold/ mortgaged or assigned to third party, then the bankers lien cannot operate.


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TYPES OF LIEN

Lien can be divided into general and particular lien. The particular lien is a specific lien exercised as a right

when the amount due is for a specific work done. Particular lien can be defined by saying, it is a right to

retain the property of another for some particular claim or charge upon the identical property detained.

This can be contrasted with the general lien where the creditor exercises a lien over the securities for the

amount so borrowed by the debtor. It is not regarding a specific transaction or object. A general lien is

considered weak in nature for it can be brought in force due to a contract, express or necessarily implied

or by custom or usage of trade of the parties. The general lien is defined as the right to retain the

property ofanother to secure a general balance due from the owner

There are about 8 types of general lien namely attorneys lien, bankers lien, common law lien, equitable

lien, maritime lien, printers lien and statutory lien. An attorneys lien is for the cost of his services and the

attorney can withhold the papers of the client till the clears his dues. The bankers lien is exercised by the

banker over the securities of the customer for any dues he might have. Common law lien as discussed

earlier entails the person to hold the property till debt is cleared; it does not give the right to sell the

property. The equitable right denotes a change or encumbrance of one person upon the property of

another, this right is different from what the statute confers upon the person and its origins are based in

equity.The next lien is the maritime lien, this type of lien is not to be understood as that under common

law, but is a civil law concept and hence for executing maritime lien, the party need not be in possession of

the property. The concept of printers lien is a right in rem only a particular court can enforce it. On copies

of a particular work, when there is balance due, the printer of these copies can enforce a lien on it called the

printers lien by which he can withhold these goods till the debt is cleared off by the person getting the

work printed. The last category of lien is the statutory lien which is basically codification of liens which are

available under the common law. Statutory lien is, however, very difficult to apply because the person

wanting to execute the lien has to follow all the conditions without any default.


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INDIAN LAW AND BANKERS LIEN

Having seen the scope of bankers lien, we now move on to the principles governing bankers lien. This

chapter will also look at matters which fall with the realm of bankers lien and matters on which lien

cannot be executed. The chapter also delves into the Indian law regarding bankers lien that is Section 171

of the Indian Contract Act 1872.

PRINCIPLES

1. Due Course of Business -

As early as 1945 Courts ruled that bankers lien means the banker can keep the securities with him which

was deposited by the customer. As mentioned in the earlier chapter and as the Courts have ruled in the caseofChettinad Mercantile Bank Ltd. v. PLA Pichammai Ach

11i and another, one of the important conditions

of the bankers lien is that the banker must have received the securities in due course of the business. The

right automatically arises unless there is an express agreement to the contrary.

2. Ownership of securities -

The other very important principle is that the securities which are deposited by the customer with the

banker must have clear ownership and good title with the customer, if there is not ownership of securities,

banker cannot exercise the lien of these securities. This principle is reiterated in the case of Punjab

National Bank Ltdv.Arura Mal Durga Das and another12.

3. Limitation on lien

The lien is only applicable on the securities which have been entrusted to the custody of the banker. At this

point it is essential to point out the difference between set off and lien, while lien is limited to the securities

deposited with banker, set off is with regard to specific amount of money and can have its basis in lex

mercatoria or law. Hence it can be concluded that if there is a loan taken by a partner of a firm, the banker

cannot draw lien on the securities of the partnership firm. It is pertinent to quote Hart when he says

The word lien cannot properly be used in reference to the claim of the bank upon a general deposit, for

the funds on general deposit is property of the bank itself. The term set off should be applied in such cases

11 AIR 1945 Mad 447

12AIR 1960 Pun 632


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and lien when a claim against paper or valuables on special or specific deposit is referred to. In the cases

the words are used very loosely the practical effect of lien and set off is much the same 13

Halsbury with regard to same thing says the general lien of bankers is part of the law merchant as

judicially recognised, and attaches to all securities deposited with them as bankers by a customer, or by a

third person on a customers account, and to money paid in by, or to the account of, a customer unless

there is a contract, express or implied, inconsistent with the lien. Money is however not usually the subject

of lien not being coupled or being earmarked and the bankers claim in such cases is probably more rightly

referred to as set off and it has been held that a bank has no lien to individuals right to set off in respect of

a customers account.

4. If money is deposited in the bank by the customer, then the banker can directly adjust it against the loan

given to the customer and need not draw a lien on the money. Here we see that the need to draw a lien on

such money is taken care by the principle of set off. In this regard, the principle of set off and lien are

related to secure debts incurred by the customer.

5. As mentioned several times before, the banker has the right to a lien by virtue of practice and law,

however this right is not absolute and can be restricted by an agreement. The burden of proof of proving

the contract rests on the party who alleges that there is a contract in existence. Case in point is Vijay Kumar

v.Jullundur Body Builders and Krishan Kishore v. United Commercial Bank.

6. When the customer repays the debt which he owes to the banker, but does not take custody of the

securities again, the banker retains the right over them, in the sense that he obviously cannot sell them, but

in future if the customer takes a loan he will retain the right to draw a lien on the same securities. Also it is

said that in case the customer owes a debt to the banker on general account, even then the banker by virtue

of principle of set off or bankers lien can adjust the debt against the securities or the customers account.14

13S.N.Gupta,Banking Law in Theory and Practice, (2

ndEdn, Universal Book Traders: Delhi, 1992) at 442

14M. Hapgood,Pagets Law of Banking, (Butterworths: London, 1992) at 503


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MATTERS OUT OF PURVIEW OF LIEN

A banker can exercise lien on almost all securities subject to the conditions aforementioned. As mentioned

above, the banker can only exercise lien on securities which he received during the course of his business.

If the customer had deposited securities with the banker for a specific purpose then the banker cannot draw

a lien on it. Since the securities were deposited for a specific purpose, it shows the implicit existence of an

agreement limiting the lien and hence lien cannot be exercised. When the securities are handed over to the

banker for a specific purpose, the banker assumes the role of a bailee and not of a banker.

Even in this case, the law is the protector of the innocent third party and does not let the customer or the

banker take advantage of any misrepresentation or fraud committed by the customer. In case where the

customer does not have a clear title on the securities and it is found that the securities actually belong to a

third party, then the banker must return the securities to the third party even if he would suffer loss because

of the customer.

With regard to safe custody rule, the case in point is Leese v.Martins15, here the Courts clearly laid down

that bankers lien is only applicable if the customer deposits the securities in due course ofbusiness. If the

securities are given with the intention of safe keeping then the banker cannot exercise a general lien on it.

In Latham v. Chartered Bank of India16

the Court held that if the security taken by the banker is a

documentary bill, then in case if the bill is dishonoured the banker cannot hold this against any other

security which the customer has. This is due to the fact that the documentary bill was given, in this case,

specifically for the purpose of bankers lien.

An important question regarding lien is the time factor, when does exactly the lien come in operation?

When a debt is incurred by the customer for a specific purpose, then till the date of repayment, the

securities deposited with the bankers will not be under the lien. The reasoning behind this is that till the

date when the customer is supposed to pay, strictly speaking, it cannot be said that the customer owes the

banker the money. The only exception to this is bankruptcy, that is, in the unfortunate event that the

customer goes bankrupt, the banker can exercise lien over securities deposited even before the time to

repay the loan has arrived.

15(1873) LR Eq 224

16 (1874) 17 Eq 205


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Authors are very clear about the fact that the title deed cannot be attached to the bankers lien and hence

the banker cannot sell this security even if it has been deposited with the banker by the customer in the

ordinary course of business.


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INDIAN CONTRACT ACT 1872SECTION 171

Section 171 of the Indian Contract Act 1872 (hereinafter to referred to as the ICA) reads as follows

Section 171

General lien of bankers, factors, wharfingers, attorneys and policy brokers

Bankers,

factors, wharfingers, attorneys of a high court and policy brokers may, in the absence of 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 balance, goods bailed to them, unless there is an

express contract to that effect.

The section makes it very clear that only those people listed under the statute are to have the right to

exercise a general lien for the purposes of security against the loan. Any other person, if so wishes to obtain

a right to lien for purpose of gathering security must have an express agreement stating the same.17

The section codifies all the principles and scope which are discussed above and in the first chapter. The

right which the banker has under this section is a very general right, however unless the special statue

specifically excludes the application, Sec. 171 would apply.18

It is mentioned several times that the securities upon which the banker exercises his lien are for his

protection against the debt of the customer. Also it is noticed that the lien can only attach once the time for

repayment has accrued. Sometimes, due to delay in time, the action in form of litigation may be barred due

to the Limitation Act, however the banker can still sell the securities upon which he has lien and redeem

the debt which the customer owes to him. This is one of the advantages of the bankers lien that it is not

barred by limitation.

In the case ofState Bank of India v.Deepak Malviya19

held that if a particular amount of sum is due to the

bank by a customer and there is another account of the customer in the same bank, then the banker can

adjust the amount due from the other account too. Also in case of negotiable instruments, upon maturity

and once time of repayment comes, if the customer defaults in repaying, the banker can sell the securities

and keep the proceeds.

17 Pollock and Mulla,Pollock and Mullas Indian Contract and Specific Relief Acts, Vol. 2, (13

thEdn, R.C. Padia Ed., Lexis

Nexis Butterworths: New Delhi, 2006) at 2016

18Ibidat 2017

19 AIR 1996 All 165


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As mentioned earlier, for a property to be attached under lien, the banker can only do so if the customer has

good title for the property. However, an exception to this rule can be seen in case the securities are in case

of money or negotiable instruments, defect in the title of the customer does not make a difference to the

security. The banker can still attach a lien on them, irrespective of the rights of the third party. Here enters

a caveat which states that the banker must act honestly and should not be aware of that the customer does

not have good title on the security.

However, once the defect in title or the interests of the third party in such securities is known to the banker,

he can no longer take the defence of honesty and clean hands. Once the element of knowledge is attributed

to the banker regarding the title, the banker cannot execute a lien.


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LIEN OVER MONEY

The Indian legislation does not definitely deal with the bankers lien over money. However, judicial

interpretation has shown that money is a security upon which the banker may exercise the general lien.

However, the Courts have ruled in the case ofRadha Raman Choudhary v. Chota Nagpur Banking

Association Ltd20

. that to attach lien on money, the sum of money should be very specific and that the lien

cannot attach on the entire current account.

In case of fixed deposits, the situation and line of thinking is such, the money is deposited by the customer

with the banker and hence is a stricto jure loan to the bank. A line of thinking is that after the customer

deposits the money into the bank, the bank becomes the borrower and the customer is a creditor. The

ownership of the money is no longer with the customer and a duty is cast upon the banker to repay the

amount when the fixed deposit matures. Hence, if the customer has taken a loan from the bank, the banker

can adjust this loan amount from the fixed deposit by virtue of a lien.21

The Indian judiciary have not been very kind to this view of lien, the Courts have reasoned this out and

said that the nature of the lien is such that the security or property is only held as surety for the debt

incurred by the creditor while the ownership of the property still remains with the debtor. Partially, the

Courts agree that in a fix deposit the customer is the creditor and the bank is the debtor but that is where the

similarity in thinking ends. The Courts rule that lien can only be exercised by the creditor, in case of fixed

deposits the bank is the debtor and hence it cannot apply the principle of bankers lien and use the money

in the fixed deposit to clear the debt of the customer.

The Courts while dealing with lien on money have been hesitant to use the term bankers lien and prefer

to call it set off as its nature is such. Therefore it is important to see the linkage between set off and

bankers lien which will be dealt with in the third chapter.

20 AIR 1944 Pat 368

21State Bank of India v.Javed Akhtar Hussain AIR 1993 Bom 87


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THE RIGHT TO SET OFF

The right to set off cannot be described comprehensively without proper reference to the various forms that

it can take, however, in the most basic sense, a right to set off can be described as the setting of money

cross claims against each other to produce a balance. Hence the essence of the right to set off is the

existence of cross demands.

A bankers right to set off is his right to combine any two accounts of the customer in the same bank. Out

of these two accounts one can be a loan account and the other a current account, or both can be current

accounts. The bankers right of set off arises in cases where a customer has more than one account with the

same bank and one of the accounts has negative balance whereas the other has positive balance.22

The right

of set off is the right of the bank to utilize the funds available in the account with positive balance to satisfy

the deficit of funds in the account with negative balance. This right of set off is, as observed by Roskill J in

Westminster Bank Ltd v. Halesowen Presswork and Assemblies Ltd23

., analogous to the exercise of the

bankers right of lien.

what is sometimes called the right to set off and sometimes the right of combination or of consolidation of

accounts but the manifestation of or a right analogous to the exercise of the bankers right of lien, a right

which is of general application and not in principle (apart from the special agreement whether express or

implied) limited to current or other similar accounts.

22 S. R. Derham, The Law of Set Off, (3

rd Edn., Oxford University Press: New York, 2003)

23 (1971) 1 All ER 33 at 47


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THE RELATIONSHIP BETWEEN LIEN AND

SET OFF

The universal recognition of the bankers right to look to a deposit for repayment of the depositors

indebtedness had led courts to call it a bankers lien. This misuse of the language to describe a combination

of accounts as a lien was laid to rest in Halesowen Presswork and Assemblies Ltd. v. Westminster Bank

Ltd. The distinction was made on two accounts. Firstly, while a customers securities are properly subject

to a bankers lien, his general deposit is not. In such a case the relationship between the bank and the

customer is of the debtor-creditor type, hence, the money deposited becomes the property of the bank. A

bank cannot have a lien on its own property.

Secondly, the two rights were of different origin. The bankers lien owes its origin to the law of merchants,

while the right to combine accounts developed from the procedural rights of set-off which are available to

the bank as a debtor. The bankers right of set-off has transcended procedural significance, however,

despite the distinctions laid down in this case, courts and the commercial world treats the bankers right to

set off as substantially equivalent to a bankers lien.24

Even though the two may not be the same, as per Lord Cross, in the House of Lords25

, the recognition of

the courts of the right of the banker to treat several accounts as one may have been influenced by their

earlier recognition of the bankers lien. The close connection between a lien and a set off can be shown by

taking an example of a cheque paid in for collection in circumstances where the customers general balance

is in debit. In such a case the bank has a lien over the cheque. However, the bank is not relieved of its duty

to present the cheque for payment. Even if the bank parts with the cheque for collection it does not lose the

lien over the cheque. It is still in the constructive possession of the bank, until it is paid or, if dishonored,

returned to its actual possession. The lien continues for that time. If the instrument is paid and the proceeds

credited to an account in credit, there is substitution for the lien by right to set off.

The difference is in the scope of the lien and a set off. The scope of the lien has been better explained by

Beevor J. in Radha Raman Choudhary v. Chota Nagpur Banking Association Ltd. According to

observation, a bankers lien can only attach to money so long as it remains an earmarked sum of money,

24See Generally, Right Of Bank To Set Off Deposit Against A Depositors Debt Despite Undisclosed Equity Harvard Law

Review, April, 1925

25(1972) AC 785 at 810


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i.e. it is still the property of the customer. Where it ceases to be such a separate earmarked sum of money

and is represented only by a balance of account or debt due from the bank, a lien cannot be continued.

However, the bankers right of set off will not be disturbed. Also a lien arises if the customer is indebted on

the general balance whether or not there is an agreement to keep accounts separate, but if there is such an

agreement and the proceeds are paid into an account in credit, the banker cannot affect a set off.


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CONCLUSION

The concept of bankers lien comes from Section 171 of the ICA. It is a well established fact that the

concept of bankers lien originated from trade usage which the Courts later accepted as a part of Lex

mercatoria which basically means the law of merchants.

The statutory basis of bankers lien can be located under the ICA and we can see that it contains an

exhaustive list of the people who can exercise a lien. The Act is based on lex mercatoria and allows the

people listed under it a lien without an express agreement. In fact, the customary usage of this type of lien

is so strong that in order to negate the lien, the customer must have an express agreement with the banker

or the nature of transactions should be such that it implies that the banker would not have a lien on the

securities of the customer.

The nature of lien is that of an implied pledge. The bankers lien unlike other types of lien is unique in the

sense that the banker after the time of repayment passes and gives notice, can sell the securities in order to

redeem the amount loaned to the customer.

One very important aspect of the bankers lien is the fact that the banker must receive the securities from

the customer in the due course of business. This means if the banker has been trusted with the securities for

a specific purpose or safe keeping, the lien cannot be drawn by the banker. The other limitation with regard

to the bankers lien is that in situations where the customer has taken an advance from the banker and

deposited securities with the banker, the Courts have held that this security would only be for the amount

specifically taken and not for any other amount that the customer may have taken or will take. The caveat

to this limitation is that suppose the customer leaves securities with the banker for a specific loan amount,

subsequently he repays the loan amount but does not take the securities in his possession again. The Courts

have interpreted this to mean that the banker may now exercise a general lien with respect to the same

securities. However, this is subject to the intention of the customer. If the customer has inadvertently left

the securities in the custody of the banker even after repaying the loan amount, the Courts have held that

the banker cannot exercise general lien on it because the securities were left in his custody for a specific

purpose.

Section 171 of the ICA embodies all the principles of the bankers lien in them. The Act does not confer

any new rights but reiterates the rights established by the law of merchants. However the section is a

general section and unless a special statue rules out the application of this section, ICA would continue to

apply in this regard.


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The tricky part in a lien is with respect to money, one school of thought believes that lien is only to be

exercised on the property or securities and that money is not within the purvi ew of the bankers lien.

However, the other school of thought believes that there is nothing that prohibits usage of money as

bankers lien in statute or in law of merchants. We see that judicial interpretations are not very comfortable

with using the term lien with regard to money and prefer to use the term set off which flows from the

nature of transaction between the banker and the customer.

For a long time the combination of accounts, or a set off, by the banker was considered to be a bankers

lien. However, this view was negated finally in theHalesowen case. The reasoning for this is that when any

amount is deposited in the bank it becomes the property of the bank and a person cannot have a lien on his

own property. The distinction between lien and a set off is that of the scope. A bankers lien is only present

so long as the monies deposited in the bank remains an earmarked sum of money. Where it ceases to be

such a separate earmarked sum of money and is represented only by a balance of account or debt due from

the bank, a lien cannot be continued.

Even though the difference has been laid down, the judiciary is of the view that the right to set off is

analogous to the right to lien. The House of Lords was of the view that the recognition of the bankers right

to combine accounts owes its existence to the recognition of the bankers lien.

It has been judicially mandated that a set off can be done even without a notice to the customer. However,

this is only true when there is no express or implied agreement to the contrary. The judicial authorities are

ample on this issue. On the other hand a bankers lien does not need any form of agreement. As soon as the

securities are deposited the bankers has a lien over it. However, just the existence of the lien does not give

the banker the right of sale of the securities without the consent of the parties. In this manner, a set off

seems to a better way to get back the amount, as the combination of two accounts can be done by the

banker without giving notice to the customer. However, unlike a lien and sale, it requires two accounts to

be present, where one measures the indebtedness of the customer, and the other is a credit account.


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BIBLIOGRAPHY

1. L.C.Goyle, Law of Banking and Bankers, (Eastern Law House: New Delhi, 1995).2. M. Hapgood,Pagets Law of Banking, (Butterworths: London, 1992).3. M.L.Tannan, Tannans Banking Law and Practice in India, (21st Edn., Wadhwa & Co: Nagpur:

2005).

4. P.Ramanatha Aiyar, Advanced Law Lexicon, Book 3, (3rd Edn., Justice Y.V. Chandrachud Ed.,Wadhwa and Co: Nagpur, 2005).

5. Pollock and Mulla,Pollock and Mullas Indian Contract and Specific Relief Acts, Vol. 2, (13th Edn,R.C. Padia Ed., Lexis Nexis Butterworths: New Delhi, 2006).

Documents

Final Bankerr's Lien