LIEN, ASSIGNMENT AND SET-OFF

                                                                                       

LIEN

Lien defined

            Lien signifies the right of a creditor in possession of goods or security belonging to a debtor to retain them until a debt due from the latter is paid.

            The right of lien arises in law out of business dealings between the parties - the person in possession of the goods or securities and the owner - and does not require any specific agreement, written or oral, to support it.

            It, however, presupposes two things.

-                      Firstly, the person vested with the rights of lien is in possession of the goods or securities in the ordinary course of business.

-                      Secondly, the owner has a lawful debt due or obligation to discharge to the person in possession of the said goods or securities.

In other words, a lien confers a right on the holder to retain goods or securities against the real owner until the debt or obligation for which the lien is exercised, is satisfied or discharged.

            Once the debt is satisfied or obligation discharged, the right of lien is extinguished and the property has to be returned to or kept at the disposal of the owner. Lien is an informal or indirect charge on security.

General lien and particular lien

            There are two kinds of lien,

(i)                 general and

(ii)               particular;

Under Section 171 of the Indian Contract Act, 1872,

(i)                 bankers,

(ii)               factors (mercantile agents),

(iii)             wharfingers (persons owning or taking care of wharfs or landing stages for loading/unloading vessels),

(iv)             attorneys of High Court, and

(v)               policy brokers can, in the absence of a contract to the contrary, exercise lien and relain security for a general balance of account any goods bailed to them.

(vi)             A general lien does not as a rule carry with it the right to sell the property.

The person exercising the lien has simply the right of retention till the dues are paid.

The case of a banker is, however, different. It will be considered in a subsequent paragraph.

In the absence of a contract to the contrary, a particular lien arises, where goods can be retained by the creditor in respect of a particular debt only.

The debt or obligation must have arisen out of some service rendered or labour or money expended on the goods on which the right of lien is to be exercised.

For example, a tailor has a particular lien for his charges on the clothes made by him for his customer.

A carrier has a lien on the goods transported by him for the freight on such goods.

Banker’s lien

            As already stated, a banker’s lien on customer’s goods and securities is recognised by law unless there is a contract, express or implied, inconsistent with the lien.

            Convention and legal decisions have further extended the implications and scope of this right.

            In Brandao vs. Barnett (1846) 12 CL. and Fin. 787, Lord Campbell stated that “bankers have a general lien on all securities deposited with them as bankers by a customer, unless there be an express contract, inconsistent with lien.

A banker’s lien is more than a general lien; it is an implied pledge”.

            It, therefore, follows that the bank can exercise all the rights of a pledgee in case of banker’s lien.

            In the event of default by the customer, the bank has a power of sale without filing a suit against the customer in a court of law, but a reasonable notice is a question of fact depending on the circumstances of each case.

            The banker has also to discharge the responsibilities of a pledgee in the case of banker’s lien.

            For example, he will have to take proper care of the goods and securities as a pledgee.

            It has to be considered as to what securities may be the subject of a banker’s lien. 

            The lien extends only to such securities as a banker ordinarily deals with for his customer.

            The securities should also be owned by the customer in his own right.

            When defining the scope of banker’s lien, Hart says that it is “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 them to whom they belong, or who had the power of disposing them of when so delivered, is indebted to the banker on the banker of the balance of the account between them, provided the circumstances in which the banker obtained possession do not imply that he had agreed that this right shall be excluded.”

            The banker thus has the general lien on

(i)                 bills or cheques deposited for collection or

(ii)               pending discount, warrants for dividends paid under mandate or

(iii)             socurities deposited or

(iv)             secure a specific loan but left in his hands after the loan has repaid.

In the latter case, the securities become subject to general lien as the customer by leaving them with the banker is supposed to have redeposited them.

The banker’s general lien will not be extended to securities.

(a)                received for sale,

(b)               deposited upon a particular trust although the trust fails,

(c)                left in his hands after an advance against them has been decliend,

(d)               deposited to secure the specific loan, or

(e)                left inadvertently with him.

A banker cannot also exercise a lien on securities or valuables lying in a locker rented to the customer in the bank’s safe deposit vault.

Regarding bank’s general lien on securities deposited for safe custody, there are two views. Whereas in Paget’s opinion, banker’s lien does not extend to securities deposited for safe custody, Hart seems inclined to make a wider view of the scope of the banker’s lien in such a case.

In deciding whether a particular security is subject to a banker’s lien, the test is how the said security came into the hands of the banker.

If the security is handed over to him in the ordinary courses of business and not for a special purpose inconsistent with the lien, the banker can exercise his right of general lien over the security.

The banker’s right of lien is not barred by the law of limitation which sets a particular time limit for filing a suit.

The debt remains though it cannot be recovered through a court process.

As such, banker’s lien continues over the security irrespective of the fact that the period of limitation has expired. The banker may, therefore, retain the security.

It may be stated that a banker does not have lien over the credit balance lying in a customer’s account. The banker’s right in such a case is a right of ‘set-off.

Letter of lien

No letter or agreement is necessary to create a banker’s general lien. Banks are vested with this right under Section 171 of the Indian Contract Act, 1872.

A bank, however, as a matter of abundant caution, sometimes requires a customer to give a letter of lien enabling it to regard as security for an advance - present or future - any securities held in any other advance given to the customer.

The letter of lien also authorises the bank to sell the securities in default of payment of the debt and apply the proceeds thereof towards the satisfaction of any indebtedness of the customer. The securities were deposited by him for a special purpose inconsistent with lien.

In fact, such a letter combines in it the right of lien with the right of set-off.

A letter or an agreement more or less on the same liens as indicated above, is taken when a customer’s credit balance, or a part of it, is to be held as security for an advance to another customer.

Negative Lien

The banker sometimes asks a borrower to execute a letter declaring that his assets are free from encumbrance at the time the advance is made.

The borrower also undertakes that the assets stated in the said letter shall not be encumbered or disposed of without a bank’s permission in writing so long as the advance continues.

This undertaking is known as a negative lien.

Usually the arrangement is drafted in the form of an agreement. In case the borrower is a limited company, the declaration and the undertaking are incorporated in a resolution of the Board and a certified true copy thereof given to the bank.

In Bank of India vs. R.F. Cowasjee (A.I.R. 1955 Bom. 419, November), it was held that a negative lien is in the nature of personal assurances or undertaking which, although of binding effect, give no right to the promissee, say, the creditor, to proceed against the property itself by bringing it for sale.

It would thus be seen that a negative lien, where no right of the nature of encumbrance is created, does not amount to a charge. As such, the provisions of Section 125 of the Companies Act, 1956 relating to registration of charges would have no application to the case.

Lien on company’s own shares

            Where an advance is made by a banker (say, X) on the security of shares of a company (say, Y), it should be remembered that the company (Y) will probably have, under its articles of association, a first and paramount lien upon its own shares for any indebtedness of the shareholder to it (Y).

            Such lien is not debarred by the law of limitation so long as the indebtedness exists, although its recovery by suit may have become time-barred (Unity Co. Pvt. Ltd. vs. Diamond Sugar Mills and others (1970)2 Comp. L.J. Calcutta).

Lien and set-off distinguished

            The banker’s right of lien can be exercised on the money lying with him so long as it is earmarked.

            Where it has ceased to be such a separate earmarked sum, the bank has no lien but the right of set off.