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.
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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.
