DR.

RAM MANOHAR LOHIYA NATIONAL

LAW UNIVERSITY
Final Draft

TABLE OF CONTENTS
 INTRODUCTION

 ORIGIN AND NATURE OF LIEN

 TYPES OF LIEN

 CONCEPT OF BANKER’S LIEN

OCTOBER 19th

BANKER’S LIEN
2012
SUBMITTED TO – Mr.D.P.S RATHORE

FACULTY OF LAW

RMLNLU

SUBMITTED BY – ABHISHT HELA

ROLL NO.- 07

SEM- V
  SOURCE OF BANKER’S LIEN

 NATURE – IMPLIED PLEDGE

 INDIAN LAW AND BANKER’S LIEN

 PRINCIPLES

 MATTERS OUT OF PURVIEW OF LIEN

 INDIAN CONTRACT ACT 1872 – SECTION 171

 LIEN OVER MONEY

 THE RIGHT TO SET OFF.

 THE RELATIONSHIP BETWEEN LIEN AND SET OFF

 CONCLUSION

 BIBLIOGRAPHY

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’ scepticism 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 securities.

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 debt. 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 man’s 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.’

ORIGIN AND NATURE OF LIEN

The origins of the lien can be traced back to the common law, it is the right that is given to a
person “to retain that which is rightfully and continuously in his possession belonging to
another until the present and accrued claims of the person in possession is satisfied”

The nature of lien is very limited; it only is a right which can be exercised on the possession of
personal property till the owner of the property discharges the amount which is due from him to
the person executing the lien. In common parlance the word ‘lien’ is used in a legal sense to
mean having a “charge or claim on property, either real or personal, as security for the payment
of some debt or obligation”. It is often mistaken to understand that with regard to lien, the right
of the person is on or in the property, however, the fact of the matter is that lien is more in nature
of charge which is created by virtue of the person being in debt of the person executing a deb.

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 of another
to secure a general balance due from the owner”.

For the purpose of this project, the researcher’s will focus on the general lien with respect to the
banker’s lien. There are about 7 types of general lien namely attorney’s lien, banker’s lien,
common law lien, equitable lien, maritime lien, printer’s lien and statutory lien. An attorney’s
lien is for the cost of his services and the attorney can withhold the papers of the client till the
clears his dues. The banker’s 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
pos2session of the property. The concept of maritime 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 printer’s 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.

Having given the basic introduction to the types, nature and origin of lien, the researchers will
now move on to the main part of the project.
CONCEPT OF BANKER’S LIEN
As mentioned earlier, the concept of banker’s 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 the Alliance
Bank of Simla Ltd v. Ghamandi Lal Gaini Lal.

SOURCE OF BANKER’S LIEN

The origins of banker’s lien can be traced back to the England, the banker’s 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. Barnett, it was here that the Court addressed the issue of banker’s
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 lien”

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 banker’s 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.

NATURE – IMPLIED PLEDGE

As is sufficiently discussed, under 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 creditor’s limited
right in property does not extend to him selling the security. However, the case of banker’s lien
is an interesting exception which allows the banker to sell the security. By this it can be
concluded that the nature of the banker’s lien is that of an implied pledge.

The distinction between ordinary lien and implied pledge does not matter if the securities under
the banker’s 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 securities.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 Kumar v. Jullunder Body Builders and Others,
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.

INDIAN LAW AND BANKER’S LIEN

Having seen the scope of banker’s lien, we now move on to the principles governing banker’s
lien. This chapter will also look at matters which fall with the realm of banker’s lien and matters
on which lien cannot be executed. The chapter also delves into the Indian law regarding banker’s
lien that is Section 171 of the Indian Contract Act 1872.

PRINCIPLES
 Due Course of Business -

As early as 1945 Courts ruled that banker’s 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 case of Chettinad Mercantile Bank Ltd. v. PLA Pichammai Achi and another[,
one of the important conditions of the banker’s 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.

 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 Ltd v. Arura Mal Durga Das and another.

 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 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”.

 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.

 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.

 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 by Paget 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 banker’s lien can adjust the debt against the securities or the
customer’s account.

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. Martins, here the Courts clearly
laid down that banker’s lien is only applicable if the customer deposits the securities in due
course of business. If the securities are given with the intention of safe keeping then the banker
cannot exercise a general lien on it.

In Lucan v. Dorrein[ the customer approached the banker with title deeds as security for loan to
be granted to him. However, the banker did not approve the loan and the customer unconsciously
left the documents with the banker. The banker later used these title deeds as security for the loan
the same customer had earlier taken. The Court held that the debt by the customer in a general
account cannot be paid off by using these deeds.
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.

Authors are very clear about the fact that the title deed cannot be attached to the banker’s 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.

Having seen the principles that guide the banker’s lien and the specific exclusions to which a
banker’s lien cannot be attached, to conclude the chapter, the paper will discuss the Indian law
regarding to this which is codified under Section 171 of the Indian Contract Act 1872

INDIAN CONTRACT ACT 1872 – SECTION 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.

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.

In the case of State Bank of India v. Deepak Malviya 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.
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.

LIEN OVER MONEY

The Indian legislation does not definitely deal with the banker’s 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 of Radha Raman Choudhary v.
Chota Nagpur Banking Association Ltd. 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. Paget’s 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.

The Indian judiciary have not been very kind to Paget’s 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 using Paget’s view of thinking, 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 banker’s 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 ‘banker’s 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 banker’s lien which will be dealt with in the third chapter.
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 banker’s 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 banker’s 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. 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 Ltd., analogous to the exercise of the banker’s 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
banker’s 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.”

THE RELATIONSHIP BETWEEN LIEN AND SET OFF

The universal recognition of the banker’s right to look to a deposit for repayment of the
depositor’s indebtedness had led courts to call it a banker’s 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 customer’s securities are properly subject to a banker’s 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 banker’s 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 banker’s right of set-off has transcended
procedural significance, however, despite the distinctions laid down in this case, courts and the
commercial world treats the banker’s right to set off as substantially equivalent to a banker’s
lien.

Even though the two may not be the same, as per Lord Cross, in the House of Lords, 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 banker’s lien. The close connection between a lien
and a set off can be shown, as shown in Paget’s Law of Banking, by taking an example of a
cheque paid in for collection in circumstances where the customer’s 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 substituted for the
lien a 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[80]. According to observation, a banker’s lien can only attach to money so long as it remains
an earmarked sum of money, 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 banker’s 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.

CONCLUSION
The subject matter of this paper is the concept of banker’s lien, the paper traces the origin and
moves on to the recent basis of the banker’s lien being the Section 171 of the ICA. As mentioned
earlier, it is a well established fact that the concept of banker’s 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 banker’s 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 banker’s 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 banker’s 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 banker’s 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.

Section 171 of the ICA embodies all the principles of the banker’s 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.

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 purview of the
banker’s lien. However, the other school of thought believes that there is nothing that prohibits
usage of money as banker’s 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.

BIBLIOGRAPHY

 ARTICLE

 “Right Of Bank To Set Off Deposit Against A Depositor’s Debt Despite Undisclosed
Equity” Harvard Law Review, April, 1925.
 BOOKS

 E.P.Ellinger et al, Ellinger’s Modern Banking Law, (4th Edn., Oxford University Press:
New York, 2006).

 L.C.Goyle, Law of Banking and Bankers, (Eastern Law House: New Delhi, 1995).

 M.L.Tannan, Tannan’s Banking Law and Practice in India, (21st Edn., Wadhwa & Co:
Nagpur: 2005).

 T.S.Ventatesa Iyer, Iyer’s The Law of Contracts and Tenders, Vol. 1, (9th Edn., Dr. V.
Krishnamachari Ed., S.Gogia & Company: Hyderabad, 2004).