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Right of General Lien

One of the important rights enjoyed by a banker is the right of general lien. Lien means the
right of the creditor to retain the goods and securities owned by the debtor until the debt due
from him is repaid. It confers upon the creditor the right to retain the security of the debtor
and not the right to sell it . Such right can be exercised by the creditor in respect of goods and
securities entrusted to him by the debtor with the intention to be retained by him as security
for a debt due by him (debtor).

Lien may be either (i) a general lien or, (ii) a particular lien. A particular lien can be
exercised by a craftsman or a person who has spent his time, labour and money on the goods
retained. In such cases goods are retained for a particular debt only. For example, a tailor has
the right to retain the clothes made by him for his customer until his tailoring charges are paid
by the customer. So is the case with public carriers and the repair shops. A general lien, on
the other hand, is applicable in respect of all amounts due from the debtor to the creditor.
Section 171 of the Indian Contract Act, 1872, confers the right of general lien on the
bankers as follows:

“Bankers… may, in the absence of a contract to the contrary, retain as a security for a general
balance of account, any goods bailed to them.”

Special Features of a Banker’s Right of General Lien

(i) The banker possesses the right of general lien on all goods and securities entrusted to him
in his capacity as a banker and in the absence of a contract inconsistent with the right of lien.
Thus, he cannot exercise his right of
general lien if –
(a) the goods and securities have been entrusted to the banker as a trustee or an agent
of the customer; and
(b) a contract – express or implied – exists between the customer and the banker
which is inconsistent with
the banker’s right of general lien. In other words, if the goods or securities are entrusted for
some specific purpose, the banker cannot have a lien over them.
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(ii) A banker’s lien is tantamount to an implied pledge: As noted above the right of lien does
not confer on the creditor the right of sale but only the right to retain the goods till the loan is
repaid. In case of pledge the creditor enjoys the right of sale. A banker’s right of lien is more
than a general lien. It confers upon him the power to sell the goods and securities in case of
default by the customer. Such a right of lien thus resembles a pledge and is usually called an ‘
implied pledge’. The banker thus enjoys the privileges of a pledge and can dispose of the
securities after giving proper notice to the customer.

(iii) The right of lien is conferred upon the banker by the Indian Contract Act: No separate
agreement or contract is, therefore, necessary for this purpose. However, to be on the safe
side, the banker takes a letter of lien from the customer mentioning that the goods are
entrusted to the banker as security for a loan—existing or future—taken from the banker and
that the latter can exercise his right of lien over them. The banker is also authorized to sell the
goods in case of default on the part of the customer. The latter thus spells out the object of
entrusting the goods to the banker so that the same may not be denied by the customer later
on.

(iv). The right of lien can be exercised on goods or other securities standing in the name of
the borrower and not jointly with others. For example, in case the securities are held in the
joint names of two or more persons the banker cannot exercise his right of general lien in
respect of a debt due from a single person.

(v) The banker can exercise his right of lien on the securities remaining in his possession after
the loan, for which they are lodged, is repaid by the customer, if no contract to contrary
exists. In such cases it is an implied presumption that the customer has re-offered the same
securities as a cover for any other advance outstanding on that date or taken subsequently.
The banker is also entitled to exercise the right of general lien in respect of a customer’s
obligation as a surety and to retain the security offered by him for a loan obtained by him for
his
personal use and which has been repaid.

In Stephen Manager North Malabar Gramin Bank vs. ChandraMohan and State of
Kerala,
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●​ Loan agreements allowed banks to retain ornaments for present & future liabilities.
●​ Surety’s liability is joint & several → ornaments could be retained.
Section 171 of the Contract Act entitles a banker to retain the goods bailed to him for any
other debt due to him,

Syndicate Bank v. Davander Karkare (AIR 1994 Karnataka 1)

●​ Possession is essential for lien. Without possession, lien cannot be claimed.

Exceptions to the Right of General Lien

As the right of lien can be exercised by a banker on the commodities entrusted to him in his
capacity as a banker and without any contract contrary to such right. Thus the right of lien
cannot be exercised in

the following circumstances:

(a) Safe custody deposits. When a customer deposits his valuables – securities, ornaments,
documents, etc. – with the banker for safe custody, he entrusts them to the banker s a bailee
or trustee with the purpose to ensure their safety from theft, fire, etc. A contract inconsistent
with the right of lien is presumed to exist. For example, if he directs the banker to collect the
proceeds of a bill of exchange on its maturity and utilize the same for honouring a bill of
exchange on his behalf, the amount so realized will not be subject to the right of general lien.
Similarly, if a customer hands over to the banker some shares with the instruction to sell them
at or above a certain price and the same are lying unsold with the banker, the latter cannot
exercise his right of lien on the same, because the shares have been entrusted for a specific
purpose and hence a contract inconsistent with the right of lien comes into existence. But if
no specific purpose is mentioned by the customer, the banker can have a lien
on bills or cheques sent for collection or dividend warrants, etc. If the security comes into the
possession of the banker in the ordinary course of business, he can exercise his right of
general lien.

b) Specific purpose deposits

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●​ Eg- Shares given to sell at a certain price.

●​ Bills/documents deposited for collection and crediting proceeds to account.

c) Contracts inconsistent with lien

If the borrower directs the bank for a specific use (e.g., to pay certain bills), bank cannot
exercise a lien.

General principle cases

London Joint Stock Bank v. Simmons (1892) Bank’s lien extends to all securities in its
hands unless agreement to contrary.
Brandao v. Barnett (1846) Banker’s lien is a general lien, applying in absence of special
contract.