Banking News

What is the meaning of Right of Lien?

Meaning of Lien: Lien is akin to bailment. It is the right to retain goods or securities belonging to a debtor until dues are paid fully to the retainer (creditor). No special agreement is necessary for creating the right of lien. However a general lien may be created by special agreement.

Section148 of the Indian Contract Act 1872 deals with the definition of bailment.

“A bailment is delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed, according to the directions of the person delivering them.”

The person who delivers the goods is called the “bailor” and the person to whom they are delivered is called the “bailee”. The goods delivered for the purpose is called “bailed goods”.

The cloth given to tailor for stitching, gold given to goldsmith for making jewellary, Scooter given to mechanic for repair, leaving the cycle at cycle stand and so forth, are some of the common instances which creates the relationship of bailment.

Lien may be either (i) particular lien or (ii) general lien.

In particular lien, the debtor gives the rights to   creditors to retain only those specific securities or goods in respect of which dues are arisen. The general lien confers a right to retain the securities or goods in respect of all the dues payable to the creditors

Banker’s Lien: Banks are conferred with the right to retention of goods or security (  such as cheques, bill of exchange, deposits etc,) ,by way of general lien, until some claim attaching to it, is satisfied or discharged. The lien extends to all such documents under which money will or may be payable to the customer.

Section 171 of the Indian Contract Act 1872 reads “Bankers Lien” as under.

“Bankers, factors, wharfingers, attorneys of a High Court and policy- brokers may, in the absence of a contract to the contrary, retain as a security for 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 express contract to that effect.

Thus, Banks are entitled to exercise a general lien or right of retention over securities belonging to the customer whom the bank holds until all the dues from the customer is fully paid.

Negative Lien: Negative lien is an undertaking obtained by the banker, from the borrower that his assets (e.g land, building, machinery, stocks, etc.) mentioned is free from any charge or encumbrance and he would not create any charge or encumbrance on any of these assets in favour of third parties during the period of bank finance.

No lien letter: No lien letter is an undertaking from the premises owners (in case of rented premise) that he does not have lien on goods hypothecated to bank which is stored in his premises rented out to the borrower, towards his dues like rent receivable etc.

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