Thursday, 3 December 2015

Banking Awareness : What is Term "LIEN" in Banking?

Know about RIGHT OF LIEN:
  • Lien has been defined as the right of a creditor to retain the possession of the goods and securities owned by the debtor until the debt has been paid.
  • Lien does not include the right of sale of goods and securities.
  • Lien is available on goods and securities only (such as bills, cheque, promissory notes, share certificates, bonds and debentures).
(Lien is not available on deposits, since deposits are neither goods nor securities.)

Types of lien

Particular lien
In case of a particular lien  (section 170 of Indian Contract Act) the creditor gets the right to retain possession only of goods or securities for which the dues have arisen and not for other dues.
For example a watch repairer can withhold the delivery of watch until is charges of repairing the watch are paid to him.

General lien
A general lien (section 171), gives the right to the creditor to retain the possession till all amounts due from debtor are paid or discharged.
This is available to bankers, factors, wharfingers, attorneys of High Court and policy brokers only.

When the borrowers does not create any charge on assets in favor of the bank but gives an undertaking to the bank stating (a) that he is owner of a particular asset which is free from charges and (b) he will either not dispose off the asset or will not create charge on the asset, without concurrence of the bank, such undertaking is known as no-lien or negative lien .
It has no legal force and if assets are disposed off, the bank cannot claim any remedy in a court of law, Filling of particulars u/s 125 of companies Act 1956, when it is done by a company is not required.

  • Banker has right of general lien.
  • To exercise the right of lien the possession of property must be obtained lawfully in the capacity of a banker and not otherwise.
  • A banker can sell the securities after giving the debtor a reasonable notice.

Features of banker’s  general lien 

Implied pledge and right of sale
To create general lien, no special contract is required. It is always implied unless there is contract to the contrary. The right to sell is also available under bank`s right of lien because a banker`s general. Lien tantamounts to an implied pledge.

The right is not restricted or barred by Law of Limitation. The Act only bars the remedy through court and not discharges the debt, Hence, bank can recover time barred debts also.

The possession is with the bank but the ownership remains with owner.

Conversion to particular lien
If it is indicated through an agreement or otherwise  that a particular security was obtained for a particular debt only, the general lien gets converted into particular lien.

Criminal action 
When the banker exercises his right of general lien, under section 409 and 420 of Indian Penal Code no criminal action is available because there in no criminal intention behind it.

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