Sasi K.G.

01. INTRODUCTION

The assignment given to me is to answer the following

1. Can a banker exercise lien in the following cases?

a) A cheque for collection.

b) A bar of gold deposited for safe custody.

c) Fixed deposit receipt jointly held by X and Y for the amount due from X to the bank.

In this regard two pieces of legislation are noteworthy.

Indian Evidence Act

Sn. 117. Estoppel of acceptor of bill of exchange, bailee or license:

No acceptor of a bill of exchange shall be permitted to deny that the drawer had authority to draw such bill or to endorse it; nor shall any bailee or licensee be permitted to deny that his bailor or licensor had, at the time when the bailment or licence commenced, authority to make such bailment or grant such licence.

Explanation 1: The acceptor of a bill of exchange may deny that the bill was really drawn by the person by whom it purports to have been drawn.

Explanation 2: If a bailee delivers the goods bailed to a person other than the bailor, he may prove that such person had a right to them as against the bailor.

Indian Contract Act

Sn. 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 a 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.

These two provisions along with customs give shape to the concept of Banker’s Lien.

02. BANKER’S LIEN

01. Rights of a Banker

Following are the major rights that a banker can exercise on his customer.

· Right of Lien

· Right of set-off

· Automatic right of set off

· Right of Appropriation

· Right to charge interest

· Right to charge service charges

02. Right of Lien of a banker

The right of a creditor (Bank) to retain goods and securities owned by the debtor bailed (as security) to the bank until the loan due from the debtor is repaid is called the right of lien. But the banker can insist on lien only in the absence of an agreement to the contrary. The creditor (bank) has the right to maintain the security of the debtor but not to sell it. There are two types of lien:

· Particular Lien

· General Lien

03. Particular Lien

Particular lien is one, in that the craftsman can retain those goods on which he has spent time, effort and money until he is paid. In Particular lien the creditor doesn’t have the right to retain all the properties of the debtor.

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 area paid by the customer. So is the case with public carriers and the repair shops.

04. General Lien

General lien gives the banker the right to retain goods and securities delegated to him in his capacity as a banker, in the absence of a contract contradictory to the right of lien. It extends to all goods/properties placed with him as a banker by his customer which are not particularly identified for another purpose. A general lien is applicable in respect of all amounts due from the debtor to the creditor.

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).

01. 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. These exceptional cases are discussed later on.

(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 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, the loan agreement authorized the bank to treat the ornaments not only as a security for that loan transaction, but also for any other transaction or liability existing or to be incurred in future. As the liability of the surety is joint and several with that of the principal debtor, such liability also came within the ambit of the above provision of the agreement.
Section 171 of the Contract Act entitles a banker to retain the goods bailed to him for any other debt due to him, i.e., any debt taken prior to the debt for which the goods were entrusted as security.
But in a lien there should be a right of possession because, lien is a right of one man to retain that which is in his possession belonging to another. Possession of the goods by the person claiming right of lien, is anterior to the exercise of that right and for which possession whether actual or conductive is a must. (Syndicate Bank v. Davander Karkare (A.I.R. 1994 Karnataka 1)

05. Cases in which lien cannot be exercised

In the following cases lien cannot be exercised.

· If the goods and securities have been entrusted to the banker as a trustee or an agent

· If a contract exists between the banker and the customer that is contradictory with the banker’s right of general lien

A banker’s lien is more than a general lien, it is an implied pledge and he has the right to sell the goods in case of default. The right of lien is granted upon the banker by the Indian Contract Act and it helps to avoid the need of a separate agreement. To be in a safe position the banker should take a letter of lien stating that the goods/ properties are entrusted as security for a loan at present and in future and that the banker can exercise his lien on them. The banker can also sell the goods if the customer doesn’t make the payment (defaults).

· The banker can exercise the right of lien only on goods standing in the name of the borrower and not jointly with others.

· The banker can exercise his right of lien on securities remaining in his possession after the loan for which they were lodged is repaid by the customer only if there is no contract to the contrary.

06. Exception to the Right of lien

The following are the general exceptions to Banker’s Lien.

· The banker cannot exercise the right of lien on valuables entrusted to the banker as a bailee or trustee.

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.

· Right of lien is not applicable on documents deposited for a special purpose or with specific instruction that the earnings are to be utilized for a specific purpose.

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 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.

Where the bills of exchange or other documents have been handed over by the customer with specific instructions to utilize their proceeds for the specific purpose banker has no general lien.

· The banker’s general lien is displaced by circumstances that show an implied agreement contradictory to the right of general lien.

Banker’s right of general lien is displaced by circumstances which show an implied agreement inconsistent with the right of general lien. In Vijay Kumar v. M/s. Jullundur Body Builders, Delhi, and Others (A.I.R. 1981, Delhi 126), the Syndicate Bank furnished a bank guarantee for Rs. 90,000 on behalf of its customer. The customer deposited with it as security two fixed deposit receipts, duly discharged, with a covering letter stating that the said deposits would remain with the bank so long on any amount was due to the Bank from the customer. Bank made an entry on the reverse of Receipt as “Lien to BG 11/80.” When the bank guarantee was discharged, the bank claimed its right of general lien on the fixed deposit receipt, which was opposed on the ground that the entry on the reverse of the letter resulted in the right of a particular lien, i.e., only in respect of bank guarantee.

The Delhi High Court rejected the claim of the bank and held that the letter of the customer was on the usual printed form while” the words written by the officer of the bank on the reverse of the deposit receipt were specific and explicit. They are the controlling words, which unambiguously tell us what was in the minds of the parties of the time. Thus the written word which prevail over the printed “word”. The right of the banker was deemed that of particular lien rather than of general lien.

· The banker has no right of lien on securities held in Trust.

The banker cannot exercise his right of general lien over the securities deposited by the customer as a trustee in respect of his personal loan. But if the banker is unaware of the fact that the negotiable securities do not belong to the customer, his right of general lien is not affected.

· The banker has no right of lien on securities left with the banker negligently or unintentionally.

The banker does not possess the right of lien on the documents or valuables left in his possession by the customer by mistake or by negligence.

· The banker doesn’t have the right of lien on securities deposited as a trustee in respect of his personal loan.

The banker’s right of lien extends over goods and securities handed over to him. Money deposited in the bank and credit balance in his/her account does not fall in the category of goods and securities. Therefore the banker can use his right of setoff as opposed to lien with regard to money deposited with him.

· The right can be exercised only on the customer’s property and not on joint accounts the customer.

Banker cannot exercise a lien on properties held on joint accounts of the customer against the liabilities of only one of such account holders.

· The banker cannot have the right to exercise the lien when the debt has not matured.

The banker cannot exercise his right of lien over the securities lodged with him for securing a loan, before such loan is actually granted to him.

· The banker cannot exercise the lien when he can exercise set off.

The banker’s right of lien extends over goods and securities handed over to the banker. Money deposited in the bank and the credit balance in the accounts does not fall in the category of goods and securities. The banker may, therefore, exercise his right of set –off rather the right of lien in respect of the money deposited with him. The Madras High Court expressed this view clearly as follows:

The lien under Section 171 can be exercised only over the property of someone else and not own property. Thus when goods are deposited with or securities are placed in the custody of a bank, it would be correct to speak of right of the bank over the securities or the goods as a lien because the ownership of the goods or securities would continue to remain in the customer. But when moneys are deposited in a bank as a fixed deposit, the ownership of the moneys passes to the bank and the right of the bank over the money lodged with it would not be really lien at all. It would be more correct speak of it as a right to set-off or adjustment.” (Brahammaya vs. K.P. Thangavelu Nadar, AIR (1956), Madras 570)

· No lien on stolen bond.

A banker has no lien on a stolen bond given for sale, if the true owner claims it before the sale is effected.

· No lien until the due date of a loan

When a specific amount is given as loan for a definite period, no lien arises until the due date. The reason is that no debt arises till that date. In the same way, a banker cannot retain any money belonging to the customer against any I discounted which are not yet matured. The reason is that no liability arises till the date of maturity. Moreover, even on the date of maturity, this liability may or may not arise.

· No lien on title deeds of immovable properties

The banker cannot exercise his lien over the title deeds of immovable properties submitted by the customer. The title deeds of immovable properties. However, the banker can recover his dues in a civil proceeding against such properties.

· No lien on balance in the deposit account of a partner in respect of debt due from the firm.

07. Some Case Laws on Banker’s Lien

01. Currie v. Misa (1867) App. Cas. 554 (H.L.)

Where the holder of a bill has a lien on it arising either from contract or by implication of law, he is deemed to be a holder for value to the extent of the sum for which he has a lien. A banker has lien on all securities and valuables of his customer, which come into his hands in his capacity as banker in the ordinary course of business.

02. Lloyds Bank v. Administrator General of Burma, AIR 1934 Rangoon

The law gives inter alia, a general lien to the bankers

03. State Bank of Travencore v. Bhargavan 1969 Kerela 572

To claim a lien, the banker must be functioning qua banker under Section 6 of the Banking Regulation Act.

04. Jaikishen Dass Jinda Ram v. Central Bank of India Ltd AIR 1960 Punj.1

Two partnership firms with the same set off partners had two separate accounts with the Bank. The Court held that the bank was entitled to appropriate the monies belonging to a firm for payment of an overdraft of another firm. Because although two separate firms are involved they are not two separate legal entities and cannot be ‘distinguished from the members who compose them. Mutual demands existed between the bank on the one hand and the persons constituting firm on the other. Nor it could be said that these demands did not exist between the parties in the same right.

05. Purewal & Associates and another V. Punjab National Bank and others (AIR 1993 SC 954)

The court can interfere in the exercise of the Bank’s Lien. Where the debtor failed to pay dues of the bank which resulted in denial of bank’s services to him, the Supreme Court of India ordered that the bank shall allow the operation of one current account which will be free from the incidence of the Banker’s lien claimed by the bank so as to enable the debtor to carry on its day to day business transactions etc. and the liberty was given to bank to institute other proceedings for the recovery of its dues.

06. State Bank of India v. Javed Akhtar Hussain

The action of the bank in keeping lien over the TDR and RD accounts was unilateral and high handed and even it is not befitting the authorities of the State Bank of India .The court relied on the ruling Union Bank of India V. K.V.Venugopalan where it was held by the court that the fixed deposit money lodged with the bank is strictly a loan to the bank. The banker in connection with the FD is a debtor .The depositor would accordingly cease to be the owner of the money in fixed deposit .The said money becomes money of the bank, enabling the bank to do as it likes, that however, with the obligation to repay the debt on maturity .In the same ruling it was further held that the bank being a debtor in respect of the money in FD, had no right to pass into service the doctrine of banker’s lien and the money in Fixed Deposit.

07. State Bank of India Kanpur v. Deepak Malviya (AIR 1996 All 165)

Section 174 of the Act contemplates that in the absence of a contract to the contrary the Pawnee is under an obligation to return the goods pledged for any debt or compromise for which the goods were pledged. This is a general provision providing for the relationship of a pawnee and a pawner in respect of pledged goods. Section 171 of the Act, providing for banker’s lien, is a specific provision, which has an overriding effect on this general provision, as such, the banker’s lien is also extended to the pledged goods.

08. Chettinad Mercantile Bank Ltd. v. PL.A.Pichammai Achi AIR 1945 Mad. 445

1) Banker’s lien is the right of retaining things delivered into his possession as a banker if and so long as the customer to whom they belonged or who had the power of disposing of them when so delivered is indebted to the banker on the balance of the account between them provided the circumstances in which the banker obtained possession, do not imply that he has agreed that this right shall be excluded. Banker’s lien can properly be said to arise only in respect of any of the securities held by the bank, the bank has a lien over these securities and it could hold them against the amount due by the customer.
2) It is necessary that the ownership of a thing, which is in possession of the bank, must be with the customer and held by the bank as a security otherwise the bank can exercise no right of lien. PNB Ltd.v. Arura Mal Durga Dass (AIR 1960 Pun.632.)

3) A bank may not be able to exercise any right of lien over the money deposited by the customer inasmuch as by itself becomes the owner of the money deposited ,but still it has the right to adjust such amounts against any debts due to from the customer. The purpose of lien in such cases is attained by the application of the principle of set off. (AIR 1945 Mad.447)

4) The banker’s lien is subject to any contract to the contrary and one alleging it must prove the existence of such a contract.

5) An insight into the matter of City Union Bank Ltd V. Thangarajan (2003)46 SCL 237 (Mad) it is pertinent to state certain principles with respect to Banker’s lien that was observed.
a) The bank gets a general lien in respect of all securities of the customer including negotiable instruments and FDR s, but only to the extent to which the customer is liable. If the bank fails to return the balance, and the customer suffers a loss thereby, the bank will be liable to pay damages to the customer. In the present matter the Court has based its decision on the principle that in order to invoke a lien by the bank, there should exist mutuality between the bank and the customer i.e. when they mutually exist between the same parties and between them in the same capacity. Retaining the customer’s properties beyond his liability is unauthorized and would attract liability to the bank for damages.

09. Syndicate Bank v. Vijay Kumar and Others, AIR 1992 SC 1066

The Supreme Court upheld the right of bankers’ lien and right of set-off, holding that these are of mercantile custom and are judiciously recognized.

The bank has general lien over all forms of securities or negotiable instruments deposited by or on behalf of the customer in the ordinary course of banking business and that the general lien is valuable right of the banker judicially recognised and in the absence of an agreement to the contrary, a Banker has a general lien over such securities or bills received from a customer in the ordinary course of banking business and has a right to use the proceeds in respect of any balance that may be due from the customer by way of a reduction of customer’s debit balance. In case the bank gave a guarantee on the basis of the two FDRs it cannot be said that a banker had only a limited particular lien and not a general lien on the two FDRs.It was hence held that what is attached is the money in deposit amount. The banker as a garnishee, when an attachment notice is served has to go before the court and obtain suitable directions for safeguarding its interest.

10. Official Liquidator, Hanuman Bank Ltd. v. K.P.T. Nadar and Others 26 Comp Cas 81

A banker’s right of set off cannot be exercised after the money in his hands has been validly assigned or in any case after he has been notified of the fact of an assignment.

11. Radha Raman Choudhary v. Chota Nagpur Banking Association Ltd (1945) 15 Comp.Cas.4 (Pat)

The banker’s right of lien can attach to the money so long as it is earmarked. Where it has ceased to be such a separate earmarked sum, the bank has not the right of set off.

There is a distinction between a banker’s lien and the bank’s right to set-off. A lien is confined to securities and property in bank’s custody. Set-off is in relation to money and may arise from a contract or from mercantile usage or by operation of law.

12. Alliance Bank of Simla Ltd v. Ghamandi Lai Gainilal AIR 1927 Lah 408

General lien confers only on holder the right to retain the goods until the payment is made out but it does not carry with it the right of sale to secure the debt. It is merely a right to retain the goods and does not create right as in favour of a pledgee. This is not the exhaustive definition of lien. Indian Contract Act, 1872 is not exhaustive and deals with only certain parts of law of contract.

13. Devendra Kumar Lai Chandji v. Gulab Singh Nekhe Singh AIR 1946 Nag 114

In cases where the law in terms is not applicable the principles of English Law should apply as rules of justice, equity and good conscience. The sections of the Indian Contract Act, 1872 relating to lien are not exhaustive, and do not negative the existence of lien in cases not specified therein.

14. In re Hamilton, Young & Co, ex p Carter [1905] 2 KB. 772

A debtor frequently gives a banker, as security for an advance, a letter of lien or charge upon goods in the hands of a third party. Where a letter of lien over goods in the hands of certain bleachers, accompanied by their receipt, was given, it was held that the letter was a document used in the ordinary course of business as a proof of the control of goods. The letter should empower the banker to sell in default of payment of the debt.

15. State Bank of India, Kanpur v. Deepak Malviya AIR 1996 All 165

Allahabad High Court held that pledge is only a form of bailment and all pledges are bailments. The banker’s lien contemplated by section 171 of the Indian Contract Act, 1872 is a specific provision relating to banker’s lien and has an overriding effect on general provisions of section 174 which deals with the relationship of pawnee and pawnor in respect of pledged goods. The banker’s lien will carry over to such pledges and bank can retain pledged goods, if the debtor had not cleared his obligation in connection with another loan. Even if the manager of the bank sent notice to the pledgor to redeem the ornaments by payment of the amount due and the amount having been paid by the pledgor, the bank is not estopped from claiming any lien over the pledged ornaments.

16. K Sita v. Corporation Bank, Kakinada AIR 1999 AP 367

Andhra Pradesh High Court decided on the short question whether the respondent Bank, while exercising Banker’s lien, has right to retain the pledged gold ornaments, even after discharge of the particular loan for the purpose of recovery of another loan subsequently advanced to the petitioner by the respondent. The court followed the decision of Allahabad High Court in SBI, Kanpur v Deepak Malviya AIR 1996 All 165 and held that banker’s lien contemplated by section 171 overrides the provisions of section 174 which deals with pawnee - pawnor relationship in respect of pledged goods. The bank can retain pledged goods if the debtor had not cleared his amount in connection with another loan.

Earlier in England also the position was different and in Wilkinson v London and County Banking Company (1884) 1 TLR 63, it was assumed that a customer was entitled to have the securities back from the bank which were deposited for some specific advances.

17. In Re London and Globe Finance Corporation (1902) 2 Ch. 416, Fin 413

Securities deposited as cover for specific advances but after discharge thereof, when left in banker’s hand become liable to general lien. Thus, we can presume that banker’s general lien attaches to all goods and securities deposited with them as bankers by a customer or by a third person on a customer’s account, provided there is no contract, express or implied, inconsistent with the lien.

18. Mercantile Bank v. Rochaldas AIR 1926 Sind 225

No separate agreement or contract is necessary for the purpose. Inspite of this legal position, very often the bankers ask for a letter of lien from the customer by way of abundant caution enabling them to enjoy the security for all the debtor’s liabilities arising in any manner, whatsoever, besides conferring a right on them to sell such securities in case there is a default in the payment of debts. This is to avoid the risk of a stand being taken by the customer that the securities were given for a special purpose only.

19. Stephen v. Chandra Mohan and others (1990) 68 Comp. Cas 636

The respondent pledged certain ornaments with the bank as security and also signed an agreement that the bank could treat the said ornaments as security for any other transactions or liability. He stood a surety for a third person. He repaid his own loan and asked the bank to return the ornaments. But the bank refused to return the ornaments on the ground that the principal debtor for whom he had stood surety had not repaid the loan and so the bank was keeping the ornaments as security. Thereupon he filed a complaint against bank under section 409 and 420 (criminal breach of trust and cheating) of Indian Penal Code. Along with the complaint, the first respondent made an application for search and seizure of the ornaments from the bank and without any hesitance the magistrate granted the prayer. The bank was searched and the ornaments were seized and produced in court.

The Kerala High Court in this case held that the magistrate has taken cognizance without due application of mind to the allegations in the complaint in order to satisfy whether the allegations do constitute any offence. In order to constitute an offence, there must be some act or conscious omission which is made penal by any provision of law. Taking cognizance on the basis of allegations which do not constitute any offence is illegal. Issue of process and the consequent trial on the basis of such cognizance will be nothing short of abuse of process of court. The first respondent has no justification in filing the complaint. He was actuated by malafides. It is the duty of this court to avoid the harassment by the trial of such cases.

The High Court further held that under section 171 of the Indian Contract Act, 1872, in the absence of a contract to the contrary, bankers could retain, as security for a general balance of account, any goods bailed to them. Even without any agreement executed by the borrower, the banker could have retained the ornaments as security under section 171 of the Contract Act without incurring the risk of commission of an offence of criminal breach of trust because such retention is allowed by law and it does not involve breach of any term of agreement. The High Court quashed the complaint and ordered that the magistrate will return the ornaments to the banker.

20. C.R.Narasimha Setty v. Canara Bank and another (1992) 74 Comp. Cas. 162

Karnataka High Court. The appellant purchased a vehicle under a hire - purchase agreement with the first respondent bank. Despite discharge of loan with interest, the bank seized the vehicle holding that the appellant was a partner of a firm which was liable to the bank on an open cash credit account and, the partners of the firm had given an undertaking that the bank could hold the vehicle as collateral security for the cash credit account. The trial court affirmed the right of the bank to retain the vehicle under banker’s lien.

Karnataka High Court, on appeal, held that the vehicle was made available only as a collateral security for the cash credit loan. The deed of hypothecation of the vehicle did not give the bank a right to seize in the event of default in payment of the cash credit loan and there was a contract to the contrary disentitling the banker from exercising the general lien. The High Court directed the bank to return the vehicle seized by it. In this case, the bank probably lost since the vehicle did not come to the possession of the bank in the course of banking business. It was rather seized which cannot be termed as the normal course of banking business so as to exercise right of general lien.

21. The Board of Trustees of the Port of Bombay and others, Appellants v. Sriyanesh Knitters, Respondent AIR 1999 SC 2947

This case before the Supreme Court relates to exercise of general lien over goods by Port Trust claiming classification as "wharfingers" under section 171 of the Indian Contract Act, 1872. The Supreme Court held that the general lien contemplated by section 171 of the Contract Act enables the retention of the bailed goods as security. Their retention does not give any power to sell the goods. In a case where section 171 of the Contract Act applies, the wharfinger can only retain the goods bailed as security and will have to take recourse to other proceedings in accordance with law for securing an order which would then enable the goods to be sold for realisation of the amounts due to it.

22. The Branch Manager, Union Bank of India & another v. Tele Surya Rao 1997 (3) All India Banking Law Judgments 66

This case before the National Consumer Disputes Redressal Commission, New Delhi relates to a consumer complaint under Consumer Protection Act, 1986. The complainant got a Fixed Deposit Receipt and then took a loan against this FDR. The bank allowed the complainant encashment of the FDR on maturity by mistake without recovering the loan. The complainant obtained another Reinvestment Deposit with the maturity proceeds of the first FDR. He demanded premature encashment of the Reinvestment Deposit. The Bank refused to comply on the ground that it had a lien on the Reinvestment Deposit for the loan advanced against the first FDR (already encashed). Questions like application of Limitation Act to the right of lien etc. were advanced.

The National Consumer Commission held that lien is a right of defence, not right of action and therefore there is no question of bar of limitation coming to the field of exercise of lien. Lien in its primary sense is a right in the banker to retain that which is in his possession belonging to another until certain demands of the person in possession are satisfied.

Where a customer deposited security with a Bank, the Bank is given a general lien over the security. The banker’s lien gives the Bank a right of all the moneys of the constituent in its hand so that they may be transferred to whatever account the Bank chooses, to set - off or liquidate the debt.

Therefore there is no deficiency in service on the part of the Bank in declining to make payment of the Reinvestment Deposit without discharge of the liabilities by the complainant of the earlier loan.

23. Cuthbert v. Roberts [1909] 2 Ch 226 CA

Banks generally receive for safe custody, customer’s valuables, such as securities, documents of title etc. Such articles, being regarded as those left with the banker for a specific purpose, are not subject to banker’s general lien either because the banker, in receiving the securities or valuables for safe custody, is supposed to be acting as a bailee and not in the capacity of the banker, or because the entrustment is for a special purpose inconsistent with the assertion of the Lien.

24. Greenhalgh (W.P.) & Sons v Union Bank of Manchester (1924) 2 KB 153

A sold goods to B and for the price A drew bills of exchange on B which B accepted. B sold the goods in turn to C, similarly drawing bills on C which C accepted. B handed C’s bills to the defendant bank for collection with directions that the proceeds should be utilised to meet the bills which B had accepted, payable at the defendant bank. The defendant bank recognising the special purpose for which bills bearing C’s acceptance were handed over for collection, opened a separate account for them called the "Provisional Bills Account". The proceeds of the bill accepted by C after collection were held not to be subject to the banker’s lien as they were entrusted for a special purpose inconsistent with the lien.

25. In Re London and Globe Finance Corporation (1902) 2 Ch 416

This is an exceptional circumstance where the banker is allowed lien on the securities left in the hands of the banker after the loan is repaid. It was held that if the securities deposited for a particular loan are left with the banker after the loan secured is cleared, the securities become subject to the banker’s lien as the customer by leaving them is supposed to have re-deposited them.

26. Lucas v Dorrein (1817) 1 Moore C.P. 29

No lien can arise on documents or valuables left inadvertently with the banker, or on property which is placed in his hands with the object of covering an advance which is not granted.

27. Wolstenholm v. Sheffield Bank (1886) 54 LT 746

No lien arises on the current account balance or the deposit account of a partner in respect of a debt due from the firm, as the credit on the one hand and the liability on the other do not exist on the same rights. Similarly a banker cannot set - off any credit balance of a partnership account against moneys due from one or more of its partners on their individual accounts.

28. O.R.M. v. Nagappa Chettiar 43 Bom LR 440 (PC)

No lien arises until the due date, in respect of an advance of a specific amount made for a definite period, as there is not debt owing till then nor can banker retain moneys of the customer against bills discounted by him for the customer, but not yet due, except perhaps in the case of the customer’s bankruptcy. In short, lien can be exercised only when the debt is due.

There is also no right of lien in respect of a separate account maintained by a customer which is known as a trust account. This is an exception to the banker’s right of general lien.

29. Anumati v. Punjab National Bank

The appellant and her husband Mam Chand made a fixed deposit of Rs. 20,000/- with the respondent bank on 31st May, 1988 for a period of 84 months ( i.e. seven years). The fixed deposit would have matured on 31.5.1995 and the amount payable on maturity was Rs. 39,930/- According to the appellant half of the deposited amount belonged to her and the other half belonged to her husband. On 24th June, 1988, a loan was taken by one Khem Chand in his sole proprietary business of M/s. Verma Agro Industries. In 1991 the respondent bank filed a suit against M/s. Verma Agro Industries, Khem Chand and the appellant's husband Mam Chand. In the suit it was alleged that M/s. Verma Agro Industries and Khem Chand had executed various agreements with regard to the loan and credit facilities made available by the Bank to them. It was also pleaded in the suit that Khem Chand and Mam Chand had secured the amount of the loan by creating a mortgage in respect of immoveable property consisting of agricultural land. According to the plaint a total sum of Rs. 2,57,625/- inclusive of interest was payable by M/s. Verma Agro Industries and Khem Chand to the respondent Bank. It was further pleaded that Mam Chand and one Nanak Chand had executed guarantee agreements on 24th June, 1988. The Bank prayed for a decree for Rs. 2,57,625/- together with the additional interest and for enforcement of the claim against the hypothecated and the mortgaged properties with a further prayer that if the aforesaid securities were found insufficient for realization of the amount payable under the decree, it be given the liberty to recover the balance from the persons and other properties of the defendants. While the suit was pending, a legal notice was given on 28th November, 1992, to the respondent Bank by the appellant and Mam Chand through their advocate, asking for premature encashment of the fixed deposit receipt. It was alleged in that letter that the Bank had kept the original receipt and only issued a photo-copy of the same to Mam Chand and the appellant with the assurance that the amount deposited would be encashable whenever required. It was also stated that both Mam Chand and the appellant were illiterate and had relied upon such representation made by the Bank. It does not appear that the Bank had responded to this notice. A second notice was sent through an advocate by Mam Chand and the appellant on 26.5.1995, again demanding the amount payable on maturity of the fixed deposit stating that the original FDR receipt had been lost by the appellant and her husband. This letter also does not appear to have been replied to by the respondent Bank.

On 3rd July, 1995 the respondent Bank filed an application in the Court before which the suit was pending seeking to inform the Court that the fixed deposit receipt had been "mortgaged" as security towards the disputed loan and that it had "after taking permission of higher officials" deposited the amount covered by the fixed deposit in the disputed loan account. Mam Chand filed an objection to the Banks' application saying that he had never given any such guarantee and that the fixed deposit receipt had never been mortgaged to the Bank.

The District Forum under the Consumer Protection Act, came to the conclusion that the appellant was entitled to recover half of the amount of the FDR i.e. Rs. 19,965/- together with interest from 1.6.1995 because she had never mortgaged her share of the fixed deposit in favour of any party. It was held that since the receipt was in the joint name of the appellant and her husband, the respondent Bank should not have accepted any pledge of the account without informing the appellant and getting her consent. Since it had not done so, the service rendered by the Bank to the appellant was deficient. The Bank was therefore directed to pay the appellant a sum of Rs. 19,967/- together with interest at 17% per annum thereon as well as Rs. 3,000/- towards mental agony suffered by the appellant and costs of Rs. 1,000/-. This judgment was challenged in the Appellate Courts and finally came for the Supreme Court. Supreme Court upheld the judgment of the District Forum and remarked,

“the Bank had no right to refuse payment of the amount deposited to the appellant. The refusal as disclosed to this Court, was contrary to banking norms. We are therefore of the view that the District Forum was correct in accepting, and the State Commission and the National Commission erred in rejecting, the appellant's complaint. The appeal is accordingly allowed and the decision of the State Commission and the National Commission are set aside and the order of the District Forum is confirmed with costs.”

30. Simla Banking and Industrial Company Limited, Ambala City Vs. Mt. Bhagwan Kuar AIR 1928 Lahore, 316

In Tannan's Banking Law and Practice in India the legal position has been summarized thus: "On the view that the terms of operation of a joint account constitute a term of the contract of deposit, any variation or revocation of instructions in a joint account, whether the operation is by 'either or survivor' or 'former or survivor' can be effected only under the joint signatures of all persons entitled to operate the joint account. One of the joint account holders thus cannot unilaterally instruct the Bank not to honour cheques signed by the others, issue duplicate deposit receipt, premature repayment or loan against Fixed Deposit". This was held by the Division Bench of the Lahore High Court (Shadi Lal, C.J. and Broadway, J.) in Simla Banking and Industrial Company Limited, Ambala City Vs. Mt. Bhagwan Kuar AIR 1928 Lahore, 316. In that case Bhagwan Kuar and her son Raghunandan Singh had deposited an amount with the Bank against a Fixed Deposit Receipt which was payable to "either or survivor". Raghunandan had borrowed money from the Bank. The Bank credited the amount due under the Fixed Deposit Receipt to the overdraft account of Raghunandan. Bhagwan Kuar thereupon filed a suit against the Bank for recovery of the amount due. The Bank pleaded a general lien and claimed to have acted within its rights in appropriating the amount as it had done. The Division Bench was of the view that the action of the Bank was neither supported by authority nor in law nor in equity. The decision in Simla Banking and Industrial Company Ltd. V. Mt. Bhagwan Kaur was followed by the Calcutta High Court in the case of Nath Bank Ltd. V. Sisir Kumar Sarkar AIR 1954 Cal. 303.

31. Nath Bank Ltd. V. Sisir Kumar Sarkar AIR 1954 Cal. 303

In this case, there was a fixed deposit made by two persons, one of whom was indebted to the plaintiff-company. The fixed deposit receipt was repayable after a period of 12 months to either or survivor. The Calcutta High Court was of the view that during the joint lives of the two account holders or at least until due demand for repayment of the money was made by the Bank to the debtor - account holder the debt in the form of a fixed deposit receipt was that of the bank to the joint account holders and the bank could not set off a debt due from one of the joint account holders against such a joint debt.

32. Hirschorn v. Evans (Barclays Bank Ltd., Garnishees), 1938 (2) KB 801(L)

A joint deposit account was opened by A and B (who were husband and wife) and the bank was authorized to accept the signature of either A or B or of the survivor as a sufficient discharge for the repayment of the moneys deposited. This debt was attached by a third party in execution of a decree against A, the husband. Pursuant to the garnishee summons, the Bank paid A's decretal debt to the decree holder. The Court of Appeal held that inasmuch as the debt which the bank owed was not a debt due to the husband alone, but to him jointly with his wife, it could not be attached to answer the judgment against the husband.

33. Punjab National Bank V. Surendra Prasad Sinha 1993 (1) SCC 499

This judgment was not rendered in connection with a joint fixed deposit account in which only one of the account holders was a debtor. In that case, both the account holders stood guarantors to the principal debtor and had jointly executed the security bond and entrusted the fixed deposit receipt as security to adjust the outstanding debt from it at maturity.

34. Brandao v. Barnett, (1846) 12C1 and Fin 787

Bankers most undoubtedly have a general lien on all securities deposited with them as bankers by a customer, unless there be an express contract, or circumstances that show an implied contract, inconsistent with lien.

35. Wolstenholme v. Sheffield Union Banking Co. Limited, 1886 (54) L.T. 746

In Wolstenholme's case one Wingh had an account with the Bank and later on he opened another account in the name of the firm of which he was a partner. The firm account was allowed to be overdrawn to the extent of dollar 2000 and Wingh's private account to the extent of dollar 3000. As a sum of dollar 5000, was required over and above the amounts already drawn, Wingh deposited a leasehold worth dollar 5000 for this temporary overdraft. Some time later the firm's account was closed and the leasehold was sold and the trustees in bankruptcy sued to recover the surplus of the proceeds of the sale after settlement of overdraft on Wingh's private account. The bank pleaded that the lease was deposited with them in order to secure advances made on both the accounts, i.e., of Wingh and of the partnership and they claimed to retain the proceeds of the sale for the purpose of repaying both such advances. It was held that the lease was deposited by Wingh merely for the purpose of securing to the bankers the repayment of the particular overdraft of dollar 5000 and that the bankers had no general lien on the proceeds so as to entitle them to retain the surplus in respect of the firm's overdrawn account.

Lord Esher M. R. during the course of arguments observed :

"They have a general lien, but they have no right to take a security given for one purpose and apply it to another."

Court of Appeal, Lindley L. J. said :

"Prima facie a separate debt cannot be set off against a joint debt either at law, in equity, or under the mutual credit clauses of the Bankruptcy Act."

36. In Re London and Globe Finance Corporation, 1902(2) Ch. 416

It was held that where securities are jointly deposited to cover a joint liability, one of the depositors on paying his share of the liability is not entitled to the return of a proportionate amount of the securities. The same was repeated in Coats v. Union Bank of Scotland, 1929 SC (HL) 114.

37. Jones v. Peppercorne, 1858 (70) E.R. 490

Vice-Chancellor, Sir W. Page Wood, held that a general lien is not excluded by a special contract unless the special contract be inconsistent with the general lien.

38. Ex Parte Kingston, In re Gross, 1871 (6) Ch. 632

It was held that the National and Provincial Bank were not entitled to set off the money in a police account against a debt in a private account even though these two accounts were opened by the same person. This decision never seems to have been questioned. It was referred to with approval by Lord Davey in the Privy Council case of Bank of New South Wales v. Goulburn Valley Butler Co., 1902 AC 543.

39. Radha Raman v. Chota Nagpur Banking Association Ltd., AIR 1944 Pat. 368

Patna High Court held that bankers have a right to combine one or more accounts of the same customer but cannot combine an account which belonged to either to another or to himself alone with another account which is the joint account with another and third person.

40. M.S. Anirudhan v. Thomco’s Bank, AIR 1963 SC 742

It was held that a document jointly executed by two persons creating a liability equal for both may not be regarded as materially altered, if liability is reduced equally for both but if the alteration is made only by one of them, then such alteration must be regarded as substantial. In such a case, even if no prejudice is caused the surety is discharged.

41. Krishna Kishore Kar v. United Commercial Bank [AIR 1982 Cal. 62]

It was held that when the plaintiff and the bank had an express contract by way of counter guarantee providing the method of re-imbursement the bank had no general lien in view of express contract as the provisions of Section 171 of the Indian Contract Act lays down that the general lien will apply only in the absence of the express contract to the contrary.

42. Latham v. Chartered Bank of India [(1874) Eq. 205)

It was held that on the dishonour of a documentary bill, the bank is not entitled to apply the security accompanying the bill to any other debt due from the customer for whom the bank discounted the bill.

43. M.Shanthi v. Bank of Baroda

In this case Madras High Court remarks, “In Brandao v. Barnett, (1846)12 Cl. and Fin.787 it was staled as under: Bankers most undoubtedly have a general lien on all securities deposited with them as bankers by a customer, unless there be an express contract, or circumstances that show an implied contract, inconsistent with lien. The above passages go to show that by mercantile system the Bank has a general lien over all forms of securities or negotiable instruments deposited by or on behalf of the customer in the ordinary course of banking business and that the general lien is a valuable right of the banker judicially recognised and in the absence of an agreement to the contrary, a Banker has a general lien over such securities or bills received from a customer in the ordinary course of banking business and has a right to use the proceeds in respect of any balance that may be due from the customer by way of reduction of customer's debit balance. Such a lien is also applicable to negotiable instruments including FDRs which are remitted to the Bank by the customer for the purpose of collection. There is no gainsaying that such a lien extends to FDRs also which arc deposited by the customer?.”

44. Rasipuram v. Sri Annapoorna Finance 2002 110 Comp. Cas 638 Mad, (2002) 1 MLJ 125

In this case, Madras High Court held, “From the above decision it would be clear that there exists a distinction between the Banker's lien and Bank's right to set-off. While a lien is confined to securities and properties in the bank's custody, the set-off is in relation to money and may arise from a contract or from the mercantile usage or by operation of law. Applying the same to the present facts of the case, it can be well stated that there is no question of exercise of the banker's lien, in the absence of any security or property in the appellant bank's custody at that time. It is true that the bank can exercise is s right to set-off in the money balance of a customer, provided there should exist mutual demands and in order that one demand might be set-off against another, both must exist mutually between the parties. in the instant case, it cannot be stated that there was any existence of mutual demands. Apart from all the above, the conduct of the appellant bank under the given situation was a glaring example of negligence and hence its act of withholding the plaintiffs money and making a debit of Rs.10,000/- in his account was unlawful and Illegal. Under the stated circumstances, without any hesitation it has to be held that the appellant bank is liable to return the said sum of Rs. 10,000/- to the plaintiff with subsequent interest at 12% per annum from 18-4-1985 till realisation. Therefore, the Judgment of the first appellate Court does not require any interference and the same has got to be sustained.”

03. CAN A BANKER exercise LIEN IN A CHEQUE FOR COLLECTION

01. Issues

The following issues are involved in this problem.

1. Whether a cheque for collection is a goods for in possession as envisaged capable of exercising a Banker’s Lien?

2. When can a Banker exercise his Lien in respect of a cheque for collection?

02. Arguments in support of the Bank

Issue 1

Cheque is a negotiable instrument. It is not money until collected, hence it can only be said to be goods.

Issue 2

As per Chitty on Contract, Twenty-sixth Edition, Page 389, Paragraph 3032, The lien is applicable to negotiable instruments which are remitted to the banker from the customer for the purpose of collection. When collection has been made the proceeds may be used by the banker in reduction of the customer's debit balance unless otherwise earmarked. Hence Bank can use its right to lien in respect of a cheque for collection.

03. Arguments against the Bank

Issue 1

Cheque is a negotiable instrument, but when it is sent for collection, the collecting bank acts only as an agent for collecting money. Hence money is dealt with, and not goods. Cheques may be dealt with as if they were cash and often credited immediately while the bank is assigned the role of holder in due course. Hence it can be treated as money only, not as goods.

Issue 2

As per Rasipuram v. Sri Annapoorna Finance 2002 110 Comp. Cas 638 Mad, (2002) 1 MLJ 125, Madras High Court held, “From the above decision it would be clear that there exists a distinction between the Banker's lien and Bank's right to set-off. While a lien is confined to securities and properties in the bank's custody, the set-off is in relation to money and may arise from a contract or from the mercantile usage or by operation of law. Bank has no right to lien in case of cheques for collection, but it has right to set off once the proceeds are collected and credited into the account.

04. Decision

The bank can exercise its right to set-off in the money balance of a customer, provided there should exist mutual demands and in order that one demand might be set-off against another, both must exist mutually between the parties in the instant case, it cannot be stated that there was any existence of mutual demands. Section 171 of the Indian Contract Act, which empowers a banker, in the absence of a 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. It does not cover money. Set off is based on mutuality where the parties, rights and liabilities are mutual. In case where parties differ, or rights or liabilities do not correspond, then set off cannot be resorted to. In case of gross negligence or other serious defects such as excessive interest rate, fraud etc., the banker’s lien may be challenged successfully.

05. Ratio Decidendi

In Chitty on Contract, Twenty-sixth Edition, Page 389, Paragraph 3032 the Banker's lien is explained as under:

By mercantile custom the banker has a general lien over all forms of commercial paper deposited by or on behalf of a customer in the ordinary course of banking business. The custom does not extend to valuables lodged for the purpose of safe custody and may in any event be displaced by either an express contract or circumstances which show an implied agreement inconsistent with the lien.... The lien is applicable to negotiable instruments which are remitted to the banker from the customer for the purpose of collection. When collection has been made the proceeds may be used by the banker in reduction of the customer's debit balance unless otherwise earmarked.

However if the proceeds are used by the banker, it can only be in the form of set off, which is distinct from banker’s lien.

In Halsbury's Laws of England, fourth edition, para 106, volume 3, page 81, it is stated,

"Money received on a bill by a sub-agent is in law received by the banker, apart from any question of account between him and the sub-agent. A banker receiving bills for collection from another banker is agent for the remitting banker, not for that banker's customer unless, therefore, the banker has distinct notice that the bills are the property of the customer, they may be treated as the property of the remitting banker, and are subject to a lien for any balance due from the latter".

In such a case the collecting banker may use its right to lien against the presenting bank, unless it is evident that the proceeds of the cheque should be accounted in the name of the customer. If the presenting bank is a holder for consideration, then the collecting bank can exercise its lien against the former bank.

In collecting cheques and other instruments for a customer, a banker acts basically as a mere agent or conduit pipe to receive payment of the cheques from the banker on whom they are drawn and to hold the proceeds at the disposal of his customer. In such a case the collecting banker cannot exercise lien against the presenting banker.

This principle has been upheld in Gerald C.S. Lobo vs Canara Bank 1991 71 Comp. Cas 290 Kar, 1989 (1) Kar LJ 182.

In Rasipuram v. Sri Annapoorna Finance 2002 110 Comp. Cas 638 Mad, (2002) 1 MLJ 125 Madras High Court has held, “From the above decision it would be clear that there exists a distinction between the Banker's lien and Bank's right to set-off. While a lien is confined to securities and properties in the bank's custody, the set-off is in relation to money and may arise from a contract or from the mercantile usage or by operation of law. Applying the same to the present facts of the case, it can be well stated that there is no question of exercise of the banker's lien, in the absence of any security or property in the appellant bank's custody at that time. It is true that the bank can exercise is s right to set-off in the money balance of a customer, provided there should exist mutual demands and in order that one demand might be set-off against another, both must exist mutually between the parties in the instant case, it cannot be stated that there was any existence of mutual demands. Apart from all the above, the conduct of the appellant bank under the given situation was a glaring example of negligence and hence its act of withholding the plaintiffs money and making a debit of Rs.10,000/- in his account was unlawful and Illegal. Under the stated circumstances, without any hesitation it has to be held that the appellant bank is liable to return the said sum of Rs. 10,000/- to the plaintiff with subsequent interest at 12% per annum from 18-4-1985 till realisation. Therefore, the Judgment of the first appellate Court does not require any interference and the same has got to be sustained.”

04. CAN A BANKER exercise LIEN IN A BAR OF GOLD DEPOSITED FOR SAFE CUSTODY

01. Issues

The following issues are involved in this problem.

1. Whether a bar of gold deposited for safe custody is part of general banking business?

2. Whether a Banker can exercise his Lien in respect of a bar of gold deposited for safe custody?

02. Arguments in support of the Bank

Issue 1

Gold deposited for safe custody is part of general banking business, because in the modern times, banks offer many more services than in olden times and banks have now come with multifaceted services.

Issue 2

Gold is a valuable used as security in the possession of the bank, and there is nothing wrong in exercising banker’s lien against it.

03. Arguments against the Bank

Issue 1

Depositing gold deposited for safe custody in bank is in the nature of bailment and it is for a specific purpose other than general banking business..

Issue 2

Both the facts that gold deposited for safe custody is bailment and that it is for a specific purpose are exceptions to the exercise of banker’s lien. Hence bank cannot exercise its lien against gold deposited for safe custody.

04. Decision

Banker’s lien is not applicable in gold deposited for safe custody.

05. Ratio Decidendi

In Chitty on Contract, Twenty-sixth Edition, Page 389, Paragraph 3032 it is stated that,

“By mercantile custom the banker has a general lien over all forms of commercial paper deposited by or on behalf of a customer in the ordinary course of banking business. The custom does not extend to valuables lodged for the purpose of safe custody and may in any event be displaced by either an express contract or circumstances which show an implied agreement inconsistent with the lien.”

According to Cuthbert v. Roberts [1909] 2 Ch 226 CA, banks generally receive for safe custody, customer’s valuables, such as securities, documents of title etc. Such articles, being regarded as those left with the banker for a specific purpose, are not subject to banker’s general lien either because the banker, in receiving the securities or valuables for safe custody, is supposed to be acting as a bailee and not in the capacity of the banker, or because the entrustment is for a special purpose inconsistent with the assertion of the Lien.

05. CAN A BANKER EXERCISE LIEN IN A FIXED DEPOSIT RECEIPT JOINTLY HELD BY X AND Y FOR THE AMOUNT DUE FROM X TO THE BANK

01. Issues

The following issues are involved in this problem.

1. Whether banker’s lien can be exercised against fixed deposit receipts?

2. Whether banker’s lien can be exercised against fixed deposit receipts jointly held by X and Y for the amount due from X to the bank?

02. Arguments in support of the Bank

Issue 1

Fixed Deposit account is like any other deposit account, on whom bank can exercise lien or set off. Hence banker’s lien can be exercised against fixed deposit receipts.

Issue 2

In cases where accounts are held by either or survivor, as the payment can be made to any one of them, thus the liability of any one of them may be met with using banker’s lien or set off.

03. Arguments against the Bank

Issue 1

Fixed deposits are different from other deposits. Fixed deposits are in the nature of loan given to bank and the deposit amount is the property of the Bank, but with a right to give with interest to the depositor at the time of maturity or otherwise agreed. Thus bank cannot exercise lien or set off bank’s own money.

Issue 2

Either or survivor is a contractual condition, but lien or set off can only be termed as statutory or customary rights. There is lack of mutuality as three parties are involved in fixed deposits held by two persons where as there are only two persons involved in lien or set off in the present context. Hence bank has no right to lien or set off in the case in consideration.

04. Decision

If the parties involved are identical, i.e. the debtors and creditors in lien or set off are the same and nobody else’s interests are infringed, banker’s lien can be exercised against fixed deposit receipts However, unless the parties have otherwise agreed, banker’s lien cannot be exercised against fixed deposit receipts jointly held by X and Y for the amount due from X to the bank.

05. Ratio Decidendi

The Supreme Court in Syndicate Bank v. Vijay Kumar and Ors., 1992 (1) RRR 19(SC) AIR 1992 SC 1066, observed that "the banks do have a general lien on the fixed deposit receipts.”

The decision given by the Punjab and Haryana High Court in the case of State Bank of India v. Hardip Singh, (1994) 14 Legal Reports and Statutes 344 also deals with this concept. It was held that the banker can enforce its lien.

The concept of banker's lien would have applied, had X alone was the account holder. This is not the case. Y also is equally the owner and the deposit with Bank is not covered by the concept of banker's lien. Apart from this the bank has not entered into fresh arrangement with Y. It is clear that Bank while executing fresh documents, if any, gave up its claim against Y.

In the case of Ex Parte Kingston, In re Gross, 1871 (6) Ch. 632, it was held that the National and Provincial Bank were not entitled to set off the money in a police account against a debt in a private account even though these two accounts were opened by the same person. This decision never seems to have been questioned. It was referred to with approval by Lord Davey in the Privy Council case of Bank of New South Wales v. Goulburn Valley Butler Co., 1902 AC 543.

The Judgment in Anumati v. Punjab National Bank on 25 October, 2004 states,

“A fixed deposit in the joint names of two persons is nothing but a joint account which, as the name itself suggests, is repayable on the expiration of the agreed period. The fixed deposit receipt is merely a written acknowledgement by the Bank that it holds a certain sum to the use of its customers. The Bank is thus a debtor to the account holders in respect of the amount deposited, a debt which is repayable by the bank to the account holders with interest on the expiry of an agreed period. An "either or survivor" clause in such an account means that the amount payable by the Bank on maturity of the fixed deposit may be paid to either of the account holders by the Bank in order to obtain a valid discharge. In other words under a tripartite agreement between the joint account holders inter se and the Bank, the Bank may, on maturity, make payment only to either of them. This tripartite agreement cannot be bilaterally modified by one of the joint account holders for example by pledging the account with any third party including the Bank itself in its capacity of creditor, so that the amount becomes payable to such third party, without the consent of the joint account holder.”

In Hirschorn v. Evans (Barclays Bank Ltd., Garnishees), 1938 (2) KB 801(L) a joint deposit account was opened by A and B (who were husband and wife) and the bank was authorized to accept the signature of either A or B or of the survivor as a sufficient discharge for the repayment of the moneys deposited. This debt was attached by a third party in execution of a decree against A, the husband. Pursuant to the garnishee summons, the Bank paid A's decretal debt to the decree holder. The Court of Appeal held that inasmuch as the debt which the bank owed was not a debt due to the husband alone, but to him jointly with his wife, it could not be attached to answer the judgment against the husband.

The judgment in Anumati v. Punjab National Bank Appeal (civil)  6945 of 2004 concludes,

“In our view, these decisions correctly set out the law. In the present case the contract in respect of the joint account was between the respondent bank and the husband and wife. The fixed deposit was not a debt due by the bank to Mam Chand alone which could be set off by the bank against any claim that the bank may have had against Mam Chand. Besides the right of Mam Chand was to receive the money deposited only after it matured, if he survived. Supposing Mam Chand had died before the fixed deposit matured, the only person entitled to get the money would be the appellant. This right of the appellant could not have been taken away without her consent. The decision cited by learned counsel on behalf of the respondents i.e. Punjab National Bank V. Surendra Prasad Sinha 1993 (1) SCC 499 was not rendered in connection with a joint fixed deposit account in which only one of the account holders was a debtor. In that case, both the account holders stood guarantors to the principal debtor and had jointly executed the security bond and entrusted the fixed deposit receipt as security to adjust the outstanding debt from it at maturity.

In the circumstances, the Bank had no right to refuse payment of the amount deposited to the appellant. The refusal as disclosed to this Court, was contrary to banking norms.”

In M.S. Anirudhan v. Thomco's Bank, AIR 1963 SC 742, it was held that a document jointly executed by two persons creating a liability equal for both may not be regarded as materially altered, if liability is reduced equally for both but if the alteration is made only by one of them, then such alteration must be regarded as substantial. In such a case, even if no prejudice is caused the surety is discharged.

In Amrit Lal v. State Bank of Travancore, AIR 1968 SC 1432, where a creditor lost part of security due to its negligence or for some other reasons, it was held that the surety was discharged to that extent. The respondents were discharged by virtue of the fresh agreement between the appellant bank and the principal debtor represented by Union of India to which the respondents sureties were neither parties nor were they made aware thereof.

Under Section 153 of the Contract Act, any variance, made without the surety's consent in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance. This is upheld in Pollock and Mulla on Contract, 10th Edition at page 1040.

Y thus, will be entitled to the amounts represented by the fixed deposits with interest at the same rate as he would have got, had the amount remained deposited for fixed term. The respondent bank is held not entitled to claim 'Banker's Lien' as it had abandoned its claim by entering into fresh agreements, with X only.

06. CONCLUSION

The above said three problems address some important areas of Banker’s Lien and set off. Bankers Lien dealing contractual statutory and customary rights is very complex in nature and depends greatly on the facts and circumstances of the case. Answering such problems contribute much to the experience of a student.