Right of Lien
Lien is the right of an individual to retain goods and securities in his possession that belongs to another until certain legal debts due to the person retaining the goods are satisfied. Lien does not endorse a power of sale but only to retain the property. This varies from other forms of charges as it does not arise from an implied or express agreement. Whereas, it arises from the dealings between the parties.
Conditions for Exercising Lien
There are three important conditions to exercise the right of lien. These are
- The goods for which this right is to be executed has to be possessed by the creditor who exercises it.
- There has to be a lawful debt due to the person in possession of the goods by the owner.
- There should not be any contract to the contract.
Types of Lien
There are three different types of Lien namely
- Possessory Lien
- Equitable Lien
- Maritime Lien
A possessory lien can be exercised only by the person in possession of the goods. It is lost by
- Loss of possession
- When money due is paid
- Substitution of security
- When a right of lien is waived
The pre-requisite that is required for a possessory lien is that the possession has to be continuous, rightful and not for any special purpose. Further, this can be divided into
- Particular Lien
- General Lien
Particular Lien is that which confers the right to retain a specific commodity for which the particular debt arose. Such debts usually arise from services that are provided or labourer or money that is spent on the goods on which the right it is to be exercised.
The ingredients of a Particular Lien are
- A right to retention of goods till debt due is paid off.
- It does not need any specific agreement.
- Arises in the ordinary course of business.
The essentials of a Possession Lien are
- A possession that is acquired in the ordinary course of business.
- The owner has a lawful debt of an obligation that has to be discharged.
A general lien refers to the right to retain goods and securities of a particular debt but in respect of the general balance that is due by the owner of the goods and securities, to the individual who is in possession of the goods. This may be conferred by an agreement to that effect or by custom and usage or by the provisions of any statue. The right of general lien is particularly given by law to bankers, solicitors, brokers, wharfingers and warehouse-keepers. A banker comprises cash, cheque, bill of exchange and securities that are deposited or any money that is due to him as a banker.
The ingredients of a general lien are given below.
- It extends to a general balance of accounts.
- It is a right of defence, not a right of action.
- It also extends to prior transactions.
- It extends to properties/ securities which a banker has come in possession of in the ordinary course of business such as cheques that are deposited for collection.
- Securities/ goods that are held for a special purpose are not subjects of General Lien.
Banker’s Lien is an implied pledged and the banker has the right to sell the property after reasonable notice where the property comes into the hands in the ordinary course of business. Section of the contract act lays down that a banker’s lien can be applied if
- The property is in the control of the banker.
- The instruments of the money or goods of the banker are not for a particular purpose inconsistent with the lien.
- The possession of the instruments is obtained lawfully as a banker.
- There is no implied or expressed agreement contrary to the lien.
The banker only obtains a lien over pledged goods for the recovery of his dues and is liable to sell those goods to reimburse himself. A banker’s general lien will not be extended to securities that are deposited with him for a specific purpose inconsistent with the lien. Therefore, the following situations are not covered by the banker’s lien.
- It does not extend to securities that do not belong to the customer of the banker.
- The articles and goods that are deposited by the owner for safe custody.
- The securities or valuables that are lying in safe deposit locker.
- The securities that are deposited for sale, the collection of interest, dividend etc. Although he will not be able to exercise his right of lien on Government promissory notes and shares, he is entitled to do so for any interest that is earned and the dividend is collected.
- A banker has no lien for fully paid-up shares except for partly-paid shares.
- A banker has no lien on an insurance policy that is pledged as a security for a loan post the repayment of debt.
- A banker has no lien on the current account balance on any bill discounts made by him.
- Conveyance of land is not subject to such lien but title deeds that are left without a memorandum of deposit are subject to such lien.
- Fixed deposit for the collection of interest from another bank will not come under the right of lien.
- The securities that are deposited upon a particular trust.
- Any security that is left in the banker’s hands to cover a proposed advance which will be subsequently declined.
- A banker cannot forfeit share in the satisfaction of a debt due to a shareholder.
- A bank does not have a lien over the credit balance lying in a customer’s account. The banker’s right, in this case, is a right of ‘set-off’.
When an advance is made, the banker sometimes asks a borrower to execute a letter declaring that the assets are free from all charges or encumbrance. The borrower also undertakes the assets that are stated in the declaration will not be encumbered or disposed of without a bank’s written permit. This undertaking is called Negative Lien. The arrangement is normally drafted in the form of an agreement. The banker cannot directly realize hid debts from such assets. However, the interests of the banker are protected to a certain extent.
An equitable lien is an equitable right that is conferred by law to a charge on the immovable or movable property of another until the satisfaction of certain specific claims. An equitable lien is created by the operation of law. The instances of the equitable lien are given below.
- Where the banker releases the pledged goods to the borrower using a trust receipt, the sale proceeds of these goods will be deposited in the loan account.
- An unpaid vendor of the immovable property has an equitable lien on the property for the whole or part of the purchase money until the actual payment.
- A partner who remits partnership debts on dissolution has an equitable lien on the property of the partnership.
A maritime lien is a right for binding a ship, furniture, machinery, cargo and freight for the payment of the claim which is based on the maritime law.