Meaning of Banker’s lien, negative and other types of liens explained.

Originally posted on July 22, 2014, and  updated on  15, March 2023

Generally speaking, a lien (positive lien) is merely a right of a person to retain a property that is in his possession but belongs to another person till such time the debt or other obligation (for which such lien is conferred) is discharged. A 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 (the creditor). No special agreement is necessary for creating the right of lien. However, a general lien may be created by a special agreement.

Examples of lien:  The cloth was given to tailoring for stitching, gold was given to a goldsmith for making jewellery, the Scooter was given to a mechanic for repair, leaving the cycle at the cycle stand, and so forth, are some of the common instances which create the relationship of bailment.

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

In the particular lien, the debtor gives the rights to creditors to retain only those specific securities or goods in respect of which dues have 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, bills 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 the security for general balance of an account, any goods bailed to them; but no other persons have a right to retain the security for such balance, goods bailed to them unless there is an express contract to that effect.

Section 171 of the contract act provides that Banker’s lien will extend to all other pledges with the bank and the banker can retain the pledged goods, even if the debtor has not cleared his amount in connection with another loan. 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 are fully paid.

Section 2(16) of the Companies Act defines the term charge as “an interest or lien created on the property or assets of a company or any of its undertakings or both as security and includes a mortgage. Hence, the term ‘Charge’ under the provisions of the Companies Act 1956 would include any kind of lien and accordingly same will have to be registered with ROC by filing the requisite ‘Form 8’ for the creation of a charge, in case a company creates a lien in favour of any person.

Negative Lien: 

There is no legal definition of the term ‘negative lien’ in any of the Indian legislative enactments. However, in the normal course of business, it is merely understood as a negative covenant which restricts a person from creating any kind of encumbrances over his assets or otherwise disposing of them without the prior consent of the other person in whose favour he has given such undertaking.A negative lien is an undertaking obtained by the banker, from the borrower that his assets (e.g land, building, machinery, stocks, including shares of the company, etc.) mentioned are 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 owners of the premises (in the case of rented premises) that he does not have a lien on goods hypothecated to the bank which is stored in his premises rented out to the borrower, towards his dues like rent receivable, etc.

Originally posted on July 22, 2014, and edited and reposted on March 15, 2023