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. The 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

Possessory 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

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.

General Lien

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

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'.

Negative Lien

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.

Equitable Lien

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.

Maritime Lien

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.

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Frequently Asked Questions

Common questions about Understanding Right of Lien in Financial Transactions.

A lien is a legal right that allows a creditor to retain possession of a debtor's property until a debt is paid. It is a form of security interest that gives the creditor a claim against the property, without transferring ownership.

The three main conditions for exercising a lien are: (1) the creditor must be in lawful possession of the goods, (2) there must be a lawful debt due to the creditor by the owner of the goods, and (3) there should not be any contract that contradicts the lien.

A particular lien allows the creditor to retain specific goods for a particular debt related to those goods, such as services provided or money spent on them. A general lien, on the other hand, gives the creditor the right to retain goods or securities as security for the general balance due from the owner.

A banker's lien is a type of general lien that allows a bank to retain possession of a customer's securities, goods, or other property until the customer's debts to the bank are paid. It is an implied pledge that arises from the banker-customer relationship.

A banker's lien does not extend to securities deposited for a specific purpose inconsistent with the lien, such as safe custody, sale, or collection of interest/dividends. It also does not cover government promissory notes, fully paid-up shares, insurance policies after debt repayment, and current account balances.

A negative lien is an agreement where a borrower declares that their assets are free from encumbrances and undertakes not to dispose of or encumber those assets without the lender's written permission. It protects the lender's interests in the borrower's assets.

An equitable lien is a legal right conferred by law to charge immovable or movable property as security for a specific claim, such as a partner's claim on partnership property after paying partnership debts.

A maritime lien is a special type of lien that allows a creditor to retain a ship, its cargo, and other related property as security for maritime claims, such as unpaid wages or damage caused by the vessel.

In general, a lien holder does not have the power to sell the liened property. A lien only confers the right to retain possession of the property until the debt is paid. However, in certain cases, such as a banker's lien, the lien holder may have the right to sell the property after reasonable notice.

A lien may be lost or terminated in several ways, including: (1) loss of possession of the property, (2) payment of the debt owed, (3) substitution of security, or (4) waiver of the lien by the creditor.