Lien and Banker’s Lien in detail

WHAT IS LIEN ?

A lien is a legal right to claim a security interest in a property provided by the owner of the property to the creditor. It is generally used as a guarantee for some sort of legal obligation such as loan repayment.

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 the debtor. This means that the creditor must already be in possession of goods and only then can he exercise the right of lien on them.

TYPES OF LIEN –

Lien can be classified into two types , namely –

  • PARTICULAR LIEN In case of a particular lien the creditor gets the right to retain possessions only of goods or securities for which the dues have arisen and not for other dues .

Example: A laptop-repairer can withhold the delivery of laptop until his charges of repairing the watch are paid to him.

  • GENERAL LIEN – A general Lien gives the right to the creditor to retain the possession till all amounts due from debtor are paid or discharged. This right is generally given to bankers, factors, policy brokers etc.

WHAT IS BANKER’S RIGHT TO LIEN ?

A banker right of lien is more than “General lien”. It confers upon him the power to sell the goods and securities in case of default by the customer.

To exercise the right of lien the bank must lawfully take over its possession &  should sell the securities only after a giving a notice to the debtor. Bankers have a general lien on all securities left with them by their customers.

The Right of lien can be exercised on goods or other securities standing in the name of the borrower only 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.

THE BANKER’S RIGHT TO LIEN CANNOT BE EXERCISED:

  • Where there is any contract inconsistent with this right between banker and the customer
  • Where the goods and securities are entrusted to the bank as a trustee or as an agent
  • If the goods or securities are entrusted for some specific purpose, the banker cannot have a lien over them.
  • 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.
  • Where some documents or valuables are left in bank’s possession by the customer by mistake or negligence .

EXAMPLE OF BANKER’S LIEN-

If an individual purchases a vehicle, the seller would be paid using the borrowed funds from the bank. In turn, the bank would be granted a lien on the vehicle. If the borrower does not repay the loan, the bank may execute the lien, seize the vehicle, and sell it to repay the loan.

If the borrower does repay the loan in full the bank then releases the lien, and the individual owns the car free and clear of any liens.

 

Thus, in simple words a lien is a claim or legal right against assets that are typically used as collateral to satisfy a debt.

Accounting & Finance for Banking

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Accounting and Finance for Banking Module A Pdf

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Accounting and finance for bankers all ePDFs are available in our an app. Get them all at https://iibf.info/app

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