Negative Lien in detail

WHAT IS LIEN ?

A lien is a right of a person to retain a property which is in his ownership or possession till such time the debt or other obligation (for which such lien is conferred) is discharged by the other person.

In other words, Lien is the right to retain goods of a borrower or pledgor for the debt. It does not endorse a power of sale but only to retain the property.

CONDITIONS FOR EXERCISING RIGHT TO 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.

WHAT IS NEGATIVE LIEN ?

When goods and securities are in possession of borrowers creditor obtains an undertaking from the borrower that he will not create any charge on those securities without the prior permission of the creditor this kind of lien is called as a negative lien.

Under the negative lien, the Banker does not get right to keep any asset of the borrower. The Borrower gives a statement to the Banker that his assets mentioned therein are free from any charge or hindrance. The borrower might sometime be having non-encumbered assets which are not charged to the bank as security. The borrower is thus free to deal with these assets and might even sell them if he so desires.

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.

 

Thus, in simple words Negative lien is in the form of a personal assurance or undertaking which has binding effect but confers no right on the bank to proceed against the property itself and thus creates no encumbrance or charge on the property.

Accounting & Finance for Banking

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