Negative Lien in Detail | JAIIB PPB Important Notes May 2024
In this post on JAIIB PPB, we will explain an important topic from the latest & applicable JAIIB Syllabus 2024 for the JAIIB Principles & Practices of Banking for MAY 2024 Exams i.e. Lien, to be specific, we will be taking a deeper understanding of Negative Lien. But first, let us tell you what & how you can confirm your Certificate of JUNIOR ASSOCIATE OF THE INDIAN INSTITUTE OF BANKERS (JAIIB) this 2024!
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Now let us begin with our topic of JAIIB which has been taken from the applicable JAIIB Principles & Practices of Banking Syllabus 2024:
WHAT IS A LIEN?
A lien is a right of a person to retain a property that 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 the goods of a borrower or pledgor for the debt. It does not endorse a power of sale but only to retain the property.
What are the different types of Liens?
Now that we understand the meaning of Lien, it is time to learn the kinds of liens that are out there. We are going to look at the 5 most common lien types:
Bank Lien: The lien which is often granted when an individual takes a bank loan to purchase an asset. For example, Harish borrows a loan from a bank to buy a car. The payment of the car will be done through a loan, giving the bank the legal right to grant a lien on his car. In case he fails to repay the loan & interest amount, the bank has the right to take the car, into its possession.
Judgment lien: When a court places a lien on the asset, usually happens because of a lawsuit, it is called a judgment lien.
Mechanic’s lien: It’s the lien attached to real property when the owner (of property) fails to pay a contractor for his services & it is called a mechanic’s lien.
Real estate lien: The legal right to seize or sell a real estate property on not fulfilling the contract terms, is known as a real estate lien.
Tax liens: Tax liens are the liens created by law under which tax authorities are allowed to put liens on the properties of taxpayers for not paying the taxes on time.
CONDITIONS FOR EXERCISING THE 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 have 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 A NEGATIVE LIEN?
There is no legal definition for – ‘negative lien’ in any of the Indian legislation. Though it could be understood in the normal course of business that it is merely a negative covenant that prohibits a person to create any kind of encumbrance over his assets or otherwise dispose of them without the prior approval of the ‘person’ in whose favor he has given such an undertaking.
When goods and securities are in possession of the borrower 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 a negative lien.
Under the negative lien, the Banker does not get the 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 a 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.
EFFECT OF NEGATIVE LIEN
It should be noted that in the case of banking and finance transactions, the loan agreement & certain security documents such as a deed of hypothecation or deed of mortgage also contain a ‘negative lien’ over the assets charged or secured in terms of such deed. Considering the above, while registering the charge created vide such deeds should also have a specific mention of the negative lien over the assets created so as to register the negative lien.
Registering a negative lien over company assets might as well act as a public notice, on behalf of financial institutions & / or banks in whose favour such negative lien is created, to others. It prevents a company from creating encumbrance over the assets and also discourages others from taking charge of such assets of the company.
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