Bankers Right to lien and set off
Authored by Devanshi goyal
Keywords: restoration of balance, mutual agreement, realization of set off, debt settlement.
Banker is the person who receives and collects money and cheque with an obligation to honor the cheques drawn by customers. The bankers also enjoy certain rights in regard to the performance of their duties. A banker’s right of lien and right to setoff are some of the rights granted to the bankers.
The bankers right to lien is particularly subjected to securities of the customers which are in form of negotiable instrument or FDRs, but it is limited to the liability of customers only. The failure of bank in restoration of balance which leads to the loss caused to customer, the bank will be obligated to pay for damages to the customers. Setoff is another right granted to bankers which is contemplated when there are mutual debts between the plaintiff and defendant, and one debt may be set against the other.
A lien in general context means a right of a creditor who is in possession of goods, security or any assets of debtors to retain them until and unless the debt is repaid, the possession here retains till the debt is discharges by the owner or the obligation to the possessor. Whereas, A set off is in form of cross claim for liquidated amount and it could be solicited only in respect of liquidated claim.
Right to lien
A bankers's lien can be judicially confined as an implied pledge on the negotiable securities. A banker has the lien on all bills receivable by the customers in the Course of banking business in respect of the balances which might be due from such customer, but such lien can be exercised only in the absence of agreement to the contrary. No special contract is necessary for the creation of general lien, the right to sell the property is applicable under general lien as the bankers general lien amounts to the implied pledge.
The lien is only prolonged to the negotiable instrument which are remitted to the banker for the purpose of collection by customers. The process might be used when the collection has been made, the banker can reduce the debit balance of the customer unless otherwise stated.
Cases regarding right to lien:
There can be interference by court in the exercise of bank's lien as stated in Purewal & Associates and other v/s Punjab National Bank and others the court ordered the procedure which is to be followed by the bank in extent to the lien and also provided the liberty to bank for instituting proceeding for the recovery.
In the case of Chettinad Mercantile Bank Ltd. v/s PL.A.Pichammai Achi the court held that the bankers lien is the right of retainment of things which are delivered into their possession as a banker, if, and so long as the customer to whom they have belonged is indebted to the banker for the balance due on his account.
Features of bankers right to lien:
• The bank does not exercise his right lien over the money deposited by the customer in as much as by itself becomes the owner of the money deposited, it still has the obligation to adjust such amount against the debts which issue from the customer. The purpose of lien in such cases can be fulfilled by the application of principle of setoff.
• This right is not restricted by the law of limitation, however the act only restricts the remedy through the court itself and not from discharge of the debt. Therefore the bank can recover their debts even when the time has so passed.
• There lies no criminal action against the performance of the banker general lien right because the said act has not been done by a criminal.
A setoff is the right in which the debit and credit accounts between the plaintiff and defendant are combined, so as to reach at a partial or full repayment of a debt. The mutual debts between the plaintiff and defendant or if it is between the party suing or sued as executor or administrator, one debt may be set against the other.
The banker has the right to set off different accounts which are in the name of same customers, provided that the accounts are not kept separated and are in the same right.
A claim made by a person who is in a representative capacity would not be set off against a personal claim. A claim against the estate of a deceased also could not even be set off against a debt, which was due to the customer from his banker during the former's lifetime, irrespective of the accounts with one or more offices of the banker, it would not materially affect the situation in any way.
Cases regarding right to set off:
In the case of Official Liquidator ,Hanuman Bank Ltd. vs. K.P.T. Nadar and Others, the court had held certain essentials which are required to exercise the right of set off i.e bankers right of set off cannot be exercised when the money in hand has already been validly assigned or in case after he has been notified of the fact of an assignment of the money.
As stated in Radha Raman Choudhary vs. Chota Nagpur Banking Association Ltd the bankers tight of lien can be attached to the money as long as it is earmarked. Where it has ceased to be such separate earmarked sum, the bank would not have the right to set off.
Features of right of set off:
• The right of set off can be exercised only when there is relationship of debtor and creditor on one hand and creditor and debtor on the other hand simultaneously.
• The right is exercised only after sending prior notice to the depositor, mentioning the intention to exercise such right.
• It is necessary that the account should have the same name and consist of same capacity. The money which belongs to someone else should not be used in order to satisfy the personal debts.
• The right could be exercised against the account of a guarantor only when the demand is made, which determines his liability.
It is said by Halsbury's laws of England that the right of lien is given by law and not by a contract itself. And is satisfied only when the demands of the person retaining the possession is fulfilled. In the right of lien the possession is with the bank but the ownership remains the same.
To exercise the right of setoff there must be Mutuality to validate the right of set off and it must be between the same periods.
AIR 1993 SC 954  AIR 1945 Mad. 445  26 Comp.Cas.  (1945) 15 Comp.Cas.4(Pat).