Question

A customer of the bank deposited with bank certain securities like bond for collection of interest. One of his loan account has become NPA. Can the bank exercise its Right of luen ?

• A. Yes, as the account has become NPA , and debt is due
• B. No, the bank cannot exercise right against securities
• C. No, as a securities have been received for a particular purpose and thus right of lien is not available
• D. None of the above

Answer 1

Answer:

C. No, as a securities have been received for a particular purpose and thus right of lien is not available

• Definition of Right of Lien: Under Section 171 of the Indian Contract Act, 1872, a banker has the right to retain goods or securities bailed to them as security for a general balance of account.
• Conditions for Lien: A lien can only be exercised when the securities are in the possession of the bank in the ordinary course of banking business and there is no express or implied contract to the contrary.
• Particular Purpose Limitation: The Right of Lien is not applicable when securities are deposited for a specific or particular purpose, such as the collection of interest, dividends, or for safekeeping.
• Legal Precedent: In instances where property is entrusted for a specific purpose, the bank acts as a trustee or agent for that specific task. If the bank attempts to retain these items for a general debt (like an NPA loan account), it constitutes a breach of the trust or contract under which the items were deposited.
• Difference between Lien and Pledge: Unlike a Pledge (Section 172), where goods are specifically deposited as security for a loan, a Lien is a general right of retention. Since these securities were never intended as collateral for the loan, the bank cannot convert a 'custodial' possession into a 'security' interest unilaterally.
• NPA Context: While banks have the right to proceed against collateral securities to recover dues from Non-Performing Assets (NPA), they cannot seize assets held in trust or for specific services to offset those losses.