Section 171 of The Indian Contract Act, 1872 provides for retention of the goods bailed to the bank by way of security for the general balance of the account, which reads as under:

‘Bankers, factors, wharfingers, attorneys of a High Court and policy-brokers may, in the absence of a contract to the contrary, retain as a security for a general balance of an account, any goods bailed to them; but no other persons have a right to retain, as a security for such balance, goods bailed to them unless there is an express contract to that effect.’

The exercise of such a lien by the banks is a vital right of a banker. However, such an exercise of rights by the banks has become a contentious and much-debated legal issue.

The oldest case on the point in our country was the case of Kunhan Mayan Vs The Bank of Madras [(1896) ILR 19Mad234], wherein the Petitioner Kunhan Mayan deposited jewellery with the Bank of Madras to secure certain debts. Subsequently, he paid the said secured debts and demanded the return of the jewels while still being indebted to the bank with respect to the other loans. It was held that the plaintiff was not entitled to recover the jewels without discharging the other debts unless he proved that the bank agreed to give up the general lien. The Madras High Court held as follows:

‘The rule of law with regard to general liens is clearly laid down in the 171st Section of the Contract Act. Bankers have such a lien on things bailed with them unless there is a contract to the contrary. It was for the plaintiff in this case to prove the existence of such a contract. It being incumbent of the plaintiff to show that the bank had agreed to give up the general lien to which by law a bank is prima facie entitled, I must say that, in my opinion, the plaintiff has failed in his proof.’

Special lien vs general lien

In the case of K Jagadeshwar Reddy Vs Respondent: Manager, Andhra Bank [MANU/AP/0333/1988], the petitioner availed a loan on the pledge of gold ornaments with the Respondent Andhra Bank. One, V Santosh Reddy, proprietor of M/s. Santosh Brick Works had availed a loan on the mortgage of his agricultural land, and the Petitioner, K Jagdeshwar Reddy, stood as guarantor. The subsequent loan in which the petitioner stood as guarantor was still subsisting. When the petitioner offered to discharge the loan availed by him along with interest thereon and demanded the return of the pledged gold ornaments, the Respondent Andhra Bank refused to return the gold on the ground that the debt of V Santosh Reddy in which the petitioner was a guarantor was still subsisting and unless it is discharged, the gold cannot be returned.

The Andhra Pradesh High Court expressed the view that the pledge of gold ornaments was for a specific purpose and, as such, the bank cannot exercise a general lien on the said gold and directed the bank to return the gold pledged while observing as under:

‘Considering from the above perspective, I have no hesitation in concluding that by operation of Sec 171, unless there is an intention expressed contrary to the contract, the bank has a general lien over the securities belonging to the debtor that come into its hands, and if the money is in its hands as the general account, it has a right to set-off; but when any deposit has been made for a special purpose, in a given circumstance, unless there is any contract to the contrary, it cannot be implied that the bank has a general lien over the specified security deposit for a specified purpose. Indisputably, there is no contract offering to take the gold ornaments pawned by the petitioner as a pawn for the debt due and payable by the petitioner as a surety of Santosh Reddy. Therefore, it is not open to the bank to claim a general lien over the gold ornaments pawned by the petitioner. The express contract was for the discharge of the petitioner's personal debt alone. Thus, the action of the respondent in refusing to release gold ornaments on petitioner's offer to pay the personal principal debt of INR 6,000 and interest accrued thereon is clearly illegal.’


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