Bank Has Right Of General Lien Over All Securities Of Customer In Ordinary Course, Unless Agreement Says Otherwise: Rajasthan HC Reiterates

The Jodhpur bench of the Rajasthan High Court has reiterated that a bank has the valuable right of general lien over all securities deposited by or on behalf of the customer in the ordinary course of banking business, unless the agreement is contrary to such right.

In doing so the court set aside an order of the single judge directing Canara Bank to return the balance amount to a guarantor which was left after adjusting the loan amount from the money received after auctioning the guarantor's property, instead of allowing the Bank to adjust the balance amount in relation to another loan that had become Non Performing Asset with the same guarantor.

Referring to the decision of the Supreme Court in Syndicate Bank v Vijay Kumar & Ors. (1992), a division bench of Justice Pushpenda Singh Bhati and Justice Munnuri Laxman said,"it is clear that it is judicially recognized the valuable right of banks i.e. general lien over all forms of security or negotiable instrument deposited by or on behalf of the customer in the ordinary course of banking business. It has right to use proceeds in absence of any balance i.e. may be due from the customer by way of deduction of customers debt balance. However, such a general lien is not available, if any agreement is contrary to such right".

It reiterated that it was judicially recognized that unless the agreement stated otherwise, the banks had general lien over all forms of security deposited by the customer and could use the proceeds towards any balance that might be due form the customer by deducting customer's debt balance.

The order by the single judge was pronounced in a writ petition filed by an individual who stood as a guarantor for a loan availed by a firm from Canara Bank. After the account became an NPA and the loan amount remained unpaid, the Bank proceeded for recovery under the SARFAESI Act by auctioning the guarantor's property.

Out of the value fetched by the property, after settling the loan liability of the firm, an amount of around Rs. 3 lakhs remained which was not refunded to the guarantor who filed the writ petition before the Court. The Bank initially argued that the balance amount was adjusted towards the additional Guaranteed Emergency Credit (GECL) and then took a new stance that the amount was adjusted towards another loan account that had become NPA and in that too the petitioner stood as a guarantor.

The single judge did not agree with the existence of the second loan account and directed the Bank to refund the balance amount to the guarantor. Against this decision, the Bank moved the special appeal.

It was argued by the Bank that even though the property was given as security for the loan availed by the firm, the Bank could also use it for another loan by exercising its power of general lien over such property unless the contract was to the contrary.

On the other hand, the counsel for the guarantor submitted that firstly, since the security was given for a particular loan, it could not be invoked as security for another loan transaction. Secondly, it was argued that unless SARFAESI proceedings were initiated in relation to the other loan default, the Bank did not have the right to adjust the balance amount towards that default.

After hearing the contentions, the Court referred to the Supreme Court case of Syndicate Bank v Vijay Kumar & Ors. in which it was held that,

“the Bank has a general lien over all forms securities or negotiable instrument deposited by or on behalf of customer in the ordinary course of banking business and that the general lien is valuable right of the banker judicially recognized and in the absence of an agreement to the contrary, Banker has a general lien over such securities or bills received from a customer in the ordinary course of banking business and has a right to use the proceeds in respect of any balance that may be due from the customer by way of reduction of customer's debit balance.”

In this background, the Court rejected all the arguments raised on behalf of the guarantor for the reason that the Bank had general lien over all forms of security and was entitled to adjust the amount to reduce debt balance of its customers.

It said that the pleadings of the petitioner is not clear whether the second claim set up by the Bank was correct or incorrect and when a stand is taken that there is another loan to which the writpetitioner was a guarantor, such a fact required to be adjudicated in the regular civil proceedings and not in the writ proceedings.

Allowing the appeal the court set aside the single judge's order.

Title: Canara Bank v M/s Gopal Industries & Ors.

Citation: 2024 LiveLaw (Raj) 410

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