Economics · Banking Regulation & Law
Mr. Sharma, a high-net-worth individual, maintains a Current Account and a Safe Deposit Locker with Global Bank. He has a Term Loan of INR 50 lakhs outstanding since 2023, secured by his residential property. In June 2024, Mr. Sharma deposits a non-negotiable Fixed Deposit Receipt (FDR) of INR 20 lakhs with the bank, specifically advising the Branch Manager in writing that this FDR is to be held purely for safekeeping and should not be used as collateral for any existing or future liabilities. However, in October 2024, his Current Account becomes severely overdrawn by INR 15 lakhs due to a failed business transaction. The bank subsequently attempts to exercise its General Lien over the FDR of INR 20 lakhs to set off the outstanding overdrawn balance, despite the specific written instructions from Mr. Sharma. Concurrently, Global Bank notices that Mr. Sharma has defaulted on his Term Loan installment for September 2024. Considering the principles governing a Banker's General Lien under Section 171 of the Indian Contract Act, 1872, and the judicial precedents related to securities held for specific purposes, which of the following statements most accurately reflects the bank's right to exercise the lien on the FDR in this complex scenario?
- 1The bank can only exercise the right of set-off on the Current Account balance but must return the FDR, as a General Lien applies only to negotiable instruments and the Term Loan is separately secured, making the lien inapplicable to the FDR.
- 2The bank cannot exercise the General Lien over the FDR for either the Current Account overdraft or the Term Loan default because the FDR was entrusted to the bank for the specific purpose of safekeeping, which overrides the general right of lien, as evidenced by the written advice of Mr. Sharma.✓
- 3The bank can exercise the General Lien to set off the Current Account overdraft (INR 15 lakhs) because a General Lien is presumed, but it cannot be applied to the Term Loan default as the property securing the Term Loan is his residential property.
- 4The bank has an absolute right to exercise the General Lien on the FDR for both the Current Account overdraft (INR 15 lakhs) and the Term Loan default, as a General Lien covers all types of debts unless expressly excluded by contract.
Correct answer
The bank cannot exercise the General Lien over the FDR for either the Current Account overdraft or the Term Loan default because the FDR was entrusted to the bank for the specific purpose of safekeeping, which overrides the general right of lien, as evidenced by the written advice of Mr. Sharma.
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