NAKULAN v. Deputy General Manager, Canara Bank Circle Office, Kollam & Others (WP(C).No. 30600 of 2013 (Y))

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE V.CHITAMBARESH WEDNESDAY, THE 18TH DAY OF DECEMBER 2013/27TH AGRAHAYANA, 1935 WP(C).No. 30600 of 2013 (Y) ---------------------------- PETITIONER(S): ---------------- NAKULAN, AGED 41 YEARS S/O.MANOHARAN, KOTTAKUZHIYIL VEEDU MANAPPALLY NORTH PO, THAZHAVA, KARUNAGAPALLY KOLLAM DISTRICT, PIN 690 574. BY ADV. SRI.M.R.SASITH ## RESPONDENT(S): ----------------- 1. THE DEPUTY GENERAL MANAGER, CANARA BANK CIRCLE OFFICE, KOLLAM - 691 001. 2. THE AUTHORISED OFFICER - CANARA BANK, THAZHAVA BRANCH, KOLLAM 690 574. 3. THE BRANCH MANAGER - CANARA BANK, THAZHAVA BRANCH, KOLLAM 690 574. R BY SRI.V.B.HARI NARAYANAN, SC CANARA BANK. THIS WRIT PETITION (CIVIL) HAVING COME UP FOR ADMISSION ON 18-12-2013, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ## WP(C).No. 30600 of 2013 (Y) ---------------------------- ## APPENDIX PETITIONER(S)' EXHIBITS --------------------------- EXHIBIT P1 COPY OF THE LOAN PASS BOOK ISSUED BY THE 3RD RESPONDENT EXHIBIT P2 COPY OF THE NOTICE DATED 8/7/2013 SEND BY THE 3RD RESPONDENT EXHIBIT P3 COPY OF THE REPRESENTATION PREFERRED BEFORE THE BANKING OMBUDSMAN DATED NIL EXHIBIT P4 COPY OF THE PETITION BEARING NO. PLP/ST 54/13 BEFORE THE THALUK LEGAL SERVICES COMMITTEE, KARUNAGAPALLY EXHIBIT P5 COPY OF THE LAWYER NOTICE ISSUED BY THE PETITIONER LAWYER EXHIBIT P6 COPY OF THE JUDGMENT DATED 11/3/2013 WPC NO. 5670/2013 EXHIBIT P7 COPY OF THE JUDGMENT DATED 23/5/2013 IN WA NO.656/2013 RESPONDENT(S)' EXHIBITS : NIL. ------------------------------ //TRUE COPY// P.S. TO JUDGE. **'C.R.'** ## **V.CHITAMBARESH, J.** ------------------------------- **WP (C) No. 30600 of 2013** ------------------------------- **Dated this the 18[th] day of December, 2013** ## **J U D G M E N T** Can the Bank retain the gold ornaments offered as security while availing a loan even after the same is cleared on the premise that the borrower has not discharged his liability in respect of another loan ? 2. The petitioner availed a personal loan of `.25,000/- from the Canara Bank ('the Bank' for short) on 31.1.2012 agreeing to repay the same with interest in equated monthly instalments in a span of three years. The personal loan was availed on the basis of a demand promissory note executed by the petitioner in favour of the Bank and no security of any sort was obtained at the time of the transaction. The petitioner also availed a gold loan of `.85,000/- from the Bank on 11.5.2012 on pledging 46.700 grams of gold and agreeing to clear the same with interest on or before 10.5.2013. The petitioner asserts that he is willing to clear the gold loan in its entirety and that the Bank is bound to release the gold ornaments pledged without retaining it as security for the personal loan. The Writ Petition W.P.(C) No.30600/2013 2 has been filed seeking the issue of a writ of mandamus directing the Bank to release the gold ornaments pledged on the petitioner clearing only the gold loan. 3. The Bank contends that the amounts due in the personal loan and the gold loan are `.31,147/- and `.95,086/respectively and that the gold ornaments cannot be released without the petitioner discharging the entire liability. The Bank relies on Section 171 of the Indian Contract Act, 1872 ['the Act' for short] to exercise its right of lien and retain as security the gold ornaments pledged for amounts due from the petitioner. The Bank also urges that a writ should not be issued which tends to interfere with its banking operations especially when the motions made by the petitioner to the Banking Ombudsman and Taluk Legal Services Committee are pending. 4. I heard Mr.Sasith Panicker, Advocate on behalf of the petitioner and Mr.Hari Narayan.V.B., Advocate on behalf of the Bank. 5. Section 171 of the Act is as follows:- **171. General lien of bankers, factors, wharfingers, attorneys and policy brokers -** Bankers, factors, wharfingers, attorneys of a High Court and policy- W.P.(C) No.30600/2013 3 brokers may, in the absence of a contract to the contrary, retain as a security for a general balance of 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. (emphasis supplied) The following excerpt from **Syndicate Bank v. Vijay Kumar and others** [(1992) 2 SCC 330] which is the oft quoted decision of the Supreme Court on this point is apposite and sets at rest the controversy: In **Halsbury's Law of England,** 2[nd] Edn., Vol.20, p.552, para 695, lien is defined as follows:- “Lien in its primary sense is a right in one man to retain that which is in his possession belonging to another until certain demands of the person in possession are satisfied. In this primary sense it is given by law and not by contract.” In **Chalmers on Bills of Exchange** , 13[th] Edn., p.91 the meaning of “Banker's lien” is given as follows: “A banker's lien on negotiable securities has been judicially defined as 'an implied pledge'. A banker has, in the absence of agreement to the contract, a lien on all bills received from a customer in the ordinary course of banking business in respect of any balance that may be due from such customer.” In **Chitty on Contract** , 26[th] Edn., p.389, para 3032 the Banker's lien is explained as under: “Extent of lien - By mercantile custom the banker W.P.(C) No.30600/2013 4 has a general lien over all forms of commercial paper deposited by or on behalf of a customer in the ordinary course of banking business. The custom does not extent to valuables lodged for the purpose of safe custody and may in any event be displaced by either an express contract or circumstances which show an implied agreement inconsistent with the lien.... ...... The lien is applicable to negotiable instruments which are ..... remitted to the banker from the customer for the purpose of collection. When collection has been made the proceeds may be used by the banker in reduction of the customer's debit balance unless otherwise earmarked.” In **Paget's Law of Banking** , 8[th] Edn., p.498 a passage reads as under: “The Banker's Lien Apart from any specific security, the banker can look to his general lien as a protection against loss on loan or overdraft or other credit facility. The general lien of bankers is part of law merchant and judicially recognised as such.” In **Brandao v. Barnett,** it was stated as under: (All ER p.722-H) “Bankers, most undoubtedly, have a general lien on all securities deposited with them, as bankers, by a customer, unless there be an express contract, or circumstances that show an implied contract, inconsistent with lien.” The above passages go to show that by mercantile system the Bank has a general lien over all forms of securities or W.P.(C) No.30600/2013 5 negotiable instruments deposited by or on behalf of the customer in the ordinary course of banking business and that the general lien is a valuable right of the banker judicially recognised and in the absence of an agreement to the contrary, a 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. (emphasis supplied) 6. The High Court of Allahabad in **State Bank of India, Kanpur v. Deepak Malaviya and others** [AIR 1996 Allahabad 165] reiterated the same principle when it observed as follows:- 16. Section 171 of the Act refers to the lien of banker's etc. The right of security for general balance on account of any goods bailed to them. In other words if certain sum is due to the Bank in one account it may retain as security money or other movable that comes into its hands in another account. The aforesaid analysis makes it clear that the Lower Appellate Court was in error in taking a view that the Bank could not have claimed lien over the pledged ornaments of the predecessor-in-interest of the respondent. Section 171 of the Act and the general principles covering the banker's lien specifically authorise the Bank to retain the pledged ornaments claiming lien over them till the Bank's money is not cleared by the respondents for the loan in connection with the other W.P.(C) No.30600/2013 6 account for which a decree has already been passed in favour of the Bank. (emphasis supplied) Again the High Court of Andhra Pradesh in **K.Sita v. Corporation Bank, East Godawari** [(1999) 3 ALT 443] upheld the right of the Bank to retain the gold ornaments pledged in exercise of its general lien till all the debts are cleared. This Court in **Thankappan v. Muthukoya** [(2011) 2 KLT 907] has held that the general lien can be exercised by a banker even with regard to debts which have become barred by limitation. It was observed thus:- In the light of the authorities mentioned above, the principles are fairly clear. The bank has general lien over the securities which come to its hands. It may be in the form of money, negotiable instrument or any form of security or it may be goods. S.171 of the India Contract Act statutorily recognises the banker's lien. To apply the banker's lien, it is not necessary that the debt in respect of which and for the recovery of which the lien is exercised should be one which is not barred by limitation. Bar of limitation for realisation of a debt does not destroy or extinguish the right of the creditor for the debt. It only destroys the remedy. The creditor is not precluded from appropriating or adjusting the amounts of the debtor which come to his hands and from appropriating it towards a barred debt. (emphasis supplied) W.P.(C) No.30600/2013 7 7. Thus a Bank has a general lien over all forms of security including gold ornaments deposited by or on behalf of the borrower in the ordinary course of banking business for the general balance of account due from him. The Bank has a further right to sell the securities like the gold ornaments and utilise the proceeds in discharge of the liability due by the borrower in respect of other loans even. This is of course subject to the condition that there is no 'contract to the contrary' between the borrower and the Bank whereby the right of general lien could be statutorily waived. The general lien can be exercised when there is a bailment of gold ornaments by way of security for the repayment of a debt and certainly not in respect of goods entrusted to the Bank for safe custody in a locker. The general lien shall be presumed even in regard to advances made subsequent to the loan availed by pledging the gold ornaments as is evident by Section 174 of the Act. 8. The burden is always on the borrower to establish 'a contract to the contrary' in order to displace the presumption in favour of the Bank under Section 171 of the Act about the existence of a right of general lien. It is not for the Bank to W.P.(C) No.30600/2013 8 establish otherwise as a presumption of a right of general lien in its favour flows from Section 171 of the Act which can of course be rebutted by the borrower. That the onus of proof is on the borrower is well settled over a century ago by the Division Bench of the High Court of Madras in **Kunhan Mayan and others v. Bank of Madras** [(1896) ILR 19 Madras 234]. Mr.Justice Shephard in his separate judgment concurring with Mr.Justice Best after examining the amplitude of Section 171 of the Act observed therein as follows:- It being incumbent on 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. There is however no plea by the petitioner that there was a contract to the contrary in the instant case disabling the Bank from exercising its right of general lien and thus withhold the gold ornaments till the personal loan is also wiped off. 9. The Bank sells the goods pledged not as agents of the borrower but as pledgees in exercise of the power under Section 176 of the Act and the provisions of the Banking Regulation Act, 1949 ('the 1949 Act' for short). The sale of W.P.(C) No.30600/2013 9 pledged assets takes place in the course of banking business and thereby the Bank recovers not only its dues but also recovers interest and its other charges. The question whether lending of money on the security of gold ornaments and its sale on default committed by the borrower is part of banking business or not is no longer res integra. The question is answered affirmatively by the Supreme Court in **Federal Bank Ltd. v. State of Kerala** [2007 (3) KLT 106 (SC)] wherein it has inter alia been held as follows:- Further on reading the provisions of the 1949 Act, one finds that every bank is required to maintain its balance-sheet in Form “A” of the Third Schedule, quoted above. The prescribed form indicates that non-banking assets acquired by the banks even in satisfaction of claims, are required to declare their holdings. The prescribed form of balancesheet indicates that banks are required to show on the asset side, non-banking assets acquired by them in satisfaction of claims. Similarly, in Form 'B' of the Third Schedule under Profit and Loss Account, banks are required to show income from non-banking assets and profit from sale of such assets. In our view, therefore, sale of pledged assets takes placed in the course of banking business. Therefore, as stated above, the banks, in selling the goods pledged to them, did not act as agents of the borrowers/pledgers and that their sale was in exercise of statutory power under the 1949 Act. Further, in our view it W.P.(C) No.30600/2013 10 is no doubt true that under S.8 of the 1949 Act, banks are prohibited from trading in goods. However, if one reads S.8 along with Third Schedule to the 1949 Act it is clear that dealing in non-banking assets is a banking business and the exception made in S.8 which allows banks to realize security and which allows banks to engage in trade in order to realize security, falls within the banking business whenever undertaken. When a pledged article is sold in an auction, the bank recovers not only its dues but also recovers interests and its other charges. This realization falls within the parameters of the Third Schedule to the 1949 Act. In the circumstances, we are of the view that sale of pledged ornaments falls within the course of banking business under the 1949 Act. 10. Heavy reliance is placed by the petitioner on the judgment of the Division Bench in **Canara Bank v. Haridas Shenoy and another** [W.A.No.656/2013] and my attention was drawn to the following observations therein:- 4. ....... Learned counsel for the appellant relies upon Section 171 of the Indian Contract Act to contend that bankers' general lien would come in aid of the appellant bank, therefore, gold cannot be allowed to be released even if the amount due so far as the gold loan is deposited. Section 171 of the Indian Contract Act reads as under: “ **171. General lien of bankers, factors, wharfingers, attorneys and policy-brokers:-** Bankers, facotrs, wharfingers, attorneys of a High Court and policy-brokers may, in the absence of a W.P.(C) No.30600/2013 11 contract to the contrary, retain as a security for a general balance of 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.” 5. Reading of the above section makes very clear that the gold pledged for raising the loan as gold loan cannot be the subject matter of bankers' general lien. Therefore, the appellant cannot insist on retaining the gold pledged by the borrower once he repays the entire dues so far as the gold loan. If the borrower completely discharges the loan amount pertaining to gold loan, the appellant bank is bound to release the gold in favour of the borrower. But the Bank alertly points out that the above observations are in conflict with the statutory provisions and the dictum laid down by the Supreme Court in Syndicate Bank's case referred to supra and that the same is not sound law. The Bank also contends that the judgment in W.A.No.656/2013 is not final in as much as the Supreme Court has entertained the challenge thereto in Special Leave to Appeal (Civil) No.27995/2013. 11. A reading of the judgment of the learned Single Judge in W.P.(C) No.5670/2013 from which W.A.No.656/2013 was filed would indicate the circumstances under which the right of general lien of the Bank was refused. It appears that W.P.(C) No.30600/2013 12 the Bank had no case therein that the security furnished for the housing loan and the loan availed by a proprietary concern was inadequate and hence the general lien is to be exercised. It would be inappropriate for me to discuss more about the implications of the judgment in W.A.No.656/2013 since the same has not become final as indicated above. The Bank in the instant case has a specific plea that the personal loan availed by the petitioner on the basis of a demand promissory note is without any security and that the gold ornaments have to be retained. Therefore nothing deters me from relying on Section 171 of the Act and following the dictum in Syndicate Bank's case supra to hold that the Bank is entitled to retain as security the gold ornaments pledged till the personal loan is also cleared. The prayer of the petitioner for a direction to the Bank to release the gold ornaments pledged on his clearing the gold loan keeping the personal loan in tact is hereby declined. 12. The petitioner faced with this situation seeks easy instalments to repay the personal loan due to the Bank even though he has expressed his willingness to clear the gold loan in lump within a short time. I permit the petitioner to repay the W.P.(C) No.30600/2013 13 amount due towards the personal loan in 6 equal monthly instalments starting from 1.2.2014 in which event the sale of the gold ornaments pledged shall be deferred. The coercive proceedings by the Bank for realisation of the amounts due shall surge ahead if the petitioner commits default in the payment of any one of the instalments as directed above. The Writ Petition is disposed of. No costs. **V.CHITAMBARESH, Judge.** nj.