Neither a borrower nor a guarantor be

Source :BL :S. MURLIDHARAN :20 Dec 2011

AP HIGH COURT, PLEDGED GOODS, BORROWER, REPAYING LOAN: 

The AP High Court has ruled that a bank is not obliged to return pledged goods on the borrower repaying a loan if the former had other claims against the borrower.

The court was disposing of a writ petition filed by V. Srinadha Reddy, who had pledged some gold ornaments to obtain a loan and, additionally, had stood guarantee to another borrower availing himself of a loan from the same bank.

The borrower for whom the petitioner had stood guarantee of repayment failed to repay the loan. The bank after invoking the guarantee refused to part with the jewels pledged earlier on the ground they are required to be retained as a ‘lien', even though the petitioner himself had repaid his jewel loan.

GENERAL LIEN

The court was interpreting Section 171 of the Indian Contract Act that gives banks among other institutions, a general lien over goods belonging to their borrowers lying in their possession, till the latter paid off other dues unless there is an express agreement to the contrary between the two.

The relevant section under the heading ‘General lien of bankers, factors, wharfingers, attorneys and policy brokers', reads as follows:

“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 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 court held that the broad sweep of such general lien against a borrower extends to goods lying in banks' possession against amounts owed in respect of guarantees extended against third-party loans that had fallen due.

The third party loan is mired in a controversy, with the Debt Recovery Tribunal adjudicating on the dispute still seized of the matter. The bank contended that till such time the dispute is finally resolved, the gold ornaments will not be returned.