A particular lien
Attaches to a specific item for a specific debt.
A repairer keeps a vehicle until the repair bill is paid.A warehouse keeps goods until the storage charges are cleared.
Net Worth & Solvency Glossary · Net Worth Mechanics
How a Lien Over an Asset Shrinks Certified Net Worth
noun · a creditor's right to hold · "lien marking", "lien balance" in bank usage
Definition
A lien is a creditor's right to keep hold of something that belongs to a debtor until what is owed has been paid.
The holder of the lien does not become the owner: the asset stays the debtor's property throughout, but the debtor cannot freely use or withdraw it while the lien lasts.
What a lien changes, and what it does not
Ownership stays. Availability goes.
- UnchangedOwnershipThe asset stays the debtor's property throughout. The holder of the lien does not become the owner.
- BlockedUse and withdrawalThe debtor cannot freely use or withdraw the asset while the lien lasts.
- Held byThe lien holderThe creditor with the right to keep the asset until what is owed has been paid.
Meaning
01What creates a lien over an asset in India
A lien arises in two main ways.
A general lien
Lets the holder keep anything of the debtor's that comes into its possession, against any balance due.
A banker's general lien comes from section 171 of the Indian Contract Act, 1872: unless a contract says otherwise, a bank may keep goods bailed to it, such as securities lodged with it, as security for the general balance of the account. Money in a deposit account is not goods bailed; the bank reaches it through set-off instead.
The creditor with the right to keep the asset.
The bank's entry on an account, deposit or holding that blocks withdrawal of the marked amount.
Or "lien amount": the part of a balance that is marked and cannot be withdrawn.
In everyday bank language, usually the amount held under lien, not a fee.
A lien does not need public registration to work between the parties. Because it is invisible on public records, it has to be asked about directly.
On the statement
02How a lien-marked deposit is reported in a statement of assets and liabilities
A lien-marked deposit still belongs to the account holder, so it stays on the statement of assets. It is shown at its full value, with the lien disclosed against it. It is never dropped, and it is never shown as free.
Dropping it
Understates the position, and raises an obvious question when the bank statement shows a balance the certificate does not account for.
Showing it as free
Overstates what is available, and the reader will correct it, usually losing confidence in the rest of the document.
The clear presentation gives four things
Four lines against one deposit, so ownership and availability are both visible
- 1The depositAt its full value, because it is still the account holder's.
- 2The amount under lienThe marked part that cannot be withdrawn.
- 3The creditor holding itWho the lien is in favour of.
- 4The balance that remains freeWhere the whole deposit is marked, the free balance reads nil, which is more informative than leaving it out.
The same treatment applies to a balance frozen by an order rather than by a creditor.
This is how a net worth certificate signed by a CA shows a lien: ownership undisturbed, availability reduced.
The paper trail
03Lien marking by Indian banks: statement entries, set-off rights and NOC letters
Indian banks leave a trail when they mark a lien, and a certifying CA asks for each part of it.
- The account or deposit statementUsually shows the lien marking or hold against the balance.
- The sanction letterFor the facility the lien secures, describes the security taken.
- A no-objection certificate (NOC)From the bank, evidences release. Without one, the lien is treated as still in place.
- Depository statementsShow a freeze or pledge marking against demat holdings.
Set-off. Banks may also have a right of set-off, applying a credit balance against a debt the customer owes them without marking the account. So where a customer has a loan with the same bank, the question is raised even if no lien appears. When a bank confirms a balance in writing, the confirmation is asked to state any lien as well.
Written by Subham Jhunjhunwala · Reviewed by CA Sundram Gupta
This entry describes Indian banking practice in general terms and is not legal advice on a particular case.
Need help with a certificate that uses lien? See our Net Worth Certificate.Where a lien-marked deposit is shown with the lien disclosed against it.