Bankers' lien over customer balances remains valid despite Debtors Relief Law suspending interest and payment obligations.

[*232] 1980 December 11

(PIKIS, P. D,

C. AND GL. MICHAELIDES, D.J.)

IN THE DISTRICT COURT OF FAMAGUSTA SITTING AT LARNACA

Ioannis Patrioti,

Plaintiff,

v.

Bank of Cyprus Ltd., Nicosia,

Defendants.

(Action No. 43/80).

Bankers - Lien over balances of customer as security for the repayment of a loan by the principal debtors - Not affected By provisions of The Debtors Relief (Temporary Provisions) Law, 1979 (Law 24/79).

M. HadjiChristofis, for the Plaintiff.

G. Nicolaides, for the Defendants.

JUDGMENT

The judgment of the Court was delivered by:-

PIKIS, P,D.C.:- By an agreement in writing[*233] dated 20th July 1972, the plaintiff gave a guarantee for the discharge of the obligations to the defendant-bank of a partnership, of which he was himself a shareholder, namely Ioannis Patriotis & Co. The agreement purports to confer to the defendants a general preferential lien over balances standing to the credit of the plaintiff as security for the repayment of the loan by the principal debtors. Relying on the rights conferred by this agreement the defendants withheld payment to the plaint iff of the foll owing amounts standing to the credit of the plaintiff, as at 31 st August : 1980:-

(i) £3,212.950 mils

(ii) £2,518.376 mils and

(iii) £18.698 mils current account.

However on the day the case was called for hearing the defendants admitted that they have no right to keep as security any amount in excess of £3,909.880 mils, the sum owing by the principal debtors. Evidently this admission was made in the light of the provisions of the recent Debtors Relief Law, notably Law 24/79, that prohibits the charge of interest on monetary obligations of displaced and stricken debtors in respect of debts incurred before the Turkish invasion as from 15th August 1974. It is implicit in the agreement of the parties reached on 3rd November 1980 recorded in the minutes of the Court, that both the plaintiff and the principal debtors are displaced debtors. In the light of these admissions the defendants have no answer to the claim of the plaintiff for the recovery of the amount[*234]standing to their credit in excess of £3,909.880 mils, for which amount the plaintiff is entitled to judgment. However the plaintiff claims that he is entitled to recovery of the whole amount standing to his credit for the reason that defendants cannot validly exercise any lien or retain the aforesaid credit balances as security for the repayment of the debt of the principal debtors, the repayment of which has, by the provisions of Law 24/79, been suspended up to 1st January 1981. On the other hand the defendants maintain they have a right under the guarantee agreement to retain the money standing to the credit of the plaintiff by virtue of the provisions of the aforesaid agreement (exhibit 1). Clause 5 of exhibit 1 provides, inter alia, that the bank shall have a general preferential lien over balances standing to the credit of the plaintiff, in one or more accounts with the bank as security for the repayment of the obligations of the principal debtors. Further clause 7 of the guarantee agreement provides that the guarantee shall remain in force for the final balance that the principal debtors may become liable to pay to the bank.

Evidence was introduced only with regard to the circumstances under which the defendants refused to refund the balances to the plaintiff and the manner in which they signified their refusal. Mr. Georghios Michaelides, the Assistant Manager of the Larnaca branch of the defendants, testified that soon after the Turkish invasion the bank’s headquarters issued instructions to the various branches to refrain from paying loans to depositors where the latter[*235]were indebted to the bank and retain the same as security for the repayment of their debts to the bank. Relying on the guarantee agreement and acting in furtherance of the aforesaid instructions the bank withheld payment of money owing to the plaintiff. Eventually the witness testified that he told the. plaintiff expressly that the bank would withhold payment of. money owing to him and retain the same as security for the discharge of the obligations of the principal debtors, claiming a lien over the money. Mr. Hadjichristofis invited me to disbelieve that part of the evidence of the witness whereas he suggested that he expressly communicated to the plaintiff that the bank was exercising a lien over his credit balances.

Having seen and heard Mr. Michaelides we found him to be a credible witness and we accept his evidence. However it appears that the bank, if this is at all material, communicated to the plaintiff specifically their decision to assert a lien over his credit balances after the enactment of Law 24/79.

Two questions arise for consideration:

1.Whether the contract of guarantee gave the plaintiffs a lien over credit balances owing to the plaintiff as security for the repayment of the debt of the principal debtors and, if so,

2.Whether such lien was validly asserted.

Mr. Hadjihristofis submitted that the defence should be rejected on procedural as well as substantive grounds. A lien, he argued, gives rise to a right to set off[*236]and a set off should he asserted through a counterclaim. Although the defendants do not plead a set off hut merely a right to exercise a lien over credit balances of the plaintiff, a general preferential lien and therefore a question of set off does not arise directly; nevertheless it should be said that a counterclaim is not the only way of pleading a set off. In Bullen and Leak and Jacobs. Precedents of Pleadings, 12th edition, at p.92 et seq. there is a discussion of how set off should he pleaded wherefrom it appears that there is much flexibility in practice and a defendant cannot he faulted for raising a set off in his defence without going over to make a positive assertion by way of counterclaim. A set off is basically a defence and if upheld it abates the claim wholly or in part as the case may be. As stated in Bullen (supra) it may, at the option of the defendant, be pleaded either as a defence or by way of counterclaim or be simultaneously pleaded as part of the defence and by way of counterclaim.

The basic submission of Mr. Hadjichristofis is that there can be no set off unless the principal debt has become due. And proceeding upon these premises he argued that no lien can be exercised over credit balances of a customer pf the bank unless the debt in respect of which the lien is exercised has become due. He cited Sheldon’s Practice and Law of Banking, 10th edition, pp. 328, 330. Therefore inasmuch as recovery of the principal debt is not legally possible by virtue of the provisions of Law 24/79 the defendants cannot validly withhold payment of his credit balances. He cited the decision in Halesowen v. Westminster Bank Ltd.

(1970) 3 All E.R.479 (C.A.) in support[*237]of his submission that liability to pay the principal debt is a condition precedent to the exercise of a lien over moneys deposited by plaintiff with the bank. In the above case it was decided that a bank could not exercise a lien over money paid into the account of a debtor, an account that was, by way. of specific agreement, separated from a second debit account of the debtor. The principle emerging from the above case, as we comprehend it, is that the parties may, by agreement, qualify the general bankers’ lien over balances standing to the credit of a debtor. Recently the Court of Appeal reviewed the circumstances under which a fund may, by agreement, be charged with the repayment of a debt in equity.(See Swiss Bank Corporation v. Lloyds Bank Limited and Others (1980), 2 All E.R.419: also note the judgment of Browne- Wilkinson J., at first instance, varied on appeal, (1979)2 All E.R.853). It should be noted that apart from any specific lien that may be created by agreement between the parties the law of banking recognizes a lien in favour of the bank over credit balances of the debtor as security for the repayment of debts owing by him. The general lien of bankers is part of the law merchant and it is recognized as such. Its implications and effect were described in Brandao v. Barnett (see Paget's Law of Banking, 7th edition, at p. 482:

"... Wherever a banker has advanced money to another, he has a lien on all the paper securities which come into his hands for the amount of his general balance . And credit balances rank as securities for purposes of a lien.”[*238]

Mr. Nicolaides submitted that defendants are entitled to withhold payment of credit balances in virtue of the rights conferred by the guarantee agreement. He further argued that immediate amenity to set off these balances against the

debt is not a prerequisite to the valid assertion of a lien. Nor does the agreement of the parties make this a condition

precedent.

The existence of a lien connotes nothing other than a right to retain a chattel, including a credit balance, as security for the repayment of a debt. The duration of a lien is co-extensive with the existence of the debt. For example a bank may exercise a lien over a security in respect of a debt payable in ten years. The fact that the debt is not immediately payable does not destroy the lien. In Halsbury's Laws of England, 4th edition, volume 3, it is stated that a lien "connotes the right of a banker to retain the subject matter of the lien until the indebtedness of the customer is paid or discharged". And the defendants claim nothing other than the right to exercise a lien as they are entitled to under the guarantee agreement over the credit balances of the plaintiff up to an amount equal to the debt of the principal debtors until such debt is repaid. The exercise of this right was not dependent on any notice being given to the guarantor and it was expressly safeguarded by the very provisions of the guarantee agreement.

Lastly the submission for the plaintiff that the Debtors Relief Law - 24/79 destroyed by necessary implication the validity of any lien in favour of the defendants. We[*239]cannot subscribe to this view. Law 24/79 does not purport or aim at redefining the obligations of parties to a contract beyond the area specifically covered by the law, and this area covers -

1.Liability for the payment of interest by displaced and stricken debtors after 15th August 197k; the law obliterates the liability of such debtors to pay interest after the specified day; and

2.The time of payment of the debt.

If anything the legislature signified that any security given for the repayment of the debt should remain intact. (See section 5).

For all the above reasons the defendants have validly exercised a lien over balances standing to the credit of the plaintiff for an amount up to £3,909.880 mils. The agreement reached between the parties as to the payment of interest in future recorded on 3rd November 1980, is hereby made a rule of Court.

In the result the plaintiff is entitled to judgment, if our arithmetic is right, to £1 , 840.144 mils.

Costs

The plaintiffs are only partly successful in their action and certainly the defendants incurred unnecessary costs having to defend an action for a claim exceeding £5,000. A just solution is that plaintiff should receive 3/4ths of his costs to be calculated on the scale of claims between £1 ,000 to £3;000.

Judgment for plaintiff for £1,180.144 mils. Order for costs as above.