The Kerala High Court has ruled that a bank is entitled to exercise its right of lien over a guarantor’s salary account. It clarified that protection under Section 60(1)(i) CPC does not restrict the bank’s substantive right.
The case arose when Agi Kumar’s daughter, proprietor of a manufacturing unit, availed a loan from Canara Bank under the Prime Minister’s Employment Generation Programme. A term loan of Rs. 40.54 lakh and working capital limits of Rs. 6.9 lakh were sanctioned. Agi Kumar was the guarantor in this loan, providing jointly owned property as collateral security.
A guarantor is someone who agrees to be responsible for someone else’s payment of debt if the latter makes a default on payments of loan. Being a guarantor is not a mere formality to help the borrower, the guarantor is equally responsible for paying off the loan. In case of disability or demise of the main borrower, banks have the right to approach the guarantor to repay the outstanding loan amount.
The loan was also eligible for a 35% subsidy through the Khadi and Village Industries Commission. Despite depositing the contribution and submitting the required documents, the subsidy was not released, allegedly due to delays by the bank.
This resulted in higher EMIs and financial stress, which ultimately led to the account being declared NPA. The bank initiated recovery proceedings, which are pending before the DRT. During this period, Canara Bank froze Kumar’s salary account, citing its right of general lien under Section 171 of the Indian Contract Act, prompting the filing of a writ petition.
The guarantor filed a case in court saying that Bank can’t freeze his salary account. A Single Judge had partly allowed the writ petition, directing the bank to permit the guarantor to use his salary account. The order would not apply to non-salary deposits. This meant that the salary account could be used by the Borrower, but other accounts could not be used. Both the guarantor and the bank filed cross appeals.
The bank contended that a banker’s lien is a substantive right and outside the scope of Section 60 CPC, which applies only to attachment in execution of a decree. The bench noted that the guarantor had undertaken an unconditional and irrevocable obligation to guarantee repayment of all amounts advanced under the guarantee agreement.
A Division Bench of Justice Anil K. Narendran and Justice Muralee Krishna S, while deciding cross appeals filed by Canara Bank and the guarantor, Agi Kumar, allowed the bank’s appeal and set aside the single judge’s direction limiting the lien.
The Court further observed that Section 60 CPC applies only to property liable to attachment and sale in execution of a decree. Freezing of the salary account constituted an exercise of the bank’s right of adjustment/set-off, not “attachment,” and therefore, protection under Section 60(1)(i) was not applicable.
Accordingly, the High Court allowed the bank’s appeal.
The Court said:
“A reading of Section 60 shows that the provisions therein are applicable only to property liable to attachment and sale in execution of a decree.”
Section 60(1)(i) protects a portion of a person’s salary from attachment by exempting the first Rs. 1000 and two-thirds of the remaining amount, except in cases of maintenance.
