PART 8
April 2014
LIENS
A lien is a right to retain possession of another’s property, where that possession already lawfully exists, pending the discharge of indebtedness. An equitable lien (see paragraph 9.147), however, does not require possession to be valid.
A lien sometimes arises where a service has been performed but not paid for. An example of this is a garage retaining possession of a car until a repair bill is paid, or a solicitor retaining papers pending the settlement of fees. A lien differs from a pledge (see paragraphs 31.0.47a to 31.7.47h) as the property is delivered to the creditor not for the purpose of security for a debt but rather in relation to the carrying out of a service.
9.136 Liens – right of creditor
A lien generally entitles the creditor to retain possession of the property, but, unlike a charge not to deal with it (to sell it, for example). Certain liens do, however, give the holder of the lien these rights (see paragraph 9.152).
The existence of a power to sell does not convert the lien into a charge as such a charge would require registration (see paragraph 40.126) [note 1].
9.137 Treatment of a creditor with a lien
Assuming that, following the guidance elsewhere in the Part (in particular paragraphs 9.142 to 9.151), the official receiver is satisfied that a lien is valid, he/she should treat a creditor with a right to a lien as a secured creditor in the insolvency (see Chapter 40, Part 5), unless the lien is over books and papers of the insolvent (and are not documents of title – see paragraph 9.141), as such a lien is unenforceable (see paragraph 9.138).
In areas of doubt, the guidance of Technical Section may be sought.
9.138 Lien over books and papers
A lien over books, papers or other documents of the insolvent is unenforceable to the extent that it would stop the official receiver, liquidator or trustee having access to them. This is to ensure that the public interest of creditors is accorded priority over private security rights.
A lien over documents of title (share certificates, property deeds, leases, etc.) is however enforceable against the official receiver, liquidator or trustee [note 2] [note 3] [note 4] [note 5].
If a creditor is claiming a lien over the books and records of the insolvent, the guidance in Chapter 10, Part 7 should be followed.
As a company subject to liquidation proceedings remains the legal owner of its property, a creditor may claim a lien, where such a right exists, over any property passed to him/her, including any passed to him/her after the commencement of winding-up (generally, the date of the presentation of the petition) but not normally after the winding-up order [note 6] [note 7].
The official receiver should therefore ensure that property of the company is not passed to a creditor of the company where that creditor might be able to claim a lien (see paragraphs 9.148 to 9.151 for examples of creditors who may be able to enforce such a right).
In bankruptcy, a lien is exercisable only on property passed to the creditor before the estate vests in the trustee (that is, when the bankrupt is still legal owner of the property). The official receiver, as receiver and manager, should therefore ensure that property of the bankrupt is not passed to a creditor of the bankrupt where that creditor might be able to claim a lien (see paragraphs 9.148 to 9.151 for examples of creditors who may be able to enforce such a right).
If after-acquired property (see Chapter 31.8, Part 1) comes into the possession of a creditor before the trustee is able to lay claim to it, the creditor will not have a lien over that property, as the trustee’s title to the property relates back to the date when it was acquired by, or devolved upon, the bankrupt [note 8]. The lien will, however, be valid if the creditor was unaware of the bankruptcy at the time that the property came into his/her possession [note 9].
9.141 Lien over documents of title
The unenforceability of a lien over books and papers referred to in paragraph 9.138 does not apply where a person has a lien on documents and those documents confer title to property. Examples of such documents would be share certificates, leases and, where a solicitor acts in a conveyance, property deeds [note 10] [note 11].
A legal lien exists through law (common law or statute – see paragraph 9.145) and not through contract (see paragraph 9.146 regarding contractual liens). A legal lien differs from a mortgage in that it cannot be assigned without the express permission of the owner of the goods and it can exist from, and only for only as long as, the time that the property is in the rightful possession of the holder of the lien [note 12].
The debt must have accrued and not be accruing in order for the lien to be valid [note 13].
A legal lien may be either general (see paragraph 9.143) or particular (see paragraph 9.144).
A general lien (sometimes referred to as a retaining lien) occurs where there is a right to retain possession of any property of the debtor until all debts due to that person have been paid. General liens are not favoured in law as they give special privilege against other creditors [note 14].
A particular lien occurs where there is a right to retain possession of a particular item of the debtor’s property until the debt in relation to that property is paid [note 15]. Where the debt is repaid, the property may not be retained pending the payment of any general sums due to the creditor [note 16].
A statutory lien is one created by statute, rather than by contract (see paragraph 9.146) or the common law. An example is the lien that a seller has in respect of goods unpaid for [note 17]. Statute can also nullify a common law lien, such as ending a lien over books and papers (see paragraph 9.138).
It is possible for a lien to arise under contract. In that case, the effect and extent of the lien will be governed by the terms of the contract [note 18].
A pledge or pawn (see paragraph 31.0.42) can be a type of contractual lien [note 19].
An equitable lien is a type of equitable charge (see paragraph 40.135). It differs from a legal lien in that possession of the property is not necessary for the lien to be valid [note 20] [note 21]. There are a diverse number of situations in which an equitable charge may arise and where there is doubt the advice of Technical Section may be sought.
A vendor’s lien (see paragraph 9.149) is an example of an equitable lien.
The right of a skilled workman to claim a legal lien will normally be given by an express contract term (see paragraph 9.146). In the absence of such a contract term, the right to claim a lien may only arise from custom and usage, where the right to claim a lien is so universally agreed within a trade (warehousing being an example), that everyone could be expected to know of it or easily find out [note 22].
Such a lien is the one that is perhaps most likely to be encountered by the official receiver, in terms of a garage claiming a lien over the bankrupt’s vehicle where there are outstanding repair costs.
A vendor’s lien is one that is founded on the principle of equity (fairness) that a person who has obtained property under contract will not be able to retain it without payment. In this case, the property will be in the hands of the purchaser, but subject to a lien in favour of the seller [note 23]. Such a lien can apply to land [note 24].
A solicitor may have a general lien (see paragraph 9.143), including over money in the client account, but not in relation to an insolvent’s books and papers (see paragraph 9.138) or he/she might have a particular lien (see paragraph 9.144), including over costs awarded to a client following litigation. The right to a lien arises at a time when the solicitor was first retained by the insolvent and the lien forms part of the contract (either written or implied) entered into between the solicitor and the insolvent [note 25].
The solicitor has the power to apply for a charging order over the debtor’s property (see paragraph 9.125).
A bank may claim a general lien on property deposited with it by a debtor. This would include a cheque received by the bank from the insolvent, whose account is overdrawn, even if not received until after the order [note 26]. In the normal course of events, this situation is unlikely to arise as cheques for the insolvent intercepted by the official receiver will be paid into the Insolvency Services Account (ISA) (see paragraph 36.125).
A lien may not apply where the property was deposited with a bank for a specific purpose (such as safekeeping). This may apply to property in a safe-deposit box, for example.
9.152 Creditor’s power to deal with property subject to lien
A person with a lien has no automatic right to sell the goods. A contractual power of sale may have been given (see paragraph 9.146) or in statute. Following sale of an insolvent’s goods, the holder of a lien should pass any surplus proceeds to the liquidator or trustee, or he/she may claim in the proceedings where there is a shortfall.
[Back to Part 7 – Creditor applying for or enforcing a charge in relation to the insolvent’s property] [On to Part 9 – Attachment of earnings and attachment of debt]