The following is a series of extracts from Paget’s Laws of Banking, 1904.
SECURITIES FOR ADVANCES
The Banker’s Lien
APART from any special security, the banker can look to his general lien as a protection against loss on loan or overdraft. The general lien of bankers is part of the law merchant and judicially recognised as such. (Brandao v. Barnett, 12 Cl. & Fin. 787.)
As stated in that case (p. 806), “Bankers most undoubtedly have a general lien on all securities deposited with them as bankers by a customer, unless there be an express contract, or circumstances that show an implied contract, inconsistent with lien.
What class of securities may be the subject of lien is not very clearly defined. The words used in Brandao v. Barnett are “all securities.” In Davis v. Bowslier, 5 Term Reports, 488, Lord Kenyon, C. J. uses first the words “all the securities,” but afterwards says: “ Whenever 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.” Grose, J. uses the term “paper securities.”
The class of securities covered by these definitions cannot, on the one hand, be limited to fully negotiable securities. In re United Service Company, L. R., 6 Ch. 212, share certificates; in Currie v. Misa, 1 A. C.564, an order to pay money to a particular person; in Jeffryes v. Agra and Masterman’s Bank, L. R., 2 Eq. 674, a species of deposit receipt, were all held subject to the banker’s lien, though none of them was negotiable.
On the other hand, the general lien cannot he said to extend to all classes of documents, even though they might otherwise be utilised as security.
In Wylde v. Radford, 38 L. J. Ch. 51, Kindersly V.-C., expressed the view that a conveyance of land was not subject to the general lien. He said: “The cases refer to a deposit of documents which are in their nature securities, but there is some ambiguity in the term “securities”. Anything may of course be deposited, and deeds or plate, after they have been deposited, may be said to be a security; but what is intended is such securities as promissory notes, bills of exchange, exchequer bills, coupons, bonds of foreign Governments, &c., and the courts have held that if such securities are deposited by a customer with his banker, and there is nothing to show the intention of such deposit one way or the other, the banker has, by custom, a lien thereon for the balance due from the customer.” See, however, In re Bowes 33 Ch. D. 586, and Mutton v. Pent [1900] 2 Ch. 7, where it would seem to have been assumed that the lien would attach to a policy of insurance and a lease respectively.
The nature of the “securities” subject to the lien is further deducible from the condition that they must come to the banker’s hands in his capacity as banker; in the course of banking business. Very possibly it is part of a banker’s business to advance money, and any class of property may by proper means be made the subject of security. But save in the case of specific deposit as security, or by way of equitable mortgage, in which cases lien becomes immaterial, it is difficult to conceive how such things as leases or conveyances should come to the banker’s hands in the course of his business as such. The better view would seem to be that the lien only attaches to such securities as a banker ordinarily deals with for his custom, otherwise than for safe custody, when there is no question or contemplation of indebtedness on the part of the customer.
But if not so circumscribed by the limitation of “securities,” the same restrictions probably arise from the banker’s qualification that the goods must be in the possession of the banker in the course of his trade as banker, or for the performance of some office which was his duty as banker. It is not everything a banker does to oblige his customer which falls within this category. The receiving of valuables for safe custody, for instance, though a common courtesy from bankers to their customers, could scarcely be regarded as in the course of the banker’s trade or duty. Lord Campbell said in Brandao v. Barnett, ubi sup. : “A special verdict might find that it is the custom of bankers in the course of their trade as such to receive such deposits from their customers, but I do not think that from that finding a general lien could be claimed on the plate chests.”
No doubt the conditions of receipt would also exclude the lien in such cases, the receipt being for a specific purpose, but the illustration is adduced by Lord Campbell as indicating the class of transaction which does not give rise to the lien. Immediately after the above remarks Lord Campbell added: “In both cases a charge might be made by the bankers if they were not otherwise remunerated for their trouble.”
It has been deduced from this that where a charge is made by the banker for the performance of any office it is prima facie evidence that the performance of that office is not within the duty or business of bankers. (See Walker on Banking, p. 186.) This does not seem to be the case. It is not an uncommon practice with banks to charge a small commission for keeping the account, especially if the credit balance stand below a certain figure. The doing so could hardly be said to destroy the relation of banker and customer, or stand in the way of cheques paid in being received by the banker in the course of his business as such, and so subject to the lien. In re United Service Company, L. R., 6 Ch. 212, certificates were deposited with a bank, which charged a commission for receiving the dividends. James, L. J.. nevertheless held that the bank would have had a lien on the certificates for their general balance.
It would not seem necessary that the security should have been absolutely sent or deposited by the customer himself. If it reach the banker’s hands by direction of the customer, that would be the same thing. In Roxburghe v. Cox, 17 Ch. D. 520, the money, with regard to which the banker’s lieu was recognised, had never been in the customer’s hands.
Whether a particular security is in the banker’s possession for the purpose of being dealt with by him in his trade as banker, or otherwise, is a question of fact, depending partly on the general usage of bankers, and partly on agreement or course of dealing between the banker and the particular customer who owns the security.
It has been suggested that the classification is collection on the one hand, safe custody on the other. This is probably too sweeping, though collection is no doubt the primary idea of the banker’s functions with regard to securities subject to the lieu. The possession of anything essential to collection, though not itself to be collected, would clearly be covered by the collection to which it was essential. A bond which had to be produced whenever interest was paid would be subject to the lien if the bankers were instructed to collect the interest.
Bonds being deposited with the banker in order that he might cut off and collect the coupons, the lien would probably attach to the bonds as well as the coupons; but not if the customer himself cut off the coupons as they became due, and, as to these latter, only if they were then handed to the banker for collection. If bonds redeemable at a fixed time or by drawings were deposited with the banker to be presented for payment at the due date, or in the event of their being drawn, the lien would attach. The case of debenture or stock certificates deposited with a bank which is to receive the interest for the customer seems doubtful. The possession of them would not seem to be essential or instrumental to the receipt of the interest, and would seem more consistent with mere safe custody until they should be required on a transfer. In re United Service Company, L. R., 6 Ch., at p. 217, James, L.J., appears to have considered that certificates deposited in such circumstances would be subject to the lien. Mr. Chalmers expresses doubt, but inclines to the view above expressed, as being the natural inference from the transaction. (See “Questions on Banking Practice,” 5th ed., question 999.)
Money paid in to the banker’s has been expressly stated by the House of Lords to be subject to the banker’s lien. (Currie v. Misa, 1 A. C. 564.)
It is somewhat difficult to see how in ordinary cases money could be the subject of lien; it would be usually incapable of identification; or if ear-marked, would be either deposited for safe custody or as specific security, conditions equally excluding the idea of lien. And the application of the principle of lien to money paid in to the bank is complicated by the consideration that such money, when paid in, constitutes a mere debt of equivalent amount from the banker to the customer, and a debt is not a suitable subject for a lien. It seems a more logical view to attribute the banker’s unquestionable right to retain a credit balance against a debt due from the customer to the doctrine and rule of law which authorises the setting off of one debt against another. In Roxburgh v. Cox, 17 Ch. D. 520, the Court of Appeal, while recognising that the banker’s lien applied to money paid into the account, preferred to base their decision on this doctrine of set-off. If the lien applies to money, it would apply to money received for a cheque paid in for collection. In such case the money is unquestionably received by the banker in the course of his business as such. But here again the doctrine of set-off would as efficiently meet the banker’s needs.
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With regard to bills, notes, and cheques, the position is as follows. Under sect. 27, sub-sect. 3, “where the holder of a bill has a lien upon it, arising either from contract or by implication of law, he is deemed to be a holder for value to the extent of the sum for which he has a lien.” There cannot be two holders for value of the same bill, inasmuch as there cannot be partial negotiation of a bill. The property in a bill is in ordinary cases vested in the holder for value of it. The words “he is deemed” must therefore be interpreted according to the exigencies of the section. (See Hill v. East and West India Dock Co., 9 A. C. 448.)
The person who has a lien on a bill, though not to its full amount, has not the property in it as against the real owner, but he is placed by the sub-section in the exceptional position of being holder for value to the extent of his lien, with full beneficial interest to that extent against all the world. (See the judgment of the Court of Appeal in Great Western Railway Co. v London and County Bank [1900] 2 Q. B. 464.) To that extent he could sue all parties to the bill, irrespective of any defect of title in the person from whom he took it, if he have taken it in good faith. To the same extent he could presumably sue the person from whom he took it, if his name is on the bill. If there be no defect of title, he recovers the whole amount of the bill from any party to the bill other than the one from whom he took it, holding the excess over the amount of the lien as trustee for or to the use of his debtor.
As expressed in the sub- section, this is the banker’s position equally whether the lien arises from contract, as where a bill or note is deposited as collateral security, or from implication of law, as where a cheque comes into his possession in the course of his business as banker, say for collection.
But if the banker takes the cheque, bill, or note in the first instance as holder for value, or if, having taken it in the first instance in the course of his business, he subsequently so deals with it as to become holder for value, there is no question of lien. If he give cash over the counter, if he demand and receive it in reduction of an ascertained overdraft, or if, according to the Gordon Case, having received it generally, he credit it as cash, the banker becomes a mere transferee, the absolute property vests in him and so excludes lien. But he acquires the higher rights of a transferee for value. He can sue for the full amount of the instrument, because, in the case of a holder for value, the court will not go into the quantum of the consideration. He would not sue in any sense as trustee (per Vaughan Williams, L.J., in Great Western Railway Co. v. London and County Bank [1900] 2 Q. B. 464), and would not have to account to any one for the balance recovered by him, so long as he duly rendered the stipulated consideration.
Whether he holds under a lien or as holder for value in his own right, forged indorsement or, in the case of a cheque, the not negotiable crossing, has precisely the same effect on his rights against parties to the instrument.
Where bills, notes, or cheques are in the banker’s hands subject to the lien, it is his duty to present them at maturity and give notice of dishonour if they are not paid.
This obligation may be based either on his position as agent or as holder for value.
As before stated, the banker is entitled to combine all accounts kept with him by the customer in his own right, and treat the balance as that for which he may claim his lien, unless precluded from so doing by agreement or course of business.
Collateral Security
Where the security is professedly handed over for the purpose of securing an overdraft or an advance, the transaction is strictly of the nature of a pledge.
Researcher’s Note: Paget is clearly inferring that the title to a security can be transferred to banker for the purposes of “securing an overdraft or an advance”. In other words, a Promissory Note can be used to create credit with a banker, therefore, it can also be used to extinguish a debt.
With regard to bills, notes, or cheques, the distinction is immaterial. Probably the lien arising from contract mentioned in sect. 27, sub-sect. 8, was intended to refer to pledge. In any case the pledgee has the same rights. If he takes in good faith, he acquires an independent title and right to sue on the instrument to the extent of what is due to him, and to hold the instrument against the true owner until his claim is satisfied; except, of course, in the case of forged indorsement or
“not negotiable” crossing. He must not negotiate the instrument; he is bound to present it at maturity and give notice of dishonour if it is not paid.
The dividing line between the pledge of a bill or note and its absolute transfer, equivalent to discount, is sometimes difficult to draw. The presumption in all cases of negotiation is in favour of absolute transfer, and this presumption is heightened when the transfer is by indorsement. The question is, however, one of fact, and the presumption is rebuttable. It may be shown, as laid down in Ex parte Schofield, 12 Ch. D. 887, that the indorsement was not by way of transfer, but merely by way of affording the additional security of the pledger’s name in a transaction which was really one of pledge only.
A bill or note deposited as security or pledged to cover an advance or overdraft does not, as does a bill or note or cheque given for a debt, suspend the remedy for the debt. The two co-exist, run side by side, are in the true sense collateral. There is nothing in law to prevent a banker suing for an overdraft even during the currency of a note or bill at a fixed date which he has taken as security.
And satisfaction of the debt is not necessarily payment of the bill or note. In Jenkins v. Tongue, 2t L. J. Ex. 147, the secretary of an institution had given a promissory note to secure an advance; part of the advance was stopped, with his consent, out of his salary. Held that this would not support a plea of payment pro tanto of the promissory note. In Glasscock v. Balls, 24 Q. B. D. 13, a promissory note was given to secure an advance, and property was mortgaged as further security. The mortgage was realised, and the mortgagee paid himself the advance out of the proceeds. The Court of Appeal were of opinion that this did not constitute payment of the promissory note. It will be noticed that in neither of these cases was there an actual direct payment by the borrower, the debt being satisfied from other sources; but, assuming the basis’ to be the collateral, concurrent nature of the debt and the security, there would seem to be no valid distinction.
In Glasscock v. Balls, Lord Esher expressed himself as not being clear what were the rights of the pledgor in such such cases. He suggested that he might be entitled to a perpetual injunction restraining the pledgee from negotiating or parting with the instrument.
It is difficult to see why, on satisfaction of the debt, however made, the pledgor is not entitled to claim the instrument, like a redeemed pledge. It is only Lord Esher’s silence as to this obvious course that suggests a doubt. If the note or bill is, after satisfaction of the debt, left in the pledgee’s hands, a bond fide holder for value, taking it before it is overdue, can acquire a good title (Glasscock v. Balls, 24 Q.
B. D. 13 ), and the satisfaction of the debt would be no defence against him when suing on the instrument.
A common form of security as cover is a promissory note payable on demand, that being a continuing security. But if such note be indorsed, it must be presented within a reasonable time after indorsement to charge the indorser (sect. 86, sub-sect. 1). In estimating such reasonable time, the character of the instrument as a continuing security must be taken into account; but that would not justify its being held over for any period during which the loan might be outstanding. Mr. Chalmers suggests ten months as the limit, and this is probably the maximum.
Fully negotiable securities, other than bills or notes, may be utilised as cover by deposit with or without an accompanying memorandum. The lender becomes at once pledgee; if he takes the instrument bona fide and for value, he acquires a title against all the world to hold it until the obligation it was given to cover is discharged. (London Joint Stock Bank v. Simmons [1892] A. C. 201 ; Bentinck v London Joint Stock Bank [1893] 2 Ch. 121.) The test of good faith is the same as is applied in the case of the transferee of a bill. An antecedent debt forborne by express or implied agreement on deposit of the security is sufficient consideration.
Fully negotiable instruments of this class, such as bonds payable to bearer, recognised as negotiable by the Stock Exchange and the mercantile community, are the best security a banker can get. No question of forged indorsement can arise, and by their nature they give no scope for the danger attaching to bills that they may have been obtained by such fraud as excludes the contracting mind. A negotiable security of this class may be stolen from its true owner, and yet the pledgee, if he take it bona fide and for value, can hold it against him, as if it had been a bank note.
Absolute negotiability is a fixed quantity, admitting of no qualifications or degrees.
For a short period a pernicious theory obtained that some sort of constructive notice affected the banker if he took by way of pledge instruments, however fully negotiable, from an agent, such as a stockbroker.
That, however, was finally dispelled by the case of London Joint Stock Bank v. Simmons [1892] A. C. 201. The previous decision of the House of Lords in Sheffield V London Joint Stock Bank, 13 A. C. 333, was the foundation of the pre-existing error above referred to. This decision was not unreasonably understood as laying down that if negotiable securities were tendered as cover by a person who, from the nature of his business, was likely to have securities of other persons in his hands, it was the duty of the bank to inquire into the nature and extent of his authority to deal with the securities; that the omission to make such inquiry might preclude the banker from the position of holder in good faith and for value; and further that, though the agent might have authority to pledge the securities of each principal separately, this would not avail the bank if the securities of various principals were pledged en bloc to secure one advance.
In the London Joint Stock Bank v. Simmons [1892] London Joint A. C. 201, the House of Lords declared that Sheffield v London Joint Stock Bank was decided purely on the particular facts of the case, which in their opinion were such as to affect the bank with either actual or legal notice of the limited right of property of the person with whom they were dealing and further that he was exceeding such right of property or any authority reposed in him, in pledging the securities as he did. They repudiated the idea that any new principle of law was laid down by that case, and emphatically affirmed the right of a bank or any other person to take as security negotiable instruments even from a person known to be an agent, without the necessity of inquiring into his authority so to deal with them, provided always there were no extrinsic circumstances reasonably calculated to arouse suspicion.
The guiding principle for bankers in dealing with brokers or other agents who, from the nature of their business, are likely to have in their hands securities belonging to their clients, must therefore be derived from Simmons’ Case irrespective of any supposed general propositions which may have appeared deducible from Lord Sheffield’s Case. Lord Halsbury in Simmons’ Case expressly says that there is nothing in the position of broker and customer which makes it a reasonable inference that the broker is exceeding his authority, or raises a doubt on the subject; that the inferences arrived at in Lord Sheffield’s Case have no relation to the course of business which brokers habitually pursue towards their own clients, and for their own clients, when dealing with bankers with whom they deposit securities.
“The deposit of securities,” he proceeds, “as cover in a broker’s business, is as well known a course of dealing as anything can be, and the phrase that they are deposited en bloc seems to me to be somewhat fallacious. That they are, in fact, deposited by the broker at one time, and to raise one sum, may be true. It does not follow, and I do not know that the banker could reasonably be expected to presume, that they belonged to different customers, and that the limit of the broker’s authority was applied to each individual security by his own client”. He then says that in Lord Sheffield’s Case no countenance was given to the notion that, because the pledgor was assumed to be the agent for the owners of the property, that circumstance alone put the bank upon inquiry as to his title to the property with which he dealt, and adds: “To lay down as a broad proposition that in every case you must inquire whether a known agent has the authority of his principal would undoubtedly be a startling proposition, and certainly nothing said in Lord Sheffield’s Case would justify so novel an idea. The broad proposition laid down by Chief Justice Abbott in 8 B. & C. 47, that whoever is the holder of a negotiable iustrument “has power to give title to any person honestly acquiring it, seems to me to be decisive of this case.”
Lord Herschell dwelt strongly on the absurdity which would result if negotiable securities could not be as readily taken by way of pledge from an agent as documents of title to goods are by virtue of the Factors Acts. He said it was admitted that a good title to negotiable instruments could be acquired by purchase from an agent entrusted with them, and could see no reason why the case of pledge should stand on any different footing. “ What ground,” he says, “is there for the position that in regard of a pledge the case is different, that one may safely take a negotiable instrument by way of sale from an agent, but cannot so take it by way of pledge ? It is surely of the very essence of a negotiable instrument that you may treat the person in possession of it as having authority to deal with it, be he agent or otherwise, unless you know to the contrary, and are not compelled in order to secure a good title to yourself to inquire into the nature of his title 6r the extent of his authority,” libi sup., at p. 217.
Researcher’s Note: Bold added for emphasis.
And at the conclusion of his judgment Lord Herschell sums up the whole matter in words which concede all that any banker could reasonably ask. He says : “I desire to rest my judgment upon the broad and simple ground that I find, as a matter of fact, that the bank took the bonds in good faith and for value. It is easy enough to make an elaborate presentation, after the event, of the speculations with which the bank managers might have occupied themselves in reference to the capacity in which the broker who offered the bonds as security for an advance held them. I think, however, they were not bound to occupy their minds with any such speculation. I apprehend that when a person whose honesty there is no reason to doubt offers negotiable securities to a banker or any other person the only consideration likely to engage his attention is whether the security is sufficient to justify the advance required, and I do not think the law lays upon him the obligation of making any inquiry into the title of the person whom he finds in possession of them. Of course, if there is anything to arouse suspicion, to lead to a doubt whether the person purporting to transfer them is justified in entering into the contemplated transaction, the case would be different. The existence of such suspicion or doubt would be inconsistent with good faith. And if no inquiry were made, or if on inquiry the doubt were not removed, and the suspicion dissipated, I should have no hesitation in holding that good faith was wanting in a person thus acting” [1892] A. C., at p. 228.
It would be superfluous to comment on the position so clearly and satisfactorily stated, except to say that the main principle involved is in no sense restricted to the case of an agent, but applies just as much to that of a person who professes to deal with the securities as an independent owner. (Cf. Jones v. Pepprrrornr, Joh., 480.) But it must be borne in mind that all the rights and immunities accorded to the banker in the Simmons Case were founded and dependent on the proved or assumed full negotiability of the instruments pledged to him. It is necessary, therefore, to consider what are the tests of negotiability.
To be negotiable, an instrument must fulfil the following conditions: It must purport to be, in its then condition, transferable by delivery; it must, either by statute or by the custom of the mercantile community of this country, be recognised as so transferable and as conferring upon a person who takes it honestly and for value, independent and indefeasible property in and right of action on it. (Cf. per Blackburn, J., in Crouch v. Crulit Fourier, L. R, 8 Q. B., at p. 881; per Lord Herschell in Loinlon Joint Stuck Hunk v. Simmons [1892] A. C., at p. 215 ; and especially the lucid statement of the true rule by Bowen, L.J., in Simmons v. London Joint Stock Bank [1891] 1 Ch., at p. 294.) The admission made in the latter case was that the bonds in question passed from hand to hand on the Stock Exchange; and Boweu, L.J., points out the difference between transferability and true negotiability, and that the admission was consistent with the bonds being transferable, but not legally negotiable. The House of Lords [1892] A. C. 201, coupling this admission with a somewhat general statement made in evidence that the bonds so passed as “negotiable securities”, held their legal negotiability proved. Lord Macnaghten, indeed, seemed desirous of minimising, or even obliterating, the difference between traasferability and negotiability by deprecating the setting up of “refined distinctions habitually ignored on the Stock Exchange”(p. 224).
The inevitable and desirable extension of the category of negotiable instruments is probably better forwarded by the growing custom of merchants, exercised on a proper and intelligent basis, than by any such summary leveling of carefully defined and logical boundaries.
It is sometimes said that the custom of the Stock Exchange is the only criterion of the negotiability of an “negotiable instrument”. No doubt the concentration in the Stock Exchange of dealings in all classes of securities renders that body a factor of ever increasing importance in the determination of the question, and evidence from the Stock Exchange is the most available and carries the greatest weight in the courts; but there is no justification, certainly not in any of the earlier cases, for confining the recognition of negotiability to the Stock Exchange, to the exclusion of bankers, merchants, and other classes of the mercantile world.
The recent origin of a mercantile custom to treat a particular class of instrument as negotiable is no bar to its validity.
This is disputed by those who advocate the view that the negotiability of certain instruments was recognised by, and incorporated in, the ancient law merchant, and that, save by statute, no addition can therefore be made to the category.
The judgment of Kennedy, J., in Bechuanaland Exploration Company v. London Trading Bank [1898] 2 Q. B. 658, in which the earlier and somewhat conflicting decisions are carefully reviewed, is very convincing in the opposite direction; and it was followed by Bigham, J., in Etlflstt’in v. Sch tiler cO Co. [1902] 2 K. B. 144. Apart from authority, it hardly appears conducive to national prosperity that an important part of the circulating medium of the country should be once and for all limited to that which sufficed for the comparatively small commerce of earlier days, with no possibility of expansion to meet the larger needs of modern times.
