9.108 General
A lien is a right to retain possession of another’s property pending the discharge of indebtedness.
A lien often arises where a service has been performed but not paid for, e.g. a garage retaining possession of a car until the repair bill is paid or a solicitor retaining documents until his/her account has been paid. A lien differs from a charge or pledge in that the property is delivered to the creditor for a purpose other than to secure the payment of the debt, e.g. to have work done on the property.
A lien is often referred to as a ‘negative’ right as the holder of the lien is entitled to retain possession but is usually unable to deal with the goods. Contractual liens (see paragraph 9.122) and certain statutory liens (see paragraph 9.114) may give the holder (by agreement between the parties or by order of the court or statute) the power to sell the goods and offset the proceeds against sums owed.
A creditor with a right to a lien should be treated as a secured creditor in the insolvency unless the lien is over books, records and papers of the insolvent (and such items are not documents of title) (see paragraph 9.109). Where a creditor claims a lien, reference should be made to Chapter 40, Part 2, paragraphs 40.31 to 40.38, and Part 4, paragraphs 40.45 to 40.69, for the rules regarding secured creditors and the valuation of their security when lodging a proof of debt. The official receiver should always ensure that a creditor has a right to claim a lien over the property held when considering the validity of the lien. Should the official receiver be uncertain about the validity of a lien, the advice of Technical Section should be sought.
Notes: [s248(b)(i) or s383(2)] [r4.88] [4.95-4.99] [Form POD] or [r6.109] [6.115-6.119]
9.109 Liens over ‘books and records’
A lien over the 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. If a creditor is claiming a lien over the books and records of an insolvent, reference should be made to Chapter 10, Part 7, paragraphs 10.69 to 10.81, for guidance concerning the recovery of the insolvent’s records.
Notes: [s246(2) or s349(1)] [s246(3) or s349(2)]
Sections 246 (2) and 349(1) do not apply where a person has a lien on documents and those documents confer a title to property on him/her, e.g. share certificates, leases and, where a solicitor obtains possession of deeds, for his/her costs when acting for a client in the purchase of property.
9.110 Power to deal with the property subject to a lien
A person with a lien has no automatic right to sell the goods. A power of sale may have been given in the contract with the insolvent or by statute e.g. by the Torts (Interference with Goods) Act 1977, section 12. Following sale of the insolvent’s goods, the holder of the lien should pass any surplus proceeds to the liquidator or trustee, or he/she could claim in the insolvency proceedings for any shortfall.
Notes: [Torts (Interference with Goods) Act 1977 s12]
The addition of such a power to sell the goods held does not convert the lien into a charge which would require registration under the Companies Act 2006, section 869, (see paragraph 9.94 and Re Hamlet International PLC [1998] The Times 13 March 1998).
There are three types of lien;
A lien can be general or particular.
A general lien (sometimes referred to as a retaining lien) occurs where there is a right to retain possession of any property of the insolvent until all debts due to that person by the insolvent have been paid.
A particular lien occurs where there is a right to retain possession of the insolvent’s property until the debt in relation to that property is paid.
The most common type of lien that the official receiver is likely to encounter is the legal lien which can be either general or particular and is dependant on the creditor having rightfully obtained possession of the property. A legal lien remains in force as long as possession of the property is retained.
Notes: [Sale of Goods Act 1979, s 41]
A legal lien can only arise:
Examples of legal liens are a banker holding property deposited with him/her (see paragraph 9.115), a solicitor who has property passed to him/her or holds money in a clients account (see paragraphs 9.116 and 9.117) or a person holding property of another until payment is made for work undertaken on it (see paragraph 9.120).
A bank, which does not have a charge granted by the insolvent, may claim a general legal lien on property deposited with it by the insolvent for the amount of the total balance due to it. This will include a cheque received by the bank from the insolvent, whose account is overdrawn, even though the proceeds are not received until after the insolvency order. Before accepting that the bank is entitled to the property being claimed, the official receiver should ensure that there was no express or implied agreement that the bank would have no right to a lien. The bank’s lien may also be invalid if the property was deposited for a specific purpose. For example, if the bank is holding property for the express purpose of safekeeping, it will not have the right to claim a lien over that property.
A solicitor may have a general legal lien extending to all papers or other "chattels" (see paragraph 9.9 for a definition of the term chattels) that come into his/her possession. This includes money held on behalf of the client in a client account but excludes the insolvent’s records. The right to such a lien arises at the 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 (Re Capital Fire Insurance Association [1883] LR 24 ChD 408).
9.117 Validity of solicitors general lien
The solicitor’s general legal lien will only be valid if the property belongs to the insolvent when it comes into his/her possession. As a company in insolvency proceedings remains the legal owner of its property, a solicitor may claim a general legal lien on any property passed to him/her, including any passed to him/her after the commencement of the winding up and possibly even after the winding-up order (Re Brereton v Nicholls [1993] B.C.L.C. 593).
In a bankruptcy, a solicitor’s general legal lien is exercisable only on property passed to him/her before the estate vests in the trustee (i.e. whilst the bankrupt is the legal owner of the property). Therefore the official receiver should ensure that property of the insolvent is not passed to a solicitor who is a creditor of the insolvent. The official receiver should, wherever possible, recover the property from any third party or request it to be held by the third party to the order of the liquidator or trustee provided that the official receiver is satisfied that the property will be preserved.
If, in a bankruptcy, after-acquired property comes into the possession of the solicitor before the trustee claims it, the solicitor will not have a general legal lien over that property, as the trustee’s title to the after-acquired property relates back to the date when it was acquired by or devolved upon the bankrupt. The lien will be valid if the solicitor was unaware of the bankruptcy at the time the property came into his/her possession.
Notes: [s307(1)] [s307(3)] [s307(4)(a)]
9.118 Solicitors particular lien
A solicitor may have a particular legal lien over chattels (see paragraph 9.9), including costs awarded to the client, which he/she has recovered or preserved for the client through litigation. The lien is only available in respect of the costs incurred in the litigation in question. For a solicitor to have a lien on chattels recovered or preserved he/she should have actual possession of those chattels, otherwise he/she will only have a right to claim the equitable interference of the court to protect his/her right to costs (Re James Bibby Ltd v Woods [1949] 2 All ER 1). The solicitor has the right to ask the court to charge the chattels recovered or preserved but until such a charge is created, the solicitor has no claim to the chattels unless they come into his/her possession (when a general legal lien may be claimed (see paragraphs 9.112 and 9.116) or his/her client is subject to an insolvency order (see paragraph 9.117).
9.119 Effect of insolvency on solicitors particular lien
Prior to the insolvency order, a solicitor can make an application under common law for a charge or, under section 73 of the Solicitors Act 1974, a charging order over the insolvent’s property. Provided the court was aware of and considered any insolvency petition prior to granting the charge or charging order, the solicitor will have a valid claim to the property even if it is not passed to him/her by the opposing party until after the date of the insolvency order.
Notes: [Solicitors Act 1974, s73] [s130)2) or s285(1)]
The solicitor will also have the right to a charge over property in the hands of the liquidator or trustee where the solicitor’s exertions gave rise to the recovery, even if he/she did not apply for a charge prior to the insolvency order. The charge may be for an amount relating to his/her costs in obtaining the property either before or after the insolvency order (Re Meter Cabs Ltd [1911] 2 Ch 557). The official receiver should therefore treat costs incurred by the solicitor in recovering the property as a first charge upon it and pay the solicitor’s costs irrespective of whether or not a charge was obtained prior to the insolvency order. If the official receiver remains liquidator or becomes trustee and considers the costs to be unreasonable, he/she may request the solicitor to have his/her bill subject to detailed assessment (see Chapter 39).
The right of a skilled workman to claim a legal lien will normally be given by an express contract term. 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 (e.g. warehousemen) that everyone could be expected to know of it or easily find out (Re Plaice v Allcock (1866) 4 F.F. 1074).
An equitable lien is an equitable right to have particular property in the possession of the insolvent realised by legal process to satisfy outstanding debts. It may arise out of an express provision in the contract with the insolvent or by law of equity from the relationship between the parties. An equitable lien does not rely upon possession of the property to be valid and it may require registration with the Registrar of Companies (in company cases) or under the bills of sale legislation (for individuals). If the official receiver is uncertain as to the validity of an equitable lien, he/she should consult Technical Section.
An example of an equitable lien is the unpaid vendor’s lien, where the vendor has an equitable lien for any unpaid balance on the sale of the property. The lien is based on the principle of equity that he/she who has obtained possession of property under a contract for payment will not be allowed to keep it without payment of the price. The unpaid vendor’s lien applies to freehold and leasehold property and certain other rights of action where a court would order specific performance of a contract. A vendor’s lien can be registered as a land charge under the Law of Property Act 1925.
A contractual lien arises from the contract between the parties and can have the properties of either a legal or equitable lien. Under a contractual lien the creditor retains possession of goods previously delivered to him/her for some other purpose. The contractual lien is lost with the loss of possession e.g. a lien can be created over goods held by a warehouse in respect of unpaid sums due.
[Back to Part 4 - Charging orders] [Onto Part 6 - Miscellaneous]