7/29/2019 BRIEF READING MATERIAL ON BANK GUARANTEE.pdf

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NON FUND BASED BUSINESS: BANK GUARANTEES.

01. Bank Guarantee is an irrevocable commitment on the part of the Bank to pay a specific amountto the beneficiary, in the event of the invocation of the B.G. Thus in a Bank Guarantee the

primary obligation to pay is on the part of Banker .thus the Bank Guarantee is an independenttransaction from the agreement between the applicant and the beneficiary. In this transaction the

person, whose has applied for the Bank Guarantee is called Applicant, The Banker is called theGuarantor, the Person in whose name the guarantee is issued is called the Beneficiary. Thus in a

Bank Guarantee transaction there are Three parties.02. Bank Guarantees are of Four types

Financial Guarantee: Guaranteeing the payment of a specific amount.Eg: EMD, Bid Bond Guarantee, Advance payment Guarantee

Performance Guarantee: In this type of guarantee the Bank guarantees the performance of theapplicant; however he restricts his liability to a specific amount.

Deferred Payment Guarantee: In this type of guarantee, the Banker guarantees the payment ofinstallments spread over a specific period of time. ( Normally high cost machinery purchased on

credit)

Statutory Guarantees ; these are the guarantees issued infavour of Courts, Customs, centraexcise, Sales Tax , Income Tax and other statutory authorities.

03. After the issue of the B.G, when a valid claim is made by the beneficiary, the Bank should honourthe claim and pay the same provided the claim is in order, even if the applicant is going the to

request/ demand the Bank not to ho honour the claim ( What ever the reason might be )04. Supreme Court has given guidelines to all the courts not to issue Injunction order against a Banks

honouring a claim under the Bank Guarantee.05. Courts are advised to issue Injunction order against the payment of a B.G/L.C claim only under the

following circumstances.

Fraud is evident in the transaction Special equities in favour of the person on whose behalf the guarantee has been issued. When the court opines the honouring the claim would cause irretrievable injustice to the

applicant.

06 A Bank Guarantee is to be invoked well with in its validity period. However a claim can be madewithin its claim period. However as per the Sec 28 of Indian Contract act the claim period for B.Gs

issued to Govt Departments/ Municipal bodies. is 30 years ( 3 years for others)07. The procedure for proper invocation of B.G

The invocation should be well with in the validity period of the B.G. The invocation amount is not more than the guaranteed amount. In case it is more, then the

maximum amount stipulated in the guarantee need be paid.

The person invoking the guarantee should have powers to do so. To avoid the complicationsthe B.G should be invoked by the designate in whose name the B.G has been issued.

Sl.No Querry Answer.

01. The Bank Guarantee is invoked by the

beneficiary. The applicant confirmed in writingthat he has completed the work undertaken

properly and hence the Bank should not honourthe claim of the Beneficiary. He also threatened

, if the bank choose to honour the claim, he wouldnot pay the amount. What should the Bank do?

If the invocation of the bank Guarantee is

proper the Bank should honour the claim,despite the objections put forth by the applicant

( Provided there is no injunction order from acompetent court of Law

02 A performance guarantee was issued for Rs500000. The said guarantee is invoked for Rs

550000.

Honour the claim for Rs 500000, if the claim isotherwise in order

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03. A Bank Guarantee is issued in favour of ChiefEngineer Public Works Department. The said

guarantee was invoked by Executive engineer ofthe same department. Whether the B.G claim be

honored?

No. In case of Bank Guarantees issued infavour of the Government Departments, the

Guarantees should be invoked by the samedesignate in whose favour the Guarantee was

issued.

04. Whether any loan documents are required to beobtained by the Bank while issuing a Bank

Guarantee?

Yes. Since it is a non-fund based limitpromissory note is not obtained. However a

counter Guarantee cum indemnity is obtained

from the applicant, to have recourse againsthim in the event of invocation of the BankGuarantee. The other documents for the

purpose of creation of charge likeHypothecation, mortgage etc are to be obtained

as usual

05 When the Bank Guarantee is invoked , sufficient

security / balance in the account of the applicantis not available. What should the Bank do?

Let the Bank honour the claim first ( By

debiting the B.G.Paid account)Next adjust the available liquid securities to the

liability. Balance amount is to be recovered bythe Bank from the Applicant based on the

Counter Guarantee and Indemnity executed byhim.

06 Whether the charge created in favour of the Bank

for sanctioning the non-fund based limits needs tobe registered with ROC

Yes.( With in 30 days from the date of creation

of the charge.)

07. A Bank Guarantee issued by the bank is invokedby the beneficiary.. There some delay in payment

of the amount by the Bank. Hence the Beneficiaryrefused to release the securities with him

demanding additional interest. What should the

bank do?

A bank is supposed to settle the claim with in areasonable time. Otherwise he would be liable

to pay overdue interest to the beneficiary for thedelayed period.

08. The applicant could not perform the contract dueto floods and other reasons beyond his control.

The B.G was invoked by the beneficiary. Theapplicant prevailed upon the Bank not to honour

the claim as he could not complete the contractfor reasons beyond his control. What should the

Bank do?

Bank Guarantee is a definite and specificobligation on the part of the issuing Bank and is

independent of the underlying contract betweenthe applicant and beneficiary of the guarantee.

As such, the bank must honour the guarantee,not withstanding the fact that applicants could

not fulfill their obligation due to circumstancesbeyond their control.

09. Is a Banker liable under its guarantee when themain contract has been suspended?

No. Since the main contract is suspended, theguarantee which was required by the main

contract also gets suspended.10. If fraud is evident in a transaction, what should

the Bank do?

The Bank should advise the Applicant to

approach the court for an injunction. Furthermore the Bank should seek appropriate

direction from the Court.

11. Whether a Bank is liable on a B.G, when the

applicant company is wound up?

Yes. On a Bank guarantee, the primary liability

i9s that of the Bank. the Bank should honourthe claim and realize the securities offered for

the loan