NON –FUND BASED BUSINESS: BANK GUARANTEES. 01.

Bank Guarantee is an irrevocable commitment on the part of the Bank to pay a specific amount to 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 independent transaction 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 the Guarantor, the Person in whose name the guarantee is issued is called the Beneficiary. Thus in a Bank Guarantee transaction there are Three parties. 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 the applicant; however he restricts his liability to a specific amount.  Deferred Payment Guarantee: In this type of guarantee, the Banker guarantees the payment of installments 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, central excise, Sales Tax , Income Tax and other statutory authorities. After the issue of the B.G, when a valid claim is made by the beneficiary, the Bank should honour the 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 ) Supreme Court has given guidelines to all the courts not to issue Injunction order against a Bank’s honouring a claim under the Bank Guarantee. 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. A Bank Guarantee is to be invoked well with in its validity period. However a claim can be made within 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) 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 complications the B.G should be invoked by the designate in whose name the B.G has been issued. Querry The Bank Guarantee is invoked by the beneficiary. The applicant confirmed in writing that he has completed the work undertaken properly and hence the Bank should not honour the claim of the Beneficiary. He also threatened , if the bank choose to honour the claim, he would not pay the amount. What should the Bank do? A performance guarantee was issued for Rs 500000. The said guarantee is invoked for Rs 550000. Answer. 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 a competent court of Law

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Honour the claim for Rs 500000, if the claim is otherwise in order

Is a Banker liable under its guarantee when the No. sufficient Let the Bank honour the claim first ( By security / balance in the account of the applicant debiting the B. 06 07. Since it is a non-fund based limit promissory note is not obtained. The applicant prevailed upon the Bank not to honour the claim as he could not complete the contract for reasons beyond his control. 08. On a Bank guarantee.( With in 30 days from the date of creation of the charge. Whether the charge created in favour of the Bank for sanctioning the non-fund based limits needs to be registered with ROC A Bank Guarantee issued by the bank is invoked by the beneficiary. 04. What should the Bank do? Yes. Bank Guarantee is a definite and specific obligation on the part of the issuing Bank and is independent of the underlying contract between the applicant and beneficiary of the guarantee. the primary liability applicant company is wound up? i9s that of the Bank. Whether a Bank is liable on a B. If fraud is evident in a transaction. Hence the Beneficiary refused to release the securities with him demanding additional interest. to have recourse against him in the event of invocation of the Bank Guarantee. What should the bank do? The applicant could not perform the contract due to floods and other reasons beyond his control. Since the main contract is suspended. In case of Bank Guarantees issued in favour of the Government Departments. what should The Bank should advise the Applicant to the Bank do? approach the court for an injunction. Otherwise he would be liable to pay overdue interest to the beneficiary for the delayed period. 10.G claim be honored? Whether any loan documents are required to be obtained by the Bank while issuing a Bank Guarantee? 05 No. What should the Bank do? Next adjust the available liquid securities to the liability. the bank must honour the guarantee. mortgage etc are to be obtained as usual When the Bank Guarantee is invoked . A Bank Guarantee is issued in favour of Chief Engineer Public Works Department. As such. not withstanding the fact that applicants could not fulfill their obligation due to circumstances beyond their control. The B.G. the Bank should honour the claim and realize the securities offered for the loan . the main contract has been suspended? guarantee which was required by the main contract also gets suspended. Whether the B. There some delay in payment of the amount by the Bank. 11. Balance amount is to be recovered by the Bank from the Applicant based on the Counter Guarantee and Indemnity executed by him. The other documents for the purpose of creation of charge like Hypothecation. the Guarantees should be invoked by the same designate in whose favour the Guarantee was issued. Further more the Bank should seek appropriate direction from the Court. Yes. when the Yes.03. 09.Paid account) is not available.G was invoked by the beneficiary. The said guarantee was invoked by Executive engineer of the same department.. However a counter Guarantee cum indemnity is obtained from the applicant.G.) A bank is supposed to settle the claim with in a reasonable time.

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