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Yogesh Nagpure (Lawyer)     02 April 2013

Invocation of bank guarantee after its expiry

I am running a business of construction. For certain contract i have issued a peformance guarantee to my client. The Guanrantee was expired on 30/09/2012. The said Guarantee was closed and the margine money against this guarantee was returned by the bank.

Now After three months my client somehow managed the bank people and invoked the bank guarantee on 12/01/2013.

What shall i do now. Can I file A police complaint for Criminal Conspiracy.

Regards



 11 Replies

sunil (ac)     02 April 2013

Dear Yogesh,

Kindly check following facts in the BG submitted by you to your client:

1.Whats the BG validity.

2.Whats the claim period if any mentioned in the BG.

If the dated under point no.1 and 2 has expired already and your client has raised the claim letter, you can proceede with legal recourse.

Advocate Sastry (Advocate)     02 April 2013

When you say that :"The said Guarantee was closed and the margine money against this guarantee was returned by the bank."   the banks normally do not encourage any claim. YOU HAVE NOT SAID WHETHER THE ORIGINAL BANK GUARANTEE WAS RETURNED FOR CANCELLATION ON THE DATE OF REVERSAL OF VOUCHRS. Please ask the Branch Manager first and later refer to their Regional / Zonal Office. You can inform the Branch Manager that you will resort to legal action against the bank. Can you please reproduce the last para of the guarantee "NOT WITHSTANDING LIABILITY CLAUSE"

Yogesh Nagpure (Lawyer)     02 April 2013

Dear Mr. Sastry

Thanks for your Reply

The said Guarantee is now valid upto 30.09.2012, with claim period upto 30.09.2012.

Notwithstanding anything contained hereinabove our liability under this bank guarantee shall not exceed Rs. 35,24,561/-(Rupees Thirty Five Lakhs Twenty Four Thousand Five Hundred and sixty one only). This bank guarantee shall be valid upto 30.09.2012 where after it ceases to be in effect in all respects whether or not the original bank guarantee is returned to us, and our liability under this guarantee will arise only if we receive a notice in writing from M/s __________ on or before 30.09.2012.

THE ORIGINAL BANK GUARANTEE WAS NOT RETURNED TO BANK BY THE BENIFICIARY. NO DEMAND WAS RAISED BEFORE THE VALIDITY PERIOD TO THE BANK.

Advocate Sastry (Advocate)     02 April 2013

Dear Yogesh,

As per the details mentioned by you, Bank cannot honour the claim on 12.01.2013. Please inform the Bank that you disown the liability and complain to their RO/ZO. If the Bank insists tell them that you will initiate legal action against the bank.

Prasun Chandra Das (Banker)     04 April 2013

Firstly, bank cannot invoke the BG if claim has been received after the claim date (30.9.12 in this case). Secondly, since your margin has been returned, and assuming that the invoked amount has not been recovered by the bank by debiting any of your a/cs (pls clarify on this), it seems that the bank has invoked the BG out of its own pocket! You need not worry if that is the case. Thirdly, you are perfectly within your rights to contest the invocation, but I'd suggest you do that 1st with the branch manager, then with zonal office, and then with the central office of the bank (whole process should be over within a month), before proceeding to the banking ombudsman if the earlier bank functionaries do not solve your issue to your satisfaction.

 

Lastly, which crazy bank is this? I hope it's not the bank I work for :)

Yogesh Nagpure (Lawyer)     05 August 2015

Dear Sir

I have tried all the suggested remedies except banking ombudsman but in vein. in an inetr office communication bank itself has stated that they were not in reciept of any communication before the expiry of bank guarantee from the benificiary and hence they have closed the bank guarantees. this communication is from branch manager to zonal manager.

even after illigal invocation of the bank guarntees the branch manager thorugh its inter bank communication informed zonal manager that they have closed the bank guarantees since they have not recived any claim before the expiry date.

it is on the instruction of higher authorities thay invoked the guarantee.

surendra prakash agrawal (advocate)     15 September 2015

The said Letter of Guarantee is upto 30.09.2012. There is a provision for claim period understood of minimum 3 months or one quarter extra upto which clai shall remain valid for invocation. Whenever, Bank issues any Guarantee, it charges commission on LG for one quarter extra.

During this claim period a claim can be settled. Suppose on last of validity, one invokes LG by post. So the same will take some time in transit to reach to issuing Bank. It will get it examined whether the same is original and well within claim period.Unless and untill the original LG bond is not received back, or beneficiary confirms having no claim, the security kept under LG (0 % to 100%) will not be refunded to the issuing party except to wait and watch claim within its claim period.

In past, some Banks did not honour the claim on one pretext or other so MMTC etc refused to accept LG issued by such Banks. Invocation of LG is just like encashing a Demand Draft payable on the same Bank.

Therefore, add claim period after expiry of period of LG to get the payment under LG Bond. Even if Bank issues notice to surrender original LG papers, Bank has no right to reverse its contingent liability to be posted in General Ledger under Head of LG Issued and outstanding.

Remember each case has got its own merits based on various legal considerations. 

Rohan   04 February 2016

Dear Sir,

I am working for corporate and do e-Governance projects for UID project in Rajasthan we have submitted the PBG of INR12,50,000 the validity of BG was 28 12 2013 and claim expiry was 28/01/2014 and in june 2014 we got the completion/experience certificate from State Registrar now District Collector in whose favour we have submitted the said BG is not interested in returning the BG even afte two years of Expiry of BG and Bank is not releasing the amount so please advise what to do.

 

Rohan

 

 

Rohan   04 February 2016

An important line is written in the last page of BG bond is "Thereafter the Bank shall discharged from all its liabilities under this guarantee and all your rights under this Guarantee shall stand extinguished, irrespective of the fact whether the Guarantee in original is returned to us or not" can we seek court's help in this matter 

 

Rohan

Prasun Chandra Das (Banker)     12 February 2016

Rohan

 

This is a common 'Not Withstanding Clause (NWC)' you will find in 99% of the BGs. Howver, practice differs from Bank to Bank on what to do when BG has expired and the oriiginal BG has not been returned by the beneficiary/applicant.

 

I suggest you ask your banker whether a 'No Claim letter' from the beneficiary of the BG, without the original BG, will be sufficient. Pls also ask whether the bank has to receive the No claim letter directly from the beneficiary, or you may arrange for it and submit it with the Bank. If they agree, you can request the beneficiary to issue such a letter.

 

Otherwise, you can always lodge a complain with the higher-ups at the beneficiary's office.

Prasun Chandra Das (Banker)     12 February 2016

Let me explain something about the Not Withstanding Clause (NWC).

 

Sec 28 of the Indian Contract Act 1872 basically says that agreements in restraint of legal proceedings are void. That is, in case of BGs, banks can't put the NWC which restricts/extinguishes the rights of the beneficiary to make a claim. One of my colleagues explained it as "rights may get extinguished, but remedies (to courts) remain".

 

The Banking Laws (Amendment) Act, 2012 has been passed by the Parliament and, under section 17 of the Amendment Act, provisions of section 28 of the Indian Contract Act, 1872 have been amended and following Exception 3 has been inserted in the said Act:

 

Exception 3. ------- "This section shall not render illegal a contract in writing by which any bank or financial institution stipulate a term in a guarantee or any agreement making a provision for guarantee for extinguishment of the rights or discharge of any party thereto from any liability under or in respect of such guarantee or agreement on the expiry of a specified period which is not less than one year from the date of occurring or non-occurring of a specified event for extinguishment or discharge of such party from the said liability."

 

However, since it has confused most banks, IBA had referred the matter to Hon’ble Justice S.H.Kapadia, former Chief Justice of India.  Shri. Kapadia vide his opinion, has stated that it is not necessary to make any changes in the existing format wherein the Bank are adding the clause as stated above. There are also cases in SC on similar matters where final judgementis pending.

 

Hope the above onformatioon helps.


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