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vishnu (Manager)     12 January 2012

Stay on encashment of bg

Dear Team of Experts,

I request your expert guidance and advise on the following case.

The company ABConstruction P Ltd  has submitted a BG for Rs.1.80 crores to the beneficiary Road Development Corporation Ltd  as a part of the BOT contract condition.

The contract was terminated and the BG was sent for encashment to the Bank by Road Development Corporation Ltd.

Meanwhile AB Construction filed a writ in HC and obtained a stay on the encashment of BG.

This order was sent to the Bank and the encashment stayed.

In 2 months of the stay order the BG expired and lapsed.

The stay order still in force , the beneficiary has not asked the bank for renewal of BG.

Now the Bank has kept 1,80 crores in FD just in case the BG has to be encashed and given to the beneficiary.

Now my question is

1. The bank cannot hold the BG and the FD amount as security since the BG has lapsed.

2. The Company AB corporation has filed an arbitration suit and the same is in progress.


Please advise what is to be done and can you highlight any HC or SC cases.


Thanks in Advance




 5 Replies

G.L.N. Prasad (Retired employee.)     13 January 2012

I am not an expert but dealt with issue of several hundred Bank Guarantees and very few encashments.

1.Every Bank Guarantee is being issued with a restrictive clause in uniform format of Bank and unless and until a demand is made the BG expires and a date is being prescribed.

2.During the tenure of BG, the security must be under lien because it is a mortgage.

3.If demand or encahsment is not made on demand officials have to accept personal responsibllity and accountability. The written demand has to be made by returning the original bank guarantee with a demand letter and RBI will not spare any bank for delay in encahsment as much emphasis has been placed on integrity of Banking systems.

SO Bank is legally right as it obtains similar counter guarantee with lien on deposit from it's customer standing that deposit remains till bank liability is liquidated.  Many unscrupulous customers are resorting to litigation before BG is encashed mostly through department officials and in this system we can not stop such tactics.   In some cases it is also possible that customers also play games with the bank to save BG.

This is a valid procedure and unfortunately I am handling several cases even when Bank guarantee without a demand within date expired and even after limitation period and even when Bank has written that there can not be liability after prescribed date mentioned in BG, Banks are neither permitting encahsment of companies nor refunding deposit to customer stating that to refund original bg has to be returned to them for refund of deposit.  Imagine BG's limitation period was over 10 years back and BG is expired, counter guarantee also expires and it is dead but banks are not refunding amount and promoting litigation.

I personally think at this point of time nothing can be expected unless you come out of litigation.   Sorry, but this is fact and also necessary for integrity of banking system and faith imposed on BG.;

with regards.

Mahesh Kakade (Company Secretary & Asst.Commercial Manager)     13 January 2012

I am in agreement with Mr. G.L.N Prasad’s views.


Bank Process for refunding the FD / counter guarantee against BG is original BG to be return with covering letter to Bank and then they will restore your fund limits or return your FD/ counter guarantee.


In your case the claim was made prior to expiry of the BG and it was hold by stay order.

In practical if the stay order was not there then banks obligation was to invoke the BG and remit the fund to RDCL. Now BG had expired during the litigation and matter is not settle between the parties so Bank have every right to hold your FD for future payment if any arise.

Surendra Gupta (Banker)     14 January 2012

(i)What was the original security at the time of issue of the BG. Generally banks issue BG by keeping margin of 10% for such BGs & not 100% by way of FDR.

(ii)The BGs contain a limitation period, generally 6 months within which the beneficiary can lodge claim with the bank. After expiry of this period, the beneficiary cannot make a claim on the bank. But since the claim has already been made possibly due to non-performance by the AB Construction, the court must have stayed the encashment of the BG on some solid/reasonable ground. The beneficiary should have moved an application before the court requesting for extension of the validity period of the BG, before the expiry of the same. It appears that no such action was taken by the benefiaiciary.

(iii) in case the original security of the bank was not 100% FDR, the bank’s action in refusing to make payment of the FDR for Rs.1.80 Crores is not justified without issuing a notice of demand on AB Construction, which has to be contested.

(iv) please make a written demand to the bank for releasing the FDR of Rs.1.80 Crores with copy to Circle Office of the Bank and in case of non-compliance, you have the option of requesting the court for issue of directions to the bank to keep the original security and release the FDR of Rs.1.80 Crores. You have have the option of taking up the matter with Banking Ombudsman/Consumer Court by engaging a good Lawyer.

RAJU O.F., (Advocate)     14 January 2012

If the company did not give any other security other than 100% cover by FDR, the bank is justified in keeping the FD with them during the pendency of HC proceedings and arbitration proceedings.  The beneficiary of the BG cannot invoke the BG susequent to the expiry of the BG.  If the contract undertaken by the company is fulfilled and hence the contract was terminated, then the BG had to be returned, without encashment.  Any how, the company has to now wait till the decision of the Writ/ Arbitration proceedings.

KrishnaRao (Construction)     07 December 2016

Hello Members

The Bank Guarantee of my friend has been sent for extension before expiry of the BG period. The Bank has to extend the BG on or before 31st January as the BG period will END by 31st January. But the Bank has extended the same on 3rd February.

My questions are:

Whether the BG will be in live even after the date of expiry, though the defaulter is BANK in this case, as it has FAILED in extending the same within the Lien Period. 

Whether the Bank can extend a BG, which was dead by 31st january with retrospective effect rom February 1st onwards on 3rd February?

Whether the Bank can extend the BG in such circumstances, without the permission of the Applicant and in negation of the Applicant? (The beneficiery has not invoked the Bank Guarantee).

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