GLS Resources
Series: Investment Management Consultancy
Bank guarantee as a security¹
Bank guarantee is a guarantee in the documentary form issued by local commercial bank having license for banking operations. According to this document bank promises to pay to a beneficiary usually named in the guarantee, upon receiving a demand letter of a beneficiary, the amount of money or any lesser amount stated in the demand letter. The bank guarantee shall have its effective term or period for repayment.
Bank guarantee is not a performance guarantee, it is always a financial guarantee or guarantee of payment, i.e., it provides a promise to pay by the issuing bank to the beneficiary should the applicant or the provider fail to make a payment to the beneficiary. A bank guarantee does not bear any interest.
The bank guarantee is issued in the form of conditional or unconditional guarantee, whereas conditional is a guarantee to be repaid upon occurrence of certain event or condition described in the guarantee letter.
A bank guarantee may be revoked or terminated in the following cases:
- Expiration of a guarantee terms;
- Performance of guarantee by a bank in full;
- Assignment of a principal agreement entered into between applicant and beneficiary to another debtor without consent of the bank for assignment;
- Withdrawal of a license for banking operations;
- In accordance with the terms of a guarantee agreement.
Presence of a bank guarantee adds to the Kazakhstan partner due diligence process concerning existence and solvency of a person. The banks grant guarantees to its clients after having completed its own due diligence and based on various securities provided by the client against guarantee, such as monetary deposits, cash or pledge of funds, etc.
Some other elements of a Kazakhstan bank guarantee:
- A bank guarantee cannot be purchased or sold; it is not a financial security;
- A bank guarantee has an exact format relating to the intended use;
- It is a non-transferable document;
- A bank guarantee may not be split or divided.
A bank guarantee is auxiliary obligations, meaning that beneficiary must make all necessary steps to receive payment from the initial debtor and is entitled to apply guarantee only after all necessary actions are exhausted. Please ask for your local lawyer to help with understanding of the preliminary actions.
Bank guarantee check list:
The text below may serve as a check list to make sure that the presented document is valid and will be effectuated and repaid upon demand of a beneficiary.
A. Presence of all requisites. A bank guarantee is issued by a bank in the form of a letter and signed by an authorized person of the issuing bank. The bank guarantee shall contain all details and requisites set out in the then effective special decree of the Kazakhstan National Bank.
B. Guarantee agreement. A bank guarantee comprises of 2 documents, a bank guarantee letter and bank guarantee agreement signed by the bank and bank’s client (applicant). This agreement shall not add much to promises and the other terms but it is worthwhile to have a look to make sure that there are no any conditions which can be detrimental to guarantee letter itself.
C. Repayment conditions. Understandably, paying attention to the text in the part of conditions for payment is important. Please request amending it accordingly until satisfied that payment conditions are described clearly enough and understood by all parties.
D. Term. The guarantee letter shall bear a term or date. Expiration of a shown date makes it invalid after that date.
E. Transaction approval. Obtainment of a bank guarantee by applicant (bank client) is likely to be a transaction which requires approval of corporate bodies of the applicant. Failure of prior approval creates risk invalidation of the bank guarantee.
F. Agreement provisions backing-up full repayment. Sometimes a bank guarantee covers only principal amount or part of indebtedness. The remaining part of debt, including interests accrued or enforcement expenses, shall be sought to be repaid by the affiliates of original applicant or through other type of securities.
[1] A security has different meaning in the business, including tradable financial instruments used to raise capital in public and private markets, or an instrument of investment in the form of a document, such as a stock certificate or bond, providing evidence of its ownership. This work is about a bank guarantee as a security provided to ensure performance of contract terms, or as described in the Merriam-Webster Dictionary, “something given, deposited, or pledged to make certain the fulfillment of an obligation”.
April, 2022
GLS