Article

Note: In order to obtain the issuance by Bank/ Assignee of an LC for approximately US$1,425,000 for the purchase of motorcycles, Reliance Trade Corporation PLC (Applicant) assigned the proceeds of a separate LC for US$1,550,000 issued by FBN Plc (Issuer) of which Applicant was the beneficiary to Union Bank of Nigeria (Bank/Assignee). In addition the Chief Executive of Applicant, Pathak, guaranteed reimbursement to Bank/Assignee.

The guarantee provided, in part, "[i]n consideration of [Bank/Assignee] granting or continuing to grant time, credit and/or banking facilities or accommodation to Name Reliance Trading Company ...." The guarantee further provided that "[t]he Guarantor shall have no right in connection with this Guarantee to require the Bank ... to ... proceed against the Principal; ... proceed against any security held from the Principal; ... proceed against any co-surety or any security held from the Guarantor or from any co-surety; ... pursue any other remedy available to the Bank."

Subsequently, the UK assets of Bank/Assignee were taken over by Union Bank United Kingdom (Assignee's Successor). Applicant then became insolvent. After Assignee's Successor paid under Assignee's LC, it demanded payment from Issuer for the full amount of the LC. Issuer declined to pay more than US$180,502.45 of the total amount of the LC, claiming a right to set off of other Applicant debts. Recognizing Issuer's right to set off, Assignee's Successor sued Guarantor on his guarantee, serving a statutory demand.

The Chief Registrar of Applicant's insolvency set aside the statutory demand under the applicable insolvency rules. The Chief Registrar agreed with Guarantor that Assignee's Successor, in drawing on the LC, "was in substance realising a security for the debt guaranteed by [Guarantor]". It therefore had a duty of care to minimize the liability of the Guarantor which it breached by recognizing Issuer's right to set off. The set off caused the security to be surrendered, damaging Guarantor and Applicant. It also decided that the guarantee misnamed Applicant such that it was not sufficiently identified. On appeal, the Chancery Division, Briggs, J., disagreed and reinstated the statutory demand.

The court addressed "the question whether [Guarantor] has any prospect of establishing at a trial that [Issuer] was not entitled to set off its cross claim against Reliance against enforcement of the [Issuer] Letter of Credit by [Applicant's Successor] ...." The court first noted that "by contrast with the well established rule that the issuer of a letter of credit may not rely upon the buyer's cross claim against the seller for the purpose of resisting the seller's enforcement of the letter of credit, there is no such general rule which prohibits the issuer from relying upon its own set-off against the seller (in the unusual circumstance that it has one) or against the seller's assignee."

The court stated that "[w]hether expressed in terms of waiver or estoppel, ... a debtor with an equity against his creditor must upon receipt of a notice of assignment of the debt disclose his equity to the assignee if he is thereafter to rely upon it." The court then found that "the circumstances in which Notice of Assignment was given to and acknowledged by [Issuer] in this case were not such as to give rise to any waiver or estoppel in relation to a set-off by then accrued due." The court stated that "in the present case the [LC] was neither surrendered nor lost nor imperfect nor altered in condition by reason of what was done by [Assignee's Successor]" and that Guarantor did not have "any reasonable prospect of leading to a conclusion that [Assignee's Successor] had committed a breach of the alleged duty of care, in forbearing to take legal proceedings against [Issuer]". The court concluded that "the Chief Registrar was in my judgment wrong to treat the breach of duty defence as enabling or requiring him to set aside the Statutory Demand ...."

The court further ruled that the guarantee did not misname Applicant because Guarantor "had been in correspondence with [Contractor], using the standard headed paper of [Applicant] which unambiguously disclosed that the [name provided in the guarantee] was the trading name of [Applicant]". The court concluded that "[t]here is therefore no relevant misnomer in the guarantee."

[LHD/jrw]

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