Discounting under own LCs

svishu · Post by **svishu** » Sun Oct 30, 2011 1:00 am

After acceptance of a document under usance LC, issuing bank decides to discount it and pay the beneficiary. Can payment be made with recourse ?
Regards
Vishu

HOANGTHIANHTHU_invalid · Post by **HOANGTHIANHTHU_invalid** » Sun Oct 30, 2011 1:00 am

I do not find any good reason for the issuing bank to prepay its acceptance with recourse.

Regards,
N.H. Duc

svishu · Post by **svishu** » Sun Oct 30, 2011 1:00 am

The issuing bank earns the interest and related commission on the transaction. It is business for the issuing bank.

Regards
Vishu

BAKHTEYERH · Post by **BAKHTEYERH** » Mon Oct 31, 2011 12:00 am

Dear,
keeping aside the formalities.
The issuing bank can discount and pay the bill but must be without recourse.

GlennRansier_olsABN · Post by **GlennRansier_olsABN** » Mon Oct 31, 2011 12:00 am

An issuer honour's their LC obligations without recourse.

svishu · Post by **svishu** » Tue Nov 01, 2011 12:00 am

Thanks for the responses. After discounting if a fraud or forgery is detected and presuming the court order stops the issuing bank from debiting the applicant's account, how should the issuing bank protect itself, if no recourse is available ?
Regards
Vishu

GlennRansier_olsABN · Post by **GlennRansier_olsABN** » Tue Nov 01, 2011 12:00 am

The LC is the issuer's "irrevocable" undertaking to the beneficiary (and/or confirmer). The LC Application Agreement is the issuer's document to protect its reimbursement rights.
Additionally, where you deem it necessary, you could decide to perform a little research on a beneficiary prior to discounting larger amounts. An issuer does not have to prepay its acceptance/deferred obligations.

HOANGTHIANHTHU_invalid · Post by **HOANGTHIANHTHU_invalid** » Wed Nov 02, 2011 12:00 am

Dear Vishu,

Court order is the issue of local law by which the issuing bank must abide notwithstanding that the court order is contrary to the UCP and international banking practice.

It is common practice that the issuing bank would prepay its own acceptance without recourse. However, the issuing bank may have a side agreement with the beneficiary allowing it to have recourse to the beneficiary in the case of such a court order. The issuing bank can prepay its own acceptance if the beneficiary is happy to sign such a side agreement.

Anyway, I do not think such a side agreement can help guarantee that the issuing bank can have recourse to the beneficiary who committed fraud on purpose, especially when the beneficiary is not in the same country as the issuing bank.

Regards,
N.H.Duc

[edited 11/2/2011 2:55:01 AM]

NigelHolt · Post by **NigelHolt** » Sat Nov 05, 2011 12:00 am

Unlike a nominated bank, an issuing bank is not protected by sub-Art. 12(b). Thus the 'Santander case' would suggest that under English law an issuing bank that purchases a draft it has accepted is protected by the Bills of Exchange Act 1882, in the event that fraud can be successfully shown prior to the due date, but that an issuing bank that pre-pays a DPU it has incurred is not protected and will lose its right of recourse to the applicant in the event that fraud can be successfully shown (prior to the due date), unless it had the applicant’s authority to pre-pay.

GSham · Post by **GSham** » Mon Nov 07, 2011 12:00 am

Generally an issuing bank should consider prepaying its obligation only when it is authorized or permitted by the applicant to do so. This can be contained in the LC application form or by way of a separate agreement signed by the applicant.