LG' are not assignable instruments .but In some countries issue LG like LC.You can easily see the required documents in the LG text.
The structure of the transaction is ; importer and exporter agree on the trade term.Importer requests from its bank to issue a LG in favour of exporter.Importer's bank issue an LG and advise the LG to the exporter through a bank which is located in exporter's country.The exporter's bank responsibility is only to transmit the LG to the exporter.but meanwhile the exporter demands its bank to discount the LG.Is it possible.?
DISCOUNTING A LETTER OF GUARANTEE
DISCOUNTING A LETTER OF GUARANTEE
A few -by no means comprehensive- thoughts:
1. Whether or not a demand guarantee (DG) is assignable depends on its terms. A DG can be issued with a provision that it is assignable (see Art. 4 URDG for example). Also if it is silent on the question of assignment then it may well be assignable under the applicable law. For an English court case involving a DG assigned by the beneficiary to a bank as ‘security’ for facilities being granted see Standard Bank London Ltd v Canara Bank [2002].
2. I would anticipate that any bank that was relying on an assignment of a ‘payment’ or ‘trade debt’ D/G (the type of D/G in question here I assume) as ‘security’ for a loan would also have assigned to it by the exporter the right to receive the proceeds of the underlying contract, i.e. that between the importer & exporter, (and give notice thereof to the importer including details of the (loan) account to which payment is to be made) so as to ensure (as far as is possible) that if payment is made in the normal course of business it is made to the assignee-bank and not to an account that the exporter might keep with another bank, for example.
3. Notwithstanding 2. above, a possible problem is that the assignee-bank may not be in a position to give legitimately the statement of default -if any- required by the D/G.
Please note I would not be able to provide any further information.
[edited 6/30/2006 10:19:30 AM]
1. Whether or not a demand guarantee (DG) is assignable depends on its terms. A DG can be issued with a provision that it is assignable (see Art. 4 URDG for example). Also if it is silent on the question of assignment then it may well be assignable under the applicable law. For an English court case involving a DG assigned by the beneficiary to a bank as ‘security’ for facilities being granted see Standard Bank London Ltd v Canara Bank [2002].
2. I would anticipate that any bank that was relying on an assignment of a ‘payment’ or ‘trade debt’ D/G (the type of D/G in question here I assume) as ‘security’ for a loan would also have assigned to it by the exporter the right to receive the proceeds of the underlying contract, i.e. that between the importer & exporter, (and give notice thereof to the importer including details of the (loan) account to which payment is to be made) so as to ensure (as far as is possible) that if payment is made in the normal course of business it is made to the assignee-bank and not to an account that the exporter might keep with another bank, for example.
3. Notwithstanding 2. above, a possible problem is that the assignee-bank may not be in a position to give legitimately the statement of default -if any- required by the D/G.
Please note I would not be able to provide any further information.
[edited 6/30/2006 10:19:30 AM]
DISCOUNTING A LETTER OF GUARANTEE
thank you for yr reply.
best regards.
esra
best regards.
esra
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RobertFoutts
- Posts: 4
- Joined: Fri Apr 05, 2019 5:14 pm
DISCOUNTING A LETTER OF GUARANTEE
On the topic of discounting LG's, my first response after reading the question was a resounding NO but after thinking about it for a moment or two longer I am not so sure that it would be the proper complete response. First one would have to make sure such a transaction is not illegal under issuing bank's country's (and advising banks's country) laws. Next onoe would have to be certain the demand for payment under the LG was in perfect order and that funds would reasonably be expected to be forthcoming from the LG issuing bank. One should also take into account whether or not there is a dispute between the parties that may cause the LG issuer to contest the demand for payment. One would also have to consider the financial condition of the LG issuers client. Bankruptcy could further complicate the recovery of funds by the discounter. One would also have to correctly estimate the time a discounter would be out of funds so that the discount fee collected covers the carrying cost of the advance plus a reasonable spread. I'm sure there are many more variables to consider prior to making the decision to discount, including (but not limited to)i) having an appropriate "Agreement to Discount" prepared by the discounter's legal counsel and signed by the LG beneficiary and the discounting entity that contained the appropriate indemnifications and ii) perhaps most importantly, the financial condition of the LG beneficiary itself. Are they a (very) good client? Have you done a KYC on them? Are they a known entity? Discounting an LG is an unusual transaction and should be looked at very carefully from many angles before a decision to discount is made. In the LC world, one could look to the Banco Santander legal case as a guide as to the dangers of discounting. After stating all of the above, my response would still be a qualified NO. Under most circumstances I would most certainly advise against discounting an LG! (Please note that I would not be in a position to offer any other comments regarding this topic.)
DISCOUNTING A LETTER OF GUARANTEE
Robert,
I think the term ‘discounting’ is somewhat unhelpful here (as it is misleading) -particularly when applied to a demand guarantee- and certainly not the term I would use. What -in effect- is being talked about is simply purchase of a ‘trade receivable’ -the sum due to the exporter from the importer- (a routine financial transaction) against the ‘security’ of the assignment of the undertaking (the guarantee) issued to secure payment of that trade receivable (a not-so-routine, but by no means unusual, transaction).
Were it a ‘commercial’ standby that was involved, particularly one subject to ISP98, then the same result could be achieved by the standby being expressed to be transferable.
Jeremy
I think the term ‘discounting’ is somewhat unhelpful here (as it is misleading) -particularly when applied to a demand guarantee- and certainly not the term I would use. What -in effect- is being talked about is simply purchase of a ‘trade receivable’ -the sum due to the exporter from the importer- (a routine financial transaction) against the ‘security’ of the assignment of the undertaking (the guarantee) issued to secure payment of that trade receivable (a not-so-routine, but by no means unusual, transaction).
Were it a ‘commercial’ standby that was involved, particularly one subject to ISP98, then the same result could be achieved by the standby being expressed to be transferable.
Jeremy
DISCOUNTING A LETTER OF GUARANTEE
Dear Both,
Yes,The subject of the LG is exactly the purchase of a trade receivable and LG is issued as assignable to discounting bank only.The exporter presents documents which are required in the LG text to the discounting bank on collection basis.If the documents are in conformity with the LG text,discounting bank discounts the LG amount.The claim clause of the LG is ; Shipment is made but the proceeds are not received to the indicated account number of dicounting bank.Meanwhile the clause "If the exporter wants LG to be discounted ,It is allowed "is written in the LG text.
Regards
Yes,The subject of the LG is exactly the purchase of a trade receivable and LG is issued as assignable to discounting bank only.The exporter presents documents which are required in the LG text to the discounting bank on collection basis.If the documents are in conformity with the LG text,discounting bank discounts the LG amount.The claim clause of the LG is ; Shipment is made but the proceeds are not received to the indicated account number of dicounting bank.Meanwhile the clause "If the exporter wants LG to be discounted ,It is allowed "is written in the LG text.
Regards
DISCOUNTING A LETTER OF GUARANTEE
Under US letter of credit and secured transactions law (revised UCC Articles 5 and 9), an independent undertaking in the form of an LG would be treated as an LC.
Under US letter of credit law, the assignee of LC proceeds under a straight LC has no reimbursement or other rights against the issuer and relies solely on whatever applicable secured transactions law provides.
Under US secured transactions law, any creditor of the beneficiary with a perfected security interest in the underlying account receivable has an automatically perfected security interest in the beneficiary's right to proceeds under any supporting LC but, absent issuer consent, has no assurance of first priority or any right to compel the issuer to pay directly.
Note that draft UCP600 clarifies that nominated banks are entitled to reimbursement notwithstanding "discounting" by early payment; it does nothing for a bank that is not nominated and leaves all assignees of proceeds dependent on "applicable law".
Regards, Jim Barnes
Under US letter of credit law, the assignee of LC proceeds under a straight LC has no reimbursement or other rights against the issuer and relies solely on whatever applicable secured transactions law provides.
Under US secured transactions law, any creditor of the beneficiary with a perfected security interest in the underlying account receivable has an automatically perfected security interest in the beneficiary's right to proceeds under any supporting LC but, absent issuer consent, has no assurance of first priority or any right to compel the issuer to pay directly.
Note that draft UCP600 clarifies that nominated banks are entitled to reimbursement notwithstanding "discounting" by early payment; it does nothing for a bank that is not nominated and leaves all assignees of proceeds dependent on "applicable law".
Regards, Jim Barnes