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5 tips for recovery of bank guarantees by liquidators

In our commercial disputes practice, we have observed that liquidations are on the rise. Consequently, we have seen an increase in liquidators seeking to recover company assets for the benefit of creditors.

In the property leasing space this includes the recovery of bank guarantees and the associated cash accounts securing those guarantees. Issues can arise depending on whether the interested party is on the lessor or lessee side, and generally in circumstances where the bank guarantee is not returned to the bank for cancellation.

In this article we explore some of the questions which should be asked by liquidators and company directors, to identify whether a bank guarantee given by a company can be recovered by a liquidator for cancellation, so that funds securing it can be released for the benefit of all creditors.

1. Has the company given any outstanding bank guarantees?

First, consideration should be given to whether the company has provided any bank guarantees to third parties. Particularly close notice should be given to historical leases entered into by the company.

For example, company directors and liquidators should ask, if the company was a trading business:

  • Where did the company operate its business from over time?

  • Did it lease any business premises?

  • If so, was a bank guarantee given to the relevant landlord(s)?

  • Was that guarantee returned to the bank at the conclusion of that lease?

  • Was that guarantee cancelled at the conclusion of that lease?

2. Who holds the bank guarantee?

Secondly, if an outstanding bank guarantee is identified, the parties should investigate who holds the original bank guarantee. It is usually the case that the bank will require the original bank guarantee to be returned to it, along with a consent from the beneficiary, in order to have the guarantee cancelled and the security funds released to the company.

The party who presently holds the guarantee might not be the party to whom it was initially given. For example, is the guarantee now held by a subsequent owner or lessor of the property, or an agent or assignee of one of those parties?

3. Is the party holding the bank guarantee the beneficiary of the bank guarantee?

Thirdly, once the party holding the guarantee has been identified, and if that party is asserting a right to hold or call on that guarantee, consider whether that party is the beneficiary as listed on the bank guarantee. This is a strict test and can be completed simply by comparing the ACN or ABN of the company holding the guarantee and asserting the right, with the ACN or ABN of the beneficiary.

If the bank guarantee is held by a party who is not a beneficiary, that party would not, on the face of it, have an entitlement to call on it.

4. Does the company owe a debt which is secured by the guarantee?

Fourthly, it is essential to determine whether the company is indebted to, or is liable to pay, a debt owed to the beneficiary of the bank guarantee. However, we have seen instances where a third party holding a bank guarantee may try to call on the guarantee irrespective of whether:

  • That party is in fact the beneficiary listed on the guarantee

  • The company who gave the guarantee is the party who owes the debt purportedly being satisfied by the guarantee.

Subject to our comments in item 5 below, in either of the above scenarios, the party calling on the debt would not have a right to do so.

Review of the company’s books and records will assist to determine whether a debt is currently owed to the beneficiary of the guarantee. If the bank guarantee secures obligations under a lease, common issues are rental arrears and costs of failing to make good at the conclusion of the lease.

Has the company indemnified another party who owes a debt?

If the guarantee was given to secure obligations under a lease, consider whether that lease was assigned by the original lessee company to a subsequent lessee under a Deed of Assignment.

If such a deed exists, ask a lawyer to review that deed in detail, and ask that lawyer to consider:

  • Is there a clause in the deed which assigns any outstanding debts owing under that lease to the assignee?

  • If so, does the assignor retain any liability for outstanding debts owed to the lessor, post-assignment?

Depending on the answer to these and related questions you will be able to determine whether the original lessee company owes any outstanding debts to the beneficiary of the bank guarantee (the lessor). If not then the bank guarantee given by the original lessee company should be returned to the bank, cancelled and funds returned to it.

Attitudes of the banks

Against this background, it should be noted that most bank guarantees contain a clause that the bank is obliged to satisfy a demand for payment under the bank guarantee:

  • Without reference to the company whose obligations are secured by the guarantee

  • Despite any notice given to the bank not to satisfy a demand made under the guarantee

  • With no obligation on the bank to confirm the validity of such demand.

That is, if a demand is made for payment from a bank by a beneficiary under a guarantee (albeit invalidly), and the bank makes payment, recourse is often limited to commencing litigation against the party who has (wrongly) called on the guarantee to recover those funds.

It is therefore imperative that liquidators and company directors take proactive steps to identify, recover and cancel bank guarantees as soon as such bank guarantees are identified.

If you are a director or liquidator of a company and you are aware the company has given outstanding bank guarantees which you would like to recover, contact our Commercial Disputes Team.

Authors: Gavin Stuart and Isabelle Stillman