Letter of Guarantee

The word ‘Guarantee’ means a promise; usually in writing that the Surety (Guarantor) shall fulfill the
promise if the concerned Principal Debtor (Customer) fails to discharge his responsibility/obligation to the
Creditor (Beneficiary). In brief, a Bank Guarantee is an undertaking given by a Bank to perform the
promise or discharge the liability of its customer in case of his default.

 Features

 The guarantee must be for a certain fixed amount and the period of its validity must be limited
and fixed.
 Bank should look to the past performance both for Bank Guarantee & Investment (if any) of the
Customer.
 Bank may request potential Customer to open an Al-Wadiah Current Account andlet him maintain
the account satisfactorily for a reasonable period.
 The customer must execute a ‘Counter Guarantee’ to the Bank providing inter-alia that he will
indemnify the Bank against all consequences and gives authority to the Bank to charge all
payments to his account. Tangible security (cash & collateral security) in support of “Counter
Guarantee” shall also be obtained securing the entire amount of the Guarantee.
 The guarantee will be issued only after completion of full documentation as per sanction
stipulation.
 • The Bank Guarantee for procurement of any assets / property / services may be settled under
Bai Al-Murabaha / MPI / Bai Al-Muajjal / Hire Purchase under Shirkatul Mielk (HPSM) mode of
investments with the Principal Debtor (Customer).
 • As soon as the guarantee period is over, the original guarantee should be called back duly
cancelled by the beneficiary.

 Types of Bank Guarantee

Various types of Guarantee are issued by Bank for several purposes as when and where needed by the
surety. Bank secures the providedfacility by either cash or collateral security and or by both as per
sanction by the competent authority. The most common types of Bank Guarantees are

 Tender or Bid Guarantee

 Performance Guarantee
 Shipping Guarantee
 Advance Payment Guarantee
 Return of Bond Deduction Guarantee
 Customs Guarantee
 Payment Undertaking Guarantee
 Miscellaneous Guarantee

1. Tender or Bid Guarantee

Government Organization and Institutions, Corporations, Companies etc. generally invite tenders for
completion of their projects, such as road building, construction of bridges, building construction, and use
of facilities, performance of any service and / or sale of unwanted goods. Parties bidding for the tender
must submit with their bids a guarantee to the beneficiary or issuer of the tender (Government
Organization and Institutions, Corporations, Companies etc.). This type of guarantee is known as a
“Tender of Bid Guarantee”. It is, generally, sought for 2 per cent to 5 per cent of the contract amount.
After the declaration of the successful bidder/bidders, the original guarantees, of parties whose bids have
not been successful, are returned to the Bank for cancellation. Only the guarantee of the successful
bidder is retained till the signing of the final agreement and submission of another guarantee under the
name of “Good performance of Undertaking Guarantee”. In case of default of the successful bidder, at
whose request the Guarantee is issued, in entering into the agreement and / or in submitting a Good
Performance of Undertaking Guarantee, the beneficiary may en-cash the “Tender for Bid Guarantee” from
the issuing Bank. As such, this type of Guarantee should usually be issued at higher cash margin with
collateral security covering the Guarantee amount.

2.      Performance Guarantee

Guarantee, which is issued in consideration of specific performance of contract, is called ‘Performance

Guarantee’. This type of Guarantee would require higher cash margin with collateral security covering the
Guarantee amount with Power of Attorney to collect bills from the beneficiary (Government Organizations
and Institutions, Corporations, Companies etc.).

The Performance Guarantee may be mainly of two types

 2.1   Good Performance of Undertaking Guarantee

This type of guarantee is issued to ensure the proper and timely performance of undertakings by the
successful bidder. The object of this type of guarantee is the assurance of good performance of
undertakings arising from signing of a contract, which is issued at the request of the applicant (the
contractor), in favour of the beneficiary (Government Organization and Institutions, Corporations,
Companies etc.), to ensure the performance of the undertakings accepted by the contractor, according to
the stipulations of agreements signed. The submission of this type of guarantee by the contractor is an
essential per-requisite for the signing of the agreement with the beneficiary (Government Organization
and Institutions, Corporations, Companies etc.).

 2.2   Good Performance of Job Guarantee

This type of guarantee is issued by the Bank at the request of the Customer (Contractor) to assure the
beneficiary (Government Organization and Institutions, Corporations, Companies etc.) of the proper
working of the customer (contractor) and the attainment of the forecast output, within the stipulated
time, after part of the job has been covered. It is valid for a stipulated period after the completion of the
project and the start-up of the work for which the project was taken in hand.

 3.      Shipping Guarantee

Banks give guarantee to shipping companies for release of goods in the absence of shipping documents,
in case goods arrive before receipt of such documents by the consignee and are incurring demur-rage or
original documents have been lost after retirement from the Bank. These guarantees are limited to bill
amount or letter of credit value and for period till receipt of original bill of lading. The guarantee is
actually signed by the importer in favour of shipping company and countersigned by the Banker.
Normally, full value of invoice or letter of credit must be retained as margin for issue of guarantee.
Alternatively, the goods may be cleared by Bank and kept in its custody as soon as the original shipping
documents are received, these shall be sent to clearing agents to facilitate return of original guarantee.
In the alternative way, custom authority’s confirmation regarding cancellation shall be obtained.

4.      Advance Payment Guarantee

The objective of this type of guarantee is to secure the funds, paid by the beneficiary (Government
Organization and Institutions, Corporations, Companies etc.) to the contractor, before start of the job, or
in the process of the job, to strengthen the financial position of the contractor for speeding up the
progress of work. The beneficiary will take steps to re-collect the funds paid by en-cashing the
Guarantee, in case of the contractor’s failure to meet his commitments. These guarantees are issued by
the Bank, in favour of the beneficiary, at the request of the contractor.

These are required for a fixed percentage of the total amount of the contactor that the beneficiary is
expected to pay to the contractor in the form of advance payments. The funds, paid by the beneficiary to
the contractor, are deducted from the job position reports at various stages in such a manner that before
the last temporary/partially job position report is filed in, the said amount should have been amortized.

According to the general terms of the contract, the amount of the guarantee is also reduced each time up
to the amount of the deductions, on the basis of the beneficiaries’ declaration, and the guarantee is
released, with the consent of the beneficiary, at the latest, by the date of the temporary/partially hand-
over of the job.

5.      Return of Bond Deduction Guarantee

In spite of the supervision and various tests carried out by the beneficiary during the period of the
contract, at various stages of the process of work, for greater confidence regarding proper performance
of the job, after the final handing over, and for a stipulated period, the beneficiary deducts the equivalent
of 10% (more or less) of the gross amount of the job position over the reports of the contractor, and
holds it in an account with himself, and may return the good performance of job assurance amount to
the contractor against the Bank guarantee.

This Type of guarantee, issued by the Bank at the request of the customer (contractor) in favour of the
beneficiary is called “Return of Bond Deductions Guarantee”.

According to the general terms of the contract, the equivalent of 50% of the amount of such guarantees,
is released by the beneficiary, immediately after the approval of the final position of job report, and the
remaining 50% of the guarantee remains valid until the approval of the memorandum of final hand-over.

At the end of each month, in accordance with the terms  of the contract, and, with the approval of the
overseer (to be appointed and introduced by the beneficiary), the contractor prepares a report of all the
jobs completed till that date, as well as, the material on the job site, and submits it to the beneficiary.
This document is known as the “Position/Program Report”.

The Guarantee period is a fixed duration of time, after the temporary hand-over, to guarantee the
rectification of mistakes and short-comings caused by non-adherence to the specifications of the contract
and / or the use of bad or poor material on the job, which the contractor is committed to redress.

 6.      Customs Guarantee

This guarantee is issued in favour of customs authority on account of custom duties for imported goods
and machinery or export commodities on behalf of Clients.

Sometimes, importers are not in a position to pay in cash, the customs duties to release their imported
goods. As such, they need to submit Bank Guarantee to the Customs for an amount equivalent to the
amount of the customs duty.
By issuing the above guarantee, the Bank makes commitment for payment, and must pay the amount of
the guarantee to the Customs Authority, without any delay, at the fixed maturity or on the dates when
the installments fall due.

In same circumstances like disputes over taxation, customers’ desire guarantees to release the goods
under guarantee up to final settlement of dispute by the competent authority.

 7.      Payment Undertaking Guarantee

This type of Guarantees is issued by the Bank to make payment of dues at fixed maturities, such as the
“Guarantee to Pay Taxes.” Normally, this type of guarantee is issued against 100% cash security.

 8.      Miscellaneous Bank Guarantees

Besides the various guarantees stated above, applications may be received for the issuance of
multifarious other types of Bank guarantee for all kinds of jobs. The draft of such guarantees is usually
dictated by the beneficiary.

Legal Position
relating to
Guarantors in
Corporate Loan in
Bangladesh
JUNE 11, 2019 BANGLADESH FOREIGN DIRECT INVESTMENT TAX (LAW)
 Sakib SikderManaging Partner, Jural Acuity

In a lending scenario by a Company, usually, lenders require a personal guarantee from

the directors of the company. A personal guarantee is a type of guarantee where one or
more company directors personally guarantee to repay any debts of their business if the
company face any financial crisis or unable to meet its financial obligation. A personal
guarantee risks their own personal assets. A director’s personal guarantee may be used
in many situations, including:

 Bank loan or overdraft applications

 Invoice financing arrangements
 Commercial property
 Trade supply deals
 Investment deals

The disadvantage of the personal guarantee is when the business unable to pay its
debt, the personal guarantee becomes personally liable for it. This means that the
company creditors can pursue personal guarantee and can put their personal assets at
risk including home as well.

Legal Requirements for a Guarantee

Many documents are called guarantee but actually, they are not. There are a few
factors which the court takes into accounts. These are:

 Proper interpretation
 Title of document
 Substance over a form.

There are a number of formal requirements to be a guarantee.

 Form of guarantees: it must be evidenced in writing in a formal contract or agreement,
note, memorandum or promissory note.
 Signed: the guarantee or their authorized agent should sign it. The name must be
written or printed, as long as it is operated as a signature.

 Secondary Liability: Establish that the guarantor has secondary liability to perform the
guaranteed obligation. The principal debtor has primary liability.
 Consideration: the documents should satisfy the requirements of any contract. That
means, offer and acceptance, contractual consideration, an intention to be legally bound and
capacity to enter into the contract.

How long is a personal guarantee enforceable?

A guarantor’s liability is “coextensive” with the debtor. Whatever the debtor is liable for
to the creditor, is the liability of the guarantor. If the debtor’s liability is released, so is the
liability of the guarantor.

Demand Promissory Note:

Demand promissory note is a document whereby the borrower makes a promise to the
banker to repay the loan amount on demand with the agreed rate of interest.

The Promissory Note Due on the

Demand document if:
 You are making a loan to someone.
 You are borrowing money from a private party.
 You want to determine the amount of a monthly payment on a loan.

Mortgages vs. Promissory Notes

The homeowner generally thinks that their mortgage as an obligation to repay the
money they borrowed to buy their own residence or property. But actually, they sign a
promissory note, as part of their financing process. This document represents that
promise to pay back their loan along with repayment terms. The promissory note is also
another way where some people don’t qualify for a mortgage, they also can purchase a
home. 

Name of the Guarantor may appear as the guarantor only in the CIB report
In the case, Anwar Cement Ltd vs. Bangladesh Bank and others, the Division Bench
of Hon’ble court presided over Justice Jinat Ara passed a Judgment and order dated
24.04.11.  It is stated in this case that the in the CIB report of Bangladesh Bank the
name of the guarantor may appear in the CIB report as a guarantor only and not as a
defaulting borrower.

However, in the previous case law refers that the guarantor’s name cannot appear in
the CIB report at all is hereby overruled. Article 43 of Bangladesh Bank Order 1972, as
well as CIB circulars 01/1994 inserting someone’s name in the CIB report, does not
automatically mean that it is classified as defaulting borrower as per the provisions of
section 27(kaka) of Bank Company Ain 1991.

Sec 17(1) of the Banking Act 1991 stated that consequences of default of payment by
the directors-Directors of the default loanee are vacated on the expiry of the period of
two months notwithstanding the subsequent rescheduling of the loan and repayment of
ten percent of the outstanding loan.

In the case Major MonjurQuadar (Reted) V Bangladesh Bank, it stated that in section

27 Kaka of the Bank Companies Act, 1991 came into force when the petitioner was
neither a shareholder of the company nor a Member of the Board of Directors of the
borrower company, his share having been validly transferred prior to that date, he is
only liable for repayment of the loan by virtue of his personal guarantee to the bank. As
stated in our judgment in Writ Petition No. 3931 of 2001, a guarantor’s liability will not
attract the provisions of section 27 Kaka of the Bank Companies Act, 1991 and, as
such, the petitioner’s name cannot be included in the CIB list.

Recovery Policy

The recovery process can be divided in two ways. Pre-legal way and the Legal way.
Pre-legal way of recovery is done by the banker himself and legal way of recovery is
done with the help of court/law. 

We have to keep in mind that the bank’s money is public money.  It’s a common
responsibility for the borrowers to repay the borrowed money within the due time,
simultaneously, as it becomes the responsibility of all the bankers to recover the money
within the due date. One of the main reasons for which lending money become stuck up
is lack of monitoring. Generally, start the recovery process after a loan becomes stuck-
up. But this is a totally wrong process. Recovery should be started from the date of
disbursement of the loan. Proper monitoring of loan can prevent it from being
classification. Account transaction of the loan account of the borrower must be
monitored. Following subjects may be monitored in case of a continuous loan account.

1.  The transaction must be in conforming with the business of the borrower. If any
suspicious transaction seems to have happened, clarification regarding the transaction
must be obtained from the borrower. Un-related business transaction indicates that the
borrower diverts the fund elsewhere.

2.  Big amount of single withdrawal by the borrower must be monitored. If it is not
conforming with the business nature of the borrower, the loan must be called back.

3.  Lowest balance of the continuous loan account must be monitored after a regular
interval. If the lowest balance is always high it indicates that the borrower may block a
certain amount which he is not getting back. This is not good for the future of the loan.

4. Stock position, as well as receivables, must be matched with the outstanding balance
of the loan account. If the stock is found less than the outstanding balance then it
indicates that either borrower has diverted the fund elsewhere or he has bad debts
which are a bad sign for the bank loan.

Visit the client on a regular basis even if his payment is regular. In the case of the
business client, borrower’s business house, factory, the stock has to be visited on a
regular basis to see whether everything is going on perfectly or not. When a loan will be
monitored in such a way, a borrower will remain alert to repay the loan and bankers will
also be relaxed to know the actual position of a loan

Bank may give an early reminder to their client before the due date in a very gentle way.
An early reminder may be given by SMS, Email, letter or even by phone call. If any
borrower misses the due date a further gentle reminder may be given to the client. If
any borrower fails to repay the dues and does not respond after a reminder, bankers
must visit the client’s office or house to physically meet with him to recover the money. If
necessary, visit the guarantors for recovery of the money.

If the bank has any pledge/hypothecated goods under control against any loan, the
bank may take possession of the goods and arrange to sell the goods through auction
towards adjustment of the liabilities. If Bank has any mortgaged property against any
loan and if a bank takes the power of Attorney u/s 12 of Artha Rin Adalata Ain to sell the
property, the bank may arrange auction to sell the property without the intervention of
the court through an auction sale. This is the last step of Pre-Legal way for the recovery
of the loan.

When a borrower fails to adjust the loan and a loan becomes classified or going to be
classified or become stuck-up due to acceptable reasons, in that situation bankers have
some option to reschedule/restructure the loan for a certain period of time (as per rule of
central bank) to assist the borrower to repay the loan. Bankers should use this option for
the borrowers who are not a willful defaulter and who are willing to repay the loan.

Training is important for the person who will be involved in the recovery process.
Capacity building of the officers is very important. Try to involve efficient officers in the
recovery team who can exert their professionalism to recover the money. Bankers must
be professional while recovering the money. Bankers must behave professionally with
the borrower in a polite manner while recovering the money. Never be rude with the
borrower and be friendly while recovering the money.

Involvement of high official in recovery process directly is another important task.

Though all the Banks have a recovery department headed by a divisional Head but the
top management of the Bank must be involved in the matter directly which will help
accelerate the recovery process. The necessary authority must be given to the recovery
manager so that he can give any decision to the defaulted borrower in a shortest
possible time or instantly. Sometimes recovery of money may be jeopardized due to a
lack of proper and timely decision.

CONCLUSION

In the conclusion, we can say that when the business unable to pay its debt, the
personal guarantee becomes personally liable for it and the company creditors can
pursue personal guarantee and can put their personal assets at risk. There are a
number of formal requirements to be a guarantee. Form of guarantees, Signed,
Secondary Liability and Consideration.

When the guarantor/ borrower takes a loan from the bank they need a document named
promissory note. This document states that the borrower makes a promise to the bank
to repay the loan amount on demand with the agreed rate of interest. Sec 3(1) of the
Bank Company Ain, 1991 stipulates that when providing loans & advances and other
financial facilities to bank directors, their relatives & their affiliated entities like loan limit,
loan approval and prior approval by Bangladesh bank.

The case Anwar Cement Ltd vs Bangladesh Bank and others, it is stated that in the
CIB report the name of the guarantor may appear in the CIB report as a guarantor only
and not as a defaulting borrower. However, in the previous case law refers that the
guarantor’s name cannot appear in the CIB report at all is hereby overruled. This means
that the name of the guarantor may appear in the report as guarantor and not a
borrower.