📘 Case Study: Assignment of Bank Guarantee
Borrower: Zenith Infrastructure Pvt. Ltd.
Issuing Bank: Union Bank of India (UBI)
Original Beneficiary: Metro Buildcorp Ltd.
Assignee Bank: Canara Bank (CB)
📝 Background
Zenith Infrastructure Pvt. Ltd., a corporate customer of Union Bank of India (UBI), requests the bank to issue a Bank Guarantee (BG) in favour of Metro Buildcorp Ltd. The BG contains a special clause:
“The beneficiary Metro Buildcorp Ltd. may assign this Bank Guarantee in favour of Canara Bank.”
📌 Sequence of Events
- Assignment of BG: Metro Buildcorp assigns the BG to Canara Bank (CB) to secure their credit exposure.
- Notice to Issuing Bank: Metro Buildcorp informs Union Bank of India about the assignment and CB becomes the new beneficiary.
- UBI Acknowledges: UBI records that no cancellation, amendment, or release shall be allowed without written consent of CB.
- Premature Closure Request: Later, Metro Buildcorp approaches UBI with the original BG and requests cancellation before expiry.
- Wrongful Cancellation: UBI cancels the BG based solely on Metro Buildcorp’s request, without obtaining consent from CB.
🔥 Problem Statement
The issuing bank (UBI) cancelled the BG prematurely despite the BG being formally assigned to Canara Bank. Was this cancellation valid? What are the responsibilities and liabilities of each party?
❓ Case Study Queries
- Is the cancellation of the BG by UBI legally valid?
- After assignment, who holds rights over the BG: Metro Buildcorp or Canara Bank?
- What risks does UBI face for cancelling the BG without CB's consent?
- What should have been the correct procedure before cancellation?
- If CB raises a claim later, who is financially responsible?
- What internal process failure occurred at UBI?
✅ Probable Solutions / Answers
1️⃣ Validity of Cancellation
No. The cancellation is invalid. Once the BG is assigned and UBI acknowledges it, only the assignee (Canara Bank) has authority to approve any cancellation or amendment.
2️⃣ Rights after Assignment
All beneficiary rights transfer to Canara Bank. Metro Buildcorp cannot demand cancellation or release.
3️⃣ Risks to UBI
- Financial Risk: CB may still invoke the BG; UBI must pay despite internal cancellation.
- Legal Risk: Wrongful cancellation may lead to litigation.
- Operational Risk: Non-compliance with instructions.
- Reputation Risk: Loss of credibility in inter-bank dealings.
4️⃣ Correct Procedure
- Check internal records showing assignment.
- Reject cancellation request from Metro Buildcorp.
- Obtain explicit written consent from Canara Bank.
- Cancel BG only after CB’s approval.
5️⃣ Who Bears the Liability?
If Canara Bank invokes the BG later, Union Bank of India must honour the claim. The borrower (Zenith Infrastructure) may eventually face debit, but the bank is directly liable.
6️⃣ Internal Process Failure
- Failure to check assignment records.
- Disregard of acknowledged obligations.
- Incorrect reliance on original beneficiary.
- Poor maker–checker oversight.
📌 Conclusion
The BG cancellation by UBI is not valid and exposes the bank to full liability. Assignment transfers all rights to the assignee (Canara Bank), and no cancellation can occur without its consent.