Q&A

It is a type of guarantee, one of the ways to ensure the performance of obligations, where a bank or any other credit institution, insurance organization or other commercial organization (the guarantor) issues, upon the debtor’s (principal’s) request, a written obligation to pay the creditor (beneficiary) a certain amount of money when they receive a claim for it to be paid.

To enter into a profitable contract, an organization must prove that it can secure its obligations. One of the ways to do it is a bank guarantee. Article 329 of the Civil Code of Russia provides for several types of collateral for a company’s obligations to its contractors. The primary ones are penalties, pledges, freezing the debtor’s property, guarantees, down payments and bank guarantees.

A bank guarantee differs favorably from other security methods: the beneficiary organization does not have to collect any penalty from the debtor through lawsuits or sell mortgaged property. It can immediately receive the money it is owed upon presenting a guarantee to the bank that issued it.

It is also quite profitable for counterparty organizations that receive bank guarantees in favor of their partners.  It confirms its solvency and can work without advance payments.

In addition, a bank guarantee allows you to buy goods, works or services with deferred payments. So, if the organization receives such a guarantee in favor of its contractors, they can ship their product for sale.

There are several types of bank guarantees. So, depending on what transactions they are used for and who receives them, guarantees are divided into the following groups:

• payment guarantees;
• performance guarantees;
• performance guarantees;
• payback guarantees;
• loan reimbursement guarantees;
• tender guarantees;
• customs payment guarantees.

Payment guarantees are one of the most popular ones. Banks issue them at the request of the buyer in favor of the seller.

A performance guarantee, on the contrary, is issued to the seller in favor of the buyer.

Organizations require performance assurance from their partners in order to insure themselves against the disruption of the delivery schedule or untimely completion of works. In this case, the bank is obligated to pay the penalties as agreed in advance.

In order to return a previously transferred advance payment, if the partner fails to fulfill the agreement terms, organizations require an advance payment guarantee.

Loan repayment guarantees are used as collateral for lending transactions.

Tender guarantees are requested by the organizations that announce tenders and consider proposals received from possible partners. Having issued such a guarantee, they are obliged to reimburse a certain amount of money if they later refuse their offer or fail sign the contract after bidding.

Customs payment guarantees are issued to organizations in favor of customs offices. It is used to secure their obligations to pay customs tariffs, fees and penalties.

Beside obtaining a bank guarantee in favor of its partner, a company can also have a guarantee provided by the counterparty advised at the bank.

In this case, the Bank will check the guarantee for authenticity, and then send it to the organization with a cover letter stating its opinion. In addition, the bank can further accompany this guarantee, i.e., perform all the necessary actions to get the funds secured  by it.

However, this is not an exhaustive list of all the bank services related to providing guarantees. For instance, many banks offer to validate guarantees. In other words, a bank can assume joint  liability under a guarantee issued by another credit institution.

And there is even more. Some banks not only confirm third parties’ guarantees on their own behalf, but also help to have it validated by a reliable foreign bank. This service may be required by an organization that is engaged in foreign trade activities and wants to conclude a major contract.

A promissory note is a financial instrument issued in a strictly prescribed format that entitles its holder to be paid by the debtor the amount specified in the promissory note.  The debtor of a promissory note is the issuer, and in the case of a bill of exchange, it is another person (drawee) specified in the promissory note, owing the funds to the bill issuer. An essential feature of a promissory note is the formality of the obligation under it, which is separated from the essence and nature of the original debt. After accepting a bill of exchange or issuing a promissory note to settle a debt under a contract, the debtor can no longer justify the refusal to pay the bill by the terms of the contract that caused the original obligation to arise. The formal and binding nature makes a bill not just a simple promissory note but a specific security, which in many cases can perform the functions of money as a means of exchange.

The mandatory details of a bill of exchange are established by the Uniform Law For Bills of Exchange and Promissory Notes, namely, Annex 1 to the Geneva Convention of 7 June 1930 , No. 358 “On the Uniform Law For Bills of Exchange and Promissory Notes”:

• words indicating that the document is a promissory note or a bill of exchange;
• an unconditional order or obligation to pay a certain amount;
• name of the payer and primary holder;
• name of the remitent;
• payment deadline and place;
• date and place the bill was drawn up and the signature of the note issuer.

If at least one of the required details is missing, the document cannot be recognized as a promissory note or a bill of exchange. Although there are exceptions:

if the payment term is not specified, it is considered that the bill is payable at sight;

if the place of payment is not specified, the payer’s address is considered to be such;

if the place of drawing up is not specified, the address of the issuer is considered to be such;

if some of the signatures on the document have been forged or belong to persons who are unable to oblige, the signatures of other persons do not lose their force.

A set of limiting measures in total and percentage terms as established by the current legislation of the Russian Federation and the bank, the operations of clients/counterparties to minimize the bank’s financial risks, ensure timely performance of obligations of the bank’s counterparties/clients and the control of settlements with counterparties/clients.

Those are transactions between the foreign exchange market participants to exchange agreed amounts of currency between different countries at an agreed rate with settlements as of a certain date.