Bank Guarantee Enforceable Upon Debtor Default, Forum Affirms

LAHORE: An appellate body has determined that a bank guarantee remains enforceable when the primary borrower fails to meet their obligations. Sources indicate that a finance firm, acting as a financial service provider, had petitioned the adjudicating authority to recover funds related to three bank guarantees, citing the principal debtors’ inability to repay their financial debts.

The borrowers had utilized both fiduciary credit and Moharbaha facilities, which were secured by a bank in favor of the finance company.

The bank contested the actions, arguing that the finance company had neglected to include the primary debtor/customer in the proceedings. They maintained that a fair judgment could not be reached without hearing the principal debtor’s perspective. Furthermore, they asserted that the forum could not arrive at an equitable decision without the customer/principal debtor submitting the relevant financial documents. The bank also refuted the issuance of guarantees for the customer, alleging they were fraudulent.

Conversely, the finance company presented documentation wherein the bank conceded its responsibility under the bank guarantee and acknowledged making payments related to the disputed guarantees. They insisted that the bank, in its capacity as guarantor, was obligated to honor the guarantee.

The appellate forum stated that a guarantor’s responsibility mirrors that of the principal debtor, meaning the guarantor is equally responsible for fulfilling the obligation if the principal debtor defaults or cannot repay the debt. The guarantor’s commitment encompasses the entirety of the principal debtor’s debt, thereby reducing risk for the lender.

Unless the contract specifies otherwise, the obligations of the principal debtor and the surety are shared and concurrent.

The financial company possesses the discretion to pursue action solely against the guarantor or to involve the principal debtor. Therefore, the bank’s argument that the financial company did not include the principal debtor is deemed invalid. The financial company’s entitlement to seek enforcement of the guarantee through legal channels was, therefore, adequately justified.