Is the Central Bank Liable if the Issuing Bank Becomes Bankrupt?

Introduction

An issuing bank assumes a primary obligation to honor a complying presentation under article 7 of UCP 600. However, beneficiaries occasionally raise a more difficult question: What happens if the issuing bank becomes insolvent, is subject to international sanctions, or is otherwise unable to fulfill its undertaking?

Would the central bank, the ministry of finance, or another government authority in the issuing bank’s country be required to step in and pay the beneficiary?

The following question explores this issue.

Question

Hello Sir,

I hope you are doing well.

As a party to a documentary credit and by virtue of the issuing bank’s primary obligation under article 7 of UCP 600, the issuing bank assumes the risks of the applicant upon issuing the credit.

However, if the issuing bank becomes bankrupt, is subject to international sanctions, or faces any other circumstances that prevent it from honoring a complying presentation, would the central bank, the ministry of finance, or any other government authority of the issuing bank’s country be liable to pay the beneficiary?

Thank you in advance.

Best regards,

Khandakar Ali Akbar

_______

Answer

Dear Khandakar,

Thank you for your question.

Neither UCP 600 nor general international banking practice provides that the central bank, the ministry of finance, or any other government authority automatically becomes liable for the issuing bank’s obligations if the issuing bank becomes insolvent or is unable to honor its commitments.

The issuing bank’s undertaking under article 7 of UCP 600 is an obligation of the issuing bank itself. Unless there is an explicit government guarantee or a specific legal provision in the issuing bank’s country, government authorities are generally not required to pay the beneficiary.

In practice, several possibilities may arise:

• If the beneficiary learns that the issuing bank has become insolvent before presenting the documents, it may consider alternative arrangements with the applicant, such as sending the documents for collection through another bank in the applicant’s country.
• If a complying presentation has already been made, the beneficiary and the applicant may agree to release the documents against payment through another bank.
• The beneficiary may seek another buyer and negotiate alternative payment terms.
• If bankruptcy proceedings have commenced, the beneficiary should promptly submit a proof of claim to the bankruptcy administrator in order to be included in the list of creditors. Any recovery will depend on the value of the liquidated assets and the priority rules established under the applicable bankruptcy law.

In some exceptional cases, the central bank or the government may provide financial support to rescue a troubled bank and protect depositors and creditors. However, such intervention is a matter of public policy and is not a legal obligation arising from UCP 600.

Best regards,

Mr. Old Man