Mr Old Man Payment Q&A Where the Applicant Goes Bankrupt By Mr Old Man Posted on 3 days ago 4 min read 0 0 70 Share on Facebook Share on Twitter Share on Google+ Share on Reddit Share on Pinterest Share on Linkedin Share on Tumblr Bankruptcy of an LC applicant is one of those nightmare scenarios that beneficiaries and banks alike worry about. Does the issuing bank still have to pay if the applicant collapses before documents arrive? And if so, how can the bank protect itself? Let’s look at a real question I received and my response. __________ QUESTION Dear Mr. Old Man, First of all, thank you. Your posts have helped me learn so much more about letters of credit. I have a question I hope you can clarify: If the importing company has already gone bankrupt and the issuing bank only then receives the LC documents, how will the issuing bank handle the situation? I look forward to your reply. Sincerely, Thanh Hoa _________ ANSWER Hi, A letter of credit is the issuing bank’s irrevocable undertaking to pay when a presentation complies with the terms and conditions of the credit. Therefore, even if the applicant has already gone bankrupt at the time the complying documents are presented, the issuing bank remains obliged to pay the beneficiary. If the court has opened bankruptcy proceedings against the applicant, the issuing bank must then file a claim with supporting documents and contracts so that the debt is included in the distribution of the applicant’s assets, in line with the priority rules under applicable bankruptcy law. Whether the issuing bank recovers all, part, or none of the funds depends entirely on the assets remaining in the applicant’s estate. LAST BUT NOT LEAST Back in 2010, I was asked whether an issuing bank could take delivery of goods and sell them to a third party to recover funds in case the applicant went bankrupt. Theoretically, if the bill of lading is made out to the order of the issuing bank, the bank has ownership rights to the goods and may thus take delivery or transfer delivery rights to a third party. In practice, however, the applicant remains the legal owner of the goods. If the applicant is declared bankrupt, the issuing bank is merely a creditor and must pursue its claim under bankruptcy law. That said, the first step is to request the court to issue a provisional measure allowing the bank to take delivery and hold the goods as security. If the goods are perishable, the bank should also seek court approval for immediate liquidation. See a similar Q&A here: https://mroldman.net/where-the-applicant-goes-bankrupt/ Best regards, Mr. Old Man