‘Bank guarantee can be enforced if principal debtor defaults’

LAHORE: An appellate forum has held that a bank guarantee can be enforced if the principal debtor defaults. According to details, a financial company, being a provider of financial facilities, had approached the adjudicating authority against three bank guarantees for recovery due to failure and default in repayment of financial liabilities by principal debtors.

The customers availed fiduciary credit facility and Moharbaha facility which were granted by a bank in favour of the financial company.

The bank challenged the actions on the plea that the financial company had not arrayed the principal debtor/customer. Therefore, the relevant forum cannot render a verdict without hearing the stance of the principal debtor. It further contended that without filing the financial documents by the customer/principal debtor, the relevant forum could not reach a just and fair conclusion. The bank also denied issuing of guarantees in favour of the customer, saying that they are fictitious.

The financial company, on the other hand, produced a letter where the bank had admitted its liability under the bank guarantee and acknowledged having paid the amount for guarantees in dispute. It asserted that it was incumbent upon the bank, as a guarantor, to honour the guarantee.

The appellate forum held that the guarantor’s responsibility is equal to that of the principal debtor, which means that if the principal debtor defaults or fails to repay the debt, the guarantor is equally liable to fulfill the obligation. The guarantor’s liability covers the entire debt of the principal debtor, ensuring minimal risk for the lender.

The obligation of the principal debtor and the surety is joint and simultaneous unless otherwise agreed in the contract.

The financial company has the prerogative to take action against the guarantor alone or include the principle debtor. Therefore, the contention of the bank that the financial company has not arrayed the principal debtor holds no merit. The financial company’s right to seek enforcement of the guarantee through legal proceedings was thus duly justified.

Copyright Business Recorder, 2025