Friday, December 19, 2008

Good God ! Are We Dumb ?

Hantu Laut

Being a businessman for many decades and dealing with the intricacies of the banking system, international trade and UCP rules(Uniform Customs and Practice) for Documentary Credits and reading the frivolity of the explanation given by the private secretary to the Yang DiPertuan Besar of Negeri Sembilan Tuanku Jaafar goes to show that the private secretary has little grasp of how the banking system operates.

It is true Tuanku Jaafar didn't take a direct loan from the bank but he has irrevocably committed himself to pay the amount of the Standby Letter of Credit in the event of a drawdown.

Standard Chartered Bank(SCB) must have with the agreement of Tuanku Jaafar issued an 'Irrevocable Standby Letter of Credit' to Connecticut Bank of Commerce (CB) for a specified validity period which means the LC cannot be revoked before its expiry or without expressed consent of the beneficiary. Tuanku Jaafar has also agreed to pledge his fixed deposit as security to SCB which is also irrevocable.

A Standby LC is a form of guarantee issued by banks to other banks either for a third party specific performance or for the beneficiary bank to give credit to a third party whom the beneficiary bank may not be comfortable with unless the party concerned can provide tangible security usually in the form of 'Banker's Guarantee'.A Standby LC instead of 'Letter of Guarantee' is the preferred instrument if the transaction is in a foreign country.

Other instrument used to make advance payment to a third party overseas is 'Red Clause Letter of Credit', mainly used for short-term trade transactions where the supplier may need additional working capital to complete the goods purchased by an overseas buyer.Such arrangement is only possible between parties that have long term business relationship and trust each other.

By the arrangement with SCB Tuanku Jaafar become a guarantor to any liability incurred under the Standby LC.Disputes about the beneficiary’s right to draw should be settled outside the letter of credit transaction.It means SCB cannot become a party in the dispute.

An injunction issued by the Seremban High Court and served on CB which is in America may not be enforceable.

The statement further said “It is clear from the facts that Tuanku Ja’afar did take steps to rescind the LC and prevent a call on the LC before any alleged funds were released by CB to Texas Encore. Despite these steps, CB called on the LC and payment was made by the bank,”.You can't legally rescind something that clearly says 'Irrevocable'.

It is not about Tuanku Jaafar took a loan or not from the bank, it is about probity, that's why the court ruled in favour of SCB.

8 comments:

donplaypuks® said...

All parties have very clearly, deliberately refrained from explaining why in the 1st place Tuanku issued the irrevocable LC.

Surely, there was a business deal where he stood to gain some benefit, presumably millions in future profits, dividends and capital gains?

It was surely not an act of charity!! And it defies belief that Tuanku's Accountant or Banker would not have explained to him the implications of such a larger LC or the meaning of irrevocable.

Otherwise, one can only surmise that some form of fraud was committed upon Tuanku!

Jed Yoong said...

negeri sembilan royals..such a notorious rep here and abroad...

de minimis said...

HL

Solid observations from you. You certainly know your trade terms and you have explained it in a way that will embarass many lawyers. Well done.

Irrevocability means irreversible without the explicit consent of the issuing bank and counterparties.

kittykat46 said...

I nearly fell out of my chair when I read about the case...

An Irrevocable LC means exactly what it says - it can only be revoked by mutual agreement, or the LC expires. Even my 23 year old shipping assistant knows the drill...

But I think there's more to the story than what has been reported...perhaps out of deferrence to the royal person. This may well have been a rather smelly deal from one or both sides.

Hantu Laut said...

donplaypuks,
It's banking requirement and standard practice that all LCs and LG(Letter of Guarantee) are made irrevocable until expiry otherwise there won't be any order in the business world.

I believe it is a businees deal that went bad.

Hantu Laut said...

Hi Jed,
If I am not mistaken someone from that royal household asked for the immunity to be restored to the royals.

Hantu Laut said...

de minimis,
Thanks.

Hantu Laut said...

kittykat46,
In this case the LC can only be relinquished by the beneficiary which is the Connecticut Bank of Commerce.It doesn't need mutual consent.

All Irrevocable LCs and Guarantees cannot be revoked by the issuer,only the beneficiary can relinquish them.Your shipping clerk was wrong in that respect.