1.19 Query
Classification of book debts backed by bank guarantees- whether secured or unsecured (2).
1. The opinion of the Expert Advisory Committee was sought on whether book debts backed by bank guarantees can be classified as ‘secured’ for the purposes of Schedule VI to the Companies Act, 1956.
2. As per the terms of trade, a company allows credit to its customers against bank guarantees and classifies such book debts as ‘secured’ for balance sheet purposes. The auditors of the company have objected to this classification on the ground that bank guarantees are not tangible assets.
3. In this context, the querist referred to “A Guide to Company Audit” of the Institute of Chartered Accountants of India wherein it is stated that “where a guarantee has been furnished in respect of a debt without the backing of tangible security, it should be ensured that the debt is classified as unsecured” (Note to para 5 (i) page 20). According to the querist, this applies only to the personal guarantees and not to bank guarantees because the latter are invariably issued on the basis of tangible assets or these are a part of borrowing limits sanctioned to the party. The querist further opined that in such cases the assets of the bank could also be considered in support to the guarantee.
Opinion September 15, 1982
1. The Committee is of the view that the querist’s argument that the bank guarantees are issued on the basis of tangible assets and therefore have backing of tangible security does not appear to be correct since the tangible assets in support of the bank guarantee are charged in favour of the bank and not in favour of the creditors. This view is supported by the Institute’s ‘Statement on Auditing Practices’, wherein it is stated that “for the purpose of Schedule VI, a loan or an advance should be treated as secured only if assets, whether or not belonging to the borrower, are charged in favour of the Company” (para 7.22, page 40). In the opinion of the Committee, this is equally applicable to the book debts backed by guarantees. On the same consideration the contention that the assets of the bank can also be considered as supporting the guarantee does not seem to hold good, since the basic nature of the guarantee remains the same. That the bank guarantees are a part of the borrowing limits sanctioned is of no significance because in this case also the book debts can be supported by tangible assets in the manner described earlier
2. Therefore the Committee is of the opinion that the book debts backed by guarantees-whether personal or furnished by banks--should be treated as ‘unsecured debts’ unless the tangible assets supporting the guarantees are charged in favour of the company. However, a separate disclosure can be made under “unsecured debts” as “Debts considered good in respect of which the company holds guarantees from banks”.
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