1.8       Query

Classification of sundry debtors, loans and advances backed

by bank guarantees—whether secured or unsecured (1).

The query raised is whether sundry debtors, loans and advances backed by bank guarantees can be classified as ‘secured debts’ for the purpose of Schedule VI to the Companies Act. In the past, it has been the practice of the querist’s company to classify such debts as ‘secured’ because the Guarantee Bond given by the banks provides that the banks have to honour a claim unconditionally, the moment it is lodged, without leaving any recourse for the bankers to refer the matter to the debtor or for arbitration. In other words, the querist considers these debts absolutely secure from the point of view of realisability. However, this practice has been objected to by the Statutory Auditors, who opine that if these debts are classified as ‘secured’ they should be separately disclosed.

                                                    Opinion                                                                     April 5, 1982

 1. The Committee is of the opinion that sundry debtors, loans and advances backed by bank guarantees cannot be classified as ‘secured’ unless these are supported by tangible assets. This is because the expression ‘secured debts’ clearly covers only those debts which are secured by way of the charge on tangible assets whether or not belonging to the borrower/debtor; it does not refer to certainty in the realisability of debt. It is possible that debts backed by bank guarantees, as in this case, may have higher chances of realisability as compared to the debts covered by tangible assets. But, realisability is not the criterion for determining whether the debt is secured or not. This view is supported by the following pronouncements of the Institute:

(1)Statement on Auditing Practices: Para 7.22 at page 40 of the Statement reads:

“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”.

(2) A Guide to Company Audit (1980): Note to Para 5(1) at Page 20 states:

“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”.

(3) Compendium or Notes (1980): para 6 at page 15 states:

“DISCLOSURE OF GUARANTEES IN THE ACCOUNTS OF

A COMPANY RECEIVING A GUARANTEE

1. A Question of disclosure would also arise in the case of company which receives a guarantee from a debtor or from a person to whom a loan has been advanced or from whom money or other obligation is owing to the company, or who is obligated to the company for the performance of services or otherwise. In all such cases, no disclosure of the guarantee is required unless the guarantee is supported by tangible security in which case the classification of the debt, loan, or advance, as the case may be would be ‘secured’ to the extent of the value of the security.”

2. In view of the above, sundry debtors, loans and advances backed only by bank guarantees, should be treated as ‘unsecured debts’. However, a separate disclosure can be made as “Debts considered good in respect of which the company holds guarantees from the bank”.

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