What can you do if AFIR demands the execution of the guaranty bank letter of repayment of the advance?

If it is considered that the demand made by AFIR regarding the execution of a guarantee bank letter is unlawful, 2007-2013 NRDP beneficiaries who received advances of funding, as authorizing of the letters, may address the court to obtain a temporary suspension of their payment, by way of a special procedure called a presidential ordinance1.

For the purpose of an early start of the projects, some beneficiaries of 121 Measure – Modernization of agricultural holdings – have spent the possibility to receive an advance on the amount of the grant, committing themselves to place at the disposal of the Agency for Funding Rural Investment (AFIR – former APDRP) a guaranty bank letter amounting to 110% of the advance.

How does the guaranty bank letter of repayment of the advance work?

The guaranty bank letter (SGB) is a autonomous guarantee instrument through which the bank (we will refer to as, generically, banks, whereas in practice the guaranty bank letters are issued mainly by financial and banking institutions) undertakes that if you receive a request to execute a guaranty letter from the authorities you will have to pay the amount mentioned in the letter. In this way, AFIR ensures that if the grant beneficiaries infringe their obligations under the grant agreement, AFIR may request and obtain directly from the bank – an institution solvable by nature – the amount paid by way of advance, without being required to undergo the procedure for enforcement of the beneficiary.
Therefore, if the bank receives a request for enforcement of a guaranty bank letter from AFIR, it must verify whether the application meets the conditions set by the text of the letter and has the right to refuse the payment only if the conditions are not fulfilled or to the extent it finds that AFIR committed a misuse or obvious fraud through the request of payment sent to the bank.

The analysis of the request made by AFIR regarding the payment of the guaranty bank letter

Given that the beneficiary the guaranty bank letter is not a legal entity governed by private law but a public authority, in practice we can notice the tendency of banking institutions to be more lax in reviewing applications for payment of guaranty letters received from AFIR and, consequently, reluctant to any arguments that grant beneficiaries  would provide regarding a possible abuse in requesting and obtaining the execution of the letter. In this context, if it is considered that the request made by AFIR regarding the execution of the guaranty letter is unlawful, FEADR beneficiaries which have received advances of funding, as authorizing of the letters, may address the court to obtain a temporary suspension their payment, through a special procedure called a presidential ordinance.

Admissibility criteria of the presidential ordinance

In accordance with Art. 996 Civil Procedure Code, the request to issue a presidential ordinance is subject to the following conditions of admissibility: urgency, appearance of right, the provisional nature of the measure sought and the imminent damage which can not be repaired.

The urgency of the measure of temporarily stopping the payment of guaranty letter is given by the fact that in the absence of a court decision, banks are required to pay the amount mentioned in the letter within a very short time. Thus, according to the Uniform Rules for Guaranty Demand  (URDG) revised 2010, CIC publication no. 758, joined by numerous financial institutions, require the payment of guaranty bank letters within 5 days of receipt of the request from the beneficiary.

In their payment requests filed to the banks, AFIR requires that the payment of the guaranty letters to be made within 15 working days, which was agreed by a Protocol of Cooperation signed in March 2015 between the Romanian Association of Banks, on the one hand, and the Ministry of Agriculture and Rural Development and AFIR, on the other – AFIR published the Protocol on their website.

The condition of the appearance of right is probably the most difficult to prove, given the autonomous nature of bank guarantee letter, which requires that its payment to be made at the first and simple request of AFIR, as beneficiary, regardless of the ratio of obligations preexisting. However, depending on the particularities of each case, we can identify arguments to convince the judge that at a brief analysis of the facts, the applicant’s position is legally preferable.

The arguments arise usually from verifying the application for payment of the bank guarantee letter, as it lodged AFIR the bank, with the actual conditions in which the bank was required to make payments specified in the wording of the letter of guarantee. Thus, for example, in some cases, the payment of the guarantee letter is conditioned by AFIR’s written statement on the failure of the the beneficiary the grant of its obligations under the financing or submitting the application for payment and a statement by a correspondent bank confirming that the signatures on these documents validly undertake AFIR.

Not lastly, necessary to ascertain whether AFIR’s request of payment of the letter of guarantee was made within the period of validity, otherwise, the letter of guarantee has expired and any request for payment is abusive.

The provisional nature of the sought  measure assumes that stopping the payment of the guaranty letter to be imposed by the court for a limited period of time, usually until the dispute on the merits (because, as I said before, in proceedings for interim court performed a brief examination of the legal relations between the parties, the substance of these reports should be the subject of another issue). Moreover, according to Art. 996 par. 2 Civil Procedure Code, if the judgment contains no reference to the duration and the factual circumstances envisaged have not changed, the measures will take effect by the resolution of the dispute on the merits.

The condition of imminent damage which can not be repaired involves proving the fact that, to the extent that the court will not temporarily stop the payment of the guaranty letter, its execution would cause damage to assets of the applicant, with irreversible consequences. In this respect, the beneficiary of the grant –  the plaintiff in the application for interim measures – will have to prove that the execution of the bank letter will have negative consequences on the possibility to carry out future work and to successfully complete the project to obtain non-refundable funding.

The request for a presidential ordinance regarding the temporary and provisional halting of the payment of the guaranty bank letter  must be brought to the competent court to adjudicate in the first instance on the merits of the law and is subject to stamp duty amounting 200 RON.

[1] Editorial signed by Oana Stratula, Partner. Article published in Revista Ferma on August 1st, 2015.