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What Is A Standby Credit?

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What is a standby credit? Standby credits are a type of letter of credit. They are also called “standby letters of credit”. The common feature of all letters of credit is an undertaking by a bank to pay the beneficiary of the letter of credit a specific sum within a specified time limit against the presentation of specific documents in accordance with the terms of the letter of credit. Standby credits are a type of quasi-security, in that although it can be used to secure obligations, it does not create rights against assets. It creates rights against a party, being (for example) the issuing bank. Another example of a quasi-security is a demand guarantee. See Boral Formwork v Action Makers [2003] NSWSC 713 which explains standby credits,…show more content…
In practice, this means standby credits create an obligation on the bank to make a payment of a specific sum to a named beneficiary on demand. The use and purpose of standby credits explained Standby credits were designed to provide a means for securing payment or other obligations if a party to the underlying transaction defaults in its obligations. A typical standby credit consists of an undertaking by a bank to pay a named beneficiary a specific sum if the beneficiary presents the bank with the documents listed in the standby credit. Standby credits are often issued to support a party 's obligations under a contract and the key document to be presented under such a standby credit is usually a certificate or declaration from the beneficiary confirming that the other party has not performed its obligations under that contract. Standby credits are a useful tool because the bank does not get involved in whether the underlying contract has been breached or not. The bank will pay out if the beneficiary of the standby credit presents the relevant documents to the bank in accordance with the terms of the standby credit. Standby credits can be used in a variety of situations, for example, in relation to: • A
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