The Trust Receipt
Lloyd's of London Press
When the documents arrive, whether under documentary credit or D/P payment terms, the importer is obliged to effect payment against the release of the documents from the bank. If the importer does not wish to effect payment, he can use the import financing provided by the bank under the Trust Receipt arrangement.
Once the importer's application for Trust Receipt facilities has been approved by the bank, a Trust Receipt Agreement and/or Letter of Hypothecation will be signed. The Bank will set a credit limit which is determined by the importer's three Cs of Credit Worthiness (Character, Capacity and Capital) and/or their goodwill.
The bank then becomes the new creditor, effecting payment on behalf of the importer to the exporter overseas, under the Trust Receipt facilities, reducing the credit limit as the facility is used.
There are two types of Trust Receipts. Method A is where the importer is given the transport documents to arrange the discharge, customs clearance, transportation and insurance of the goods at their own risk and expense. For warehouses there are two options: safe keeping the goods in the importer's own warehouse, clearly separate from other goods, and made accessible to the bank or its agent for inspection from time to time; or: warehousing in the importer's name, in a warehouse approved by the bank with a warehouse warrant endorsed to the bank, and held by the bank as collateral. The collateral goods can then be sold to the purchasers.
Method B is where the importer is again given the transport documents to arrange at their own risk and expense, the discharge, customs clearance, transportation, procurement of insurance and warehousing of the goods, but in godowns approved by the bank and with a godown warrant made out to the order of the bank, and the original copy of the godown warrant given to the bank as collateral. All delivery orders for the delivery of the collateral goods to the purchaser need to be signed or countersigned by the bank.
There are several terms and conditions common to both these methods. The importer is the agent, trustee and/or bailee of the bank. Before full payment is made to the bank by the importer, the title of the goods and all documents relating to the title and the insurance, are held by the bank as collateral. The importer must procure full value insurance coverage, against all risks, covering fire, flood, burglary and other risks common in the trade. The insurance policy has to be held to the order of the bank, made out with the bank as the beneficiary and is retained by the bank as collateral.
The importer must not indebted to any other party in respect of the goods. In other words the importer cannot negotiate further loans, services and/or performance against the collateral goods from a third party.
If something goes wrong, the goods must be surrendered to the bank when demanded. Also, the bank can change from Method A to Method B at any time they think necessary.
The above terms may also change for raw materials. As it would be difficult for the bank to recover the raw materials if they have already been consumed during the manufacture of a finished product, and cannot be separated or recovered from the finished products the bank insists that it be notified of the sales details and prior approval must be obtained before the sale is made. This also applies to credit sales to the purchasers.
When accounting for goods sold under a Trust Receipt, all deposits, advance payments, bills of exchange, promissory notes, and other payments received from the sale of goods must be given to the bank as a special option. Normally, payment is made when the Trust Receipt expires which is either 30, 60 or 90 days from the signing depending on what has been specified. Accounts for the sale of the goods should be treated separately and not to be mixed with the sales of other goods or the capital of the importer.
Wherever possible the bank should be given priority in claiming the assets of the company after its bankruptcy.
To redeem the Trust Receipt, full payment is made to the bank including interest, once the goods have been sold. The bank will then release the insurance policy and/or warehouse warrant held as collateral. If necessary, it is possible to obtain approval from the bank for an extension on the expiry date of the Trust Receipt, if the importer is unable to sell the goods before expiry.
The accountants as well as the auditing firms adopt the "Concept of Going Concern" when dealing with collateral goods under a Trust Receipt. That is, the collateral goods will be treated like other equipment, where the real ownership is not yet transferred to the user (e.g. photocopiers and trucks under hire purchase instalment payments) and will treat them as if they were owned by the users. The remarks "True and Correct" or "True and Fair" appear on their audit reports.
The bankers may know how the accountants and the auditors treat the collateral goods in their books as the "Concept of Going Concern," instead of keeping separate accounts. This could lead to disputes in litigations and it would be difficult to judge which party is right. Importers of course would argue that they should not be held responsible for "unreasonable" terms which are against accounting and audit practices. The banks might argue that the importers sign these trust receipts without querying these terms.
It seems that the banks may enjoy false comfort by adding odd terms which they do not believe would actually be implemented. However, importers have to be aware of what they have really agreed to in the Trust Receipt Agreement. Most importers, when hearing that other companies have also signed the same agreement in printed format, feel content to put their signatures on these documents, having the comfortable feeling that if they have made a mistake, they are not alone. This kind of attitude encourages banks, shipping companies and other parties to add more odd terms to their contracts and in doing so will upset the trade equilibrium between the banks, shippers and traders against the interests of the traders.
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