Trust Receipt: How a Bank Lets Go of the Goods

When a bank pays an overseas supplier under a letter of credit or a collection, it ends up holding the documents of title, above all the bill of lading, and through them control of the goods. That control is its security for the money it has paid out. But the importer can only repay by collecting the goods, clearing them and selling them. The trust receipt is the long-standing answer: the bank lets the documents go for a stated purpose and keeps a claim, in place of possession, over the goods and whatever they turn into.

The claim is meant to follow the goods: in the warehouse, the importer holds them for the bank; once sold, the claim moves to the money the buyer owes and then to the cash it pays. Receipts commonly require the importer to keep the goods identifiable and insured, not to pledge them to anyone else, and to pay the proceeds to the bank, or into an account the bank controls, until the import loan is cleared.

In Australia and New Zealand, the personal property securities statutes name the trust receipt among their examples of a security interest, where the arrangement in substance secures payment. The bank's interest then needs perfecting like any other, usually by registration. In Australia an unperfected interest vests in the importer if it is wound up or enters administration, which leaves the bank unsecured. A bank lending to an importer often already holds a registered all-assets security, and the goods fall within it. A bank that finances the shipment without holding that security can take a purchase-money interest in the goods, which in both markets can rank ahead of an earlier general security if it is registered in time. In both markets, a buyer that purchases the goods in the ordinary course of the importer's business generally takes them free of the bank's interest, unless it knows the sale breaches the security agreement.

English law treats the arrangement differently. A bank that releases the documents to its customer so the goods can be sold keeps its pledge, and because a pledge is not a charge, it is not registered at Companies House the way a company's charges are. But a buyer or second lender dealing in good faith with an importer that holds the documents can take free of the bank. In all three markets, then, the receipt is strongest against the importer itself and weakest against an innocent buyer, and the bank's practical protection is the sale money.

An importer of bicycles, constructed for this page, buys 600 bicycles from an overseas maker for US$420,000 under a sight letter of credit, US$700 each. Its bank pays the maker against the documents, books a 120-day import loan for the same sum and releases the bill of lading against a trust receipt. The importer sells to cycle shops at US$1,050 each on 30-day terms. The prices, terms and tenor are the example's.

By day 75 it has sold 450 bicycles. By day 120, buyers of 300 bicycles have paid US$315,000 into the importer's operating account, and the importer has spent US$120,000 of it on the deposit for its next shipment. A cycle-shop chain that bought the other 150 sold bicycles has entered administration owing US$157,500. On the day the loan falls due, the bank's claim has split into pieces of very different quality:

The recovery rates are the example's. On paper the receipt covered the loan with US$37,500 to spare. In practice it fell short by US$130,500, and nothing in the document was defective. The money was mixed with the importer's other cash and spent on the next order, one buyer failed, and the unsold stock was worth less on a forced sale than at cost. What would have changed the outcome was control of the proceeds, not the wording of the receipt.

The letter of credit is the bank's promise to the supplier; the trust receipt is the importer's promise to the bank, given after the bank has paid. A shipping guarantee solves the opposite timing problem: the goods arrive before the bill of lading, and the bank indemnifies the carrier for releasing them without it. One shipment can need both.

The difference from holding the documents is control. While the bank has the bill of lading, it can stop the goods going to anyone else. Once it releases the bill, its protection rests on the importer's honesty, on registration where the law requires it, and on the route the sale money takes.

DEFINED IN ONE PARAGRAPH → · PRODUCT FILE: TRADE LOAN → · THE BILL OF LADING →

A credit officer reads a trust receipt line as security that has to be kept, not merely taken. Three questions do the work. Where the money goes: a requirement that buyers pay into a collection account the bank controls, or that each sale is reported and remitted, turns the claim on proceeds into something the bank can see. How long the loan runs: a tenor that matches the time it takes to land, sell and collect means the loan is repaid from the goods it financed, not the next drawing. And who the importer sells to: an importer selling on credit to a few buyers turns the bank's goods into receivables, and the file then needs those buyers' credit as much as the importer's.

In monitoring, the signal is an importer asking to extend trust receipt loans, or repaying one with a drawing on the next. Either can mean the goods have not sold or the money has gone elsewhere. A stock count against shipments outstanding, and collections matched against loans repaid, show which.

DOCUMENTARY COLLECTION → · HOW BANKS ASSESS WORKING CAPITAL REQUESTS →