Trust Receipt Financing Without Control of Title Documents

Trust Receipt financing is a common facility used in import trade, yet many practitioners still associate it exclusively with the bank’s control over the bill of lading or other title documents. But what happens when the bank no longer holds those documents? Can Trust Receipt financing still be granted?

A reader recently raised this practical question.

Question

Hi Sir,

I have a question about Trust Receipt financing.

Is it possible for a bank to grant Trust Receipt financing without control over the title documents?

Nicholas

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Answer

Dear Nicholas,

Thank you for your question.

A Trust Receipt (TR) is generally a form of short-term financing granted by a bank to an importer for goods imported under a letter of credit or collection transaction. Traditionally, the arrangement is based on the bank having an interest in the goods, usually through possession of the shipping documents, including the bill of lading.

When the shipping documents arrive at the bank, the importer may request Trust Receipt financing and execute a Trust Receipt Agreement, under which the importer undertakes, among other things:

• to acknowledge the bank’s interest in the goods;
• to hold the goods in trust for the bank;
• to keep the goods insured with the bank’s interest noted or protected;
• to hold the proceeds from any sale of the goods in trust for the bank; and
• to repay the bank from the proceeds of sale or by the agreed maturity date.

Upon approval of the Trust Receipt facility, the bank settles the payment obligation and releases the shipping documents to the importer so that the goods can be cleared and sold.

It is important to note that once the bill of lading and other shipping documents have been released, the bank no longer has physical possession of the document of title. At that stage, the bank’s security relies primarily on the importer’s contractual undertakings under the Trust Receipt Agreement rather than on possession of the title documents themselves.

Therefore, in practice, a bank may grant Trust Receipt financing even when it does not retain control of the title documents, provided it is satisfied with the importer’s creditworthiness and the undertakings given under the Trust Receipt arrangement.

In short:

Yes, a bank can grant Trust Receipt financing without retaining control of the title documents. The bank’s protection in such cases is based principally on the importer’s contractual undertakings and credit standing rather than on possession of the bill of lading.

Best regards,

Mr. Old Man

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Further question from Nicholas

Noted. However, if the bill of lading is made out to the order of the LC applicant or a third party, rather than to the order of the issuing bank, would it be correct to say that the bank does not have documentary control or title to the goods in the first place? In such circumstances, on what basis can the bank be said to have an interest in the goods for the purpose of granting Trust Receipt financing?

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Answer

Dear Nicholas,

Thank you for your further question.

As mentioned in my previous reply, Trust Receipt financing is not necessarily dependent on the bank having documentary title to the goods. In practice, a bank may grant Trust Receipt financing primarily on the basis of the importer’s undertakings and creditworthiness, subject to the bank’s internal policies and risk assessment.

In a letter of credit transaction, the issuing bank’s primary obligation is to honour a complying presentation. The bank is then entitled to reimbursement from the applicant in accordance with the terms of the credit agreement and related banking facilities. Where the applicant pays immediately upon document presentation, Trust Receipt financing is not involved.

Where Trust Receipt financing is granted, the bank’s interest in the goods is typically established through the Trust Receipt Agreement, under which the importer acknowledges the bank’s interest in the goods and undertakes to hold the goods and/or the sale proceeds in trust for the bank.

Therefore, if the bill of lading is consigned to the order of the applicant or a third party rather than to the order of the issuing bank, it may be argued that the bank does not have documentary control of the goods through the bill of lading itself. Nevertheless, this does not necessarily prevent the bank from granting Trust Receipt financing. In such circumstances, the bank’s protection is derived mainly from its contractual arrangement with the importer rather than from possession of a document of title.

The bill of lading, whether consigned to the issuing bank, the applicant, or a third party, remains evidence that the goods have been shipped. The extent of the bank’s security, however, depends on the overall financing structure and the rights granted to the bank under the applicable agreements.

Best regards,

Mr. Old Man