ADVANCES AGAINST DOCUMENTS OF TITLE TO GOODS
A document of title to goods is a document used in the ordinary course of business as a proof of the possession or control of goods, It authorizes, either by endorsement or by delivery, the possessor of the document to transfer or receive the goods represented by it [Sec.2 (4) of the Sale of Goods Act, 1930)]. Thus, a document of title to goods represents actual goods in the possession of somebody else. It confers on the purchaser the right to receive the goods and to transfer such right to any other person by mere delivery or by endorsement and delivery. There are two tests by which we may judge the validity of such a document:
(a) The person who possesses such document is recognized by law or by business practice as possessing the actual goods; and
(b) The person who possesses such document can transfer the goods to any person by endorsement or delivery of by both. The transferee is thus, entitled to take delivery of the goods in his own right.
Bill of Lading, Dock Warrants, Warehouse-keeper''''s or wharfinger''''s certificate, railway receipts and delivery orders are the instances of the documents of title to goods. Documents of title to goods must be distinguished from those documents which are mere acknowledgement of receipt of the goods. In case of documents of title to goods, the person possessing such documents is entitled to have the legal title to goods, and the said goods are taken "out of the order and disposition of the insolvent" under Section 52(2)(c) of the Presidency Towns Insolvency Act, 1909. It means that if the person in whose possession the goods lie becomes insolvent, the official receiver will not include such goods amongst the total assets of the insolvent.
Risks in Case of Advances against Documents
The documents of title to goods represent actual goods and hence, they are presumed to be as good a security as the goods. However, the advances against documents of title to goods are subject to the following risks in addition to the risks involved in advances against goods:
1. Greater Risks of Frauds and Dishonesty. The transporter or warehouseman grants a receipt for the goods entrusted to him but he does not certify or guarantee the correctness of the contents of the bags or the packages. A dishonest trader may deceive the banker by giving false description of the goods in the documents of title which are pledged with the banker. For example, if a trader dispatches by rail hundred bags containing sand but gives the description of sugar on the forwarding note, he receives a railway receipt for sugar bags which may be handed over to the banker for securing an advance. The banker will have no remedy against the transporter in such circumstances. Moreover, the documents may be forged also or the figures therein may be raised fraudulently.
2. Not Negotiable Documents. The documents of title to goods are not negotiable instruments like cheques, bills of exchange or promissory notes. A negotiable instrument confers on its bonafide holder in due course an unimpeachable title to goods irrespective of the defect in the title of the endorser or the transferor. The documents of title to goods are however, transferable ones and can be endorsed to any person but the transferee does not get a better title than of the transferor.
3. In case of railway receipt, there is the risk of the borrower''''s taking delivery of the goods on the basis of an Indemnity Bond, while the railway receipt is given to the banker as security. An interesting case of such fraud was reported in which five wagons containing 415 bales of fully pressed cotton were delivered in a private siding belonging to a firm of Saharanpur and unloaded by them without producing the railway receipt, which was duly endorsed in favour of United Commercial Bank. The bales were pledged to the Central Bank of India and the firm took an advance from the latter. The Railway Protection Force alleged lapse on the part of the railwaymen for surrendering the railway receipt by the party and negligence on the part of the bank authorities for not ascertaining the ownership of the bales before advancing huge sums. The RPF took into possession the bales from the godowns of the firm and the same were handed over to the Central Bank of India on superdari (entrustment) by the Court.
Precautions to be taken by the Banker
1. In order to avoid risks of fraud and dishonesty, the banker should accept such documents as security from honest, reliable and trusted parties only.
2. Special care should be taken to see that documents are genuine and not forged ones.
3. It should be carefully noted that the documents of title do not contain any onerous or prejudicial remark about packing of the goods. If the document contains a remark to this effect, such as "Packing defective" or "goods not properly packed" or "the container leaking", the banker should not grant any advance against such receipt.
4. The goods must be insured for its full value against the risks of fire, theft etc.
5. To ensure that the goods packed in bags, etc. actually conform to the description contained in the documents, it is desirable that a certificate from a reliable firm of packers is obtained, especially in case of valuable goods.
6. The banker should also take a memorandum of charge from the borrower authorizing the banker to sell the goods if the borrower defaults in making payment.
7. It is also essential that the issuer of the document of title to goods, i.e. transporter, warehouseman, etc. is a reliable person of firm.
Important Documents of Title of Goods
1. Bill of Lading. A Bill of Lading is a document issued by a shipping company acknowledging the receipt of goods for carrying to a specified port. It also contains the conditions for such transportation of goods and full description of the goods, i.e. their markings and contents as declared by the consignor. The shipping company gives an undertaking to deliver the goods to the consignee or to his order in the same condition in which it has received, on payment of the freight and other charges due thereon. It is to be noted that a Bill of Lading is prima facie evidence of the fact that the packages, as specified therein, were put on board the ship but the shipping company is not responsible for the contents of the bags or the bales entrusted to it for transportation. It is, therefore, essential for the banker to accept such documents from reliable and trustworthy parties only.
Bills of lading are issued in sets of three, duly signed and bearing the mark ''''original'''', ''''duplicate'''' or ''''triplicate'''', respectively. The shipping company delivers the goods on presentation of any one of the three copies of the bills of lading, thus rendering the other two ineffective. It is, therefore, essential for the banker to demand all the three copies of the bill of lading duly endorsed, before an advance is made against it.
A bill of lading is not a negotiable instrument, though it is transferable by endorsement and delivery. Therefore, a bonafide holder for value of such a bill of lading does not get title to the goods better than that of the transferor of the documents. He can sue on his own name and can give valid discharge.
2. Warehouse Receipts. An important objective of promoting warehousing in the country has been to enable the owners of commodities—agriculturists and traders—to acquire a convenient security in the form of warehouse receipt, which can be accepted as security by the banks. To popularize the warehouse receipts as security for loans from banks, the Reserve Bank granted some concessions in respect of such advances in its selective credit control directives in the past. Most of the advances against warehouse receipts have been sanctioned to the traders.
Precautions to be taken by the Banker
(i) A Warehouse Receipt is not a negotiable instrument under the Negotiable Instrument Act and hence, the transferee (i.e. the banker) cannot acquire title better than that of transferor. In case the receipt is a stolen one or the endorsement thereon is a forged one, the banker will have no protection. The banker should, therefore, satisfy himself as to the title of the holder or the transferor. Some bankers usually confine such advances to the original depositors of the goods or to the first endorsee or transferee only. The banker should also take a declaration from the borrower certifying that the goods are his absolute property.
(ii) The banker should ensure that the Warehouse Receipt is a genuine one. The signatures of the Warehouseman and the endorsee, if any, should also be confirmed.
(iii) The receipt should be pledged with the banker with a memorandum of pledge.
(iv) The banker should inform the warehouseman about his lien over the Receipt and the latter''''s acknowledgement be secured by the banker.
(v) An additional undertaking should also be taken from the customer that he will not take delivery of the goods on the basis of Indemnity Bond. He should also inform the warehouseman not to release the goods without the consent of the banker.
(vi) The banker should release the Receipt on payment of the debt. If in the meanwhile a part of the goods is to be released to the customer, the banker should issue a delivery order.
3. Railway Receipt. Railway receipt is a document acknowledging the receipt of goods specified therein for transportation to a place mentioned therein. It is transferable but not a negotiable instrument. It can be transferred by endorsement and delivery. As the Receipt is to be produced before the railway authorities to clear the goods at the destination, advances sought against such receipt are for very short periods. Generally, the consignor of the goods draws a bill of exchange or a hundi on the consignee for the amount of the goods consigned and discounts the bill/hundi with the banker. The Railway Receipt is enclosed with the bill which is called a documentary bill. The banker releases the Railway Receipt to the consignee against payment/acceptance of the bill. The Bombay High Court held that an endorsee of a Railway Receipt could not file a suit for damages for short delivery in consignment of the goods unless he had been shown to be the owner of the goods. Though this right of action is ordinarily vested in the consignor but the consignee, who is in possession of a railway receipt duly endorsed by the consignor, may maintain an action, but he could do so not because he is the consignee but because he is the owner of the goods. A bare consignee who is not the owner of the goods could not maintain a suit for such compensation. The banker should take the following precautions in this connection:
(i) The consignor may give wrong description of the goods consigned. The banker should, therefore, discount only such documentary bills with Railway Receipt which are drawn by parties of repute.
(ii) Sometimes the goods are delivered by the railway authorities on the basis of Indemnity Bond furnished by a wrong party. In such circumstances, the banker shall have to file a suit in the court of law. To avoid such a situation, the banker should inform the railway authorities at the destination about his interest in the goods and ask them not to release the goods without the railway receipt duly discharged.
(iii) The railway receipt should be on railway risk and without any alterations. The banker should prefer "Freight Paid" railway receipt because he will not be required to pay the freight, if he is forced to take the delivery of the goods at the destination.
4. Trust Receipts. The goods or the documents of title to goods pledged with a banker as security for an advance are usually released by the banker on the repayment of the borrowed amount. Sometimes, the borrower wishes to get the security released before he actually repays the loan. In such cases, the banker may, at his discretion, allow the customer to get back the goods or documents and ask the latter to execute a Trust Receipt. By signing such Receipt, the customer undertakes to receive the goods or the documents of title to goods in trust for the lender. The borrower promises to hold the goods or their sale proceeds as trustee for the banker and to pay the same to the latter as and when received.
The legal position of the Trust Receipt from the banker''''s point of view, however, remains unsatisfactory. As regards the ineffectiveness of a Trust Receipt as security for the banker, the Banking Commission, 1972, opined that –
"The present position seems to be that advances against trust receipt do not create any trust, that goods released against trust receipt would be affected by the reputed ownership clause under the insolvency laws in India, that the borrower may validly create unauthorized pledge of the documents of title to goods released to him under a Trust Receipt and that any wrongful dealing with the goods it may not be possible to prosecute the borrower."
The Commission, therefore, concluded that "from the banker''''s point of view, the trust receipt is considered practically valueless as a document creating a security interest in their favour." Banks treat advances against trust receipts as unsecured and grant this facility only to well established customers.