“Trust Receipt” under the contract of pledge
In “trust receipt” under the contract of pledge, the borrower gets his assets/goods released from the pledge, only on full payment of his dues which automatically terminates contract of pledge. However in case of Key cash Credit or Key Loan, if bank desire to release the assets/goods retained under pledge before repayment of dues as a temporary arrangement, the bank obliges so by obtaining a Trust Receipt from the borrower. Under the trust receipt the borrower acknowledges the receipt of goods or documents of title to goods and undertakes to hold the goods in trust on behalf of the bank. Further the borrower undertakes that he would not encumber on the goods released or dispose-off the goods without the consent of the bank and also promises to return the assets (security) on demand, such portions as shall remain unsold. The borrower also undertakes that the entire transaction will be done separately and remit the sale proceeds directly to the bank.
The purpose of “Trust Receipt” is that allows bankers to maintain the original charge under pledge and if the customer becomes insolvent, the official assigner/receiver cannot claim the goods for the benefit of unsecured creditors. Normally such business contingencies arise while taking delivery of goods from Railways whereas documents are pledged in bank, and later shift the goods to Godown under bank’s lock and key or sometime sold goods to be released from godown/warehouse before receipt of payment.