Trust Receipts Characteristics
Trust Receipts are usually negotiable. The Trustee is obligated to pay not only the obligee/beneficiary, but also any bank nominated by the obligee/beneficiary. Negotiable instruments are passed freely from one party to another almost in the same way as money. To be negotiable, the Trust Receipts must include an unconditional promise to pay, in the event that there is a default. The nominated bank becomes a holder in due course. As a holder in due course, the holder takes the Trust Receipts for value, in good faith, without notice of any claims against it. A holder in due course is treated favorably under the UCC.
The transaction is considered a straight negotiation if the Trust Receipt's payment obligation extends only to the obligee/beneficiary. If a Trust Receipts is a straight negotiation it is referenced on its face by "we engage with you" or "available with ourselves". Under these conditions the promise does not pass to a purchaser of the draft as a holder in due course.
Trust Receipts may be either revocable or irrevocable. A revocable Trust Receipts may be revoked or modified for any reason, at any time by the Trustee without notification. A revocable Trust Receipts cannot be confirmed.
Once the documents have been presented and meet the terms and conditions in the Trust Receipts, and the draft is honored, the Trust Receipts cannot be revoked. The revocable Trust Receipts is not a commonly used instrument. It is generally used to provide guidelines and bid bonds. If a Trust Receipts is revocable it would be referenced on its face.
The irrevocable Trust Receipts may not be revoked or amended without the agreement of the Trustee and the obligee/beneficiary, unless FSA decides to revoke surety because FSA finds contempt by the Obligee to not fairly pay client for services, or if information about the project and/or its entire use of project funds is found not to be fully and properly disclosed prior to the surety being issued by FSA. An irrevocable Trust Receipts from the Trustee insures the beneficiary that if the required documents are presented and the terms and conditions are complied with, payment will be made. If a Trust Receipts is irrevocable it is referenced on its face.
Transfer and Assignment
The obligee/beneficiary has the right to transfer or assign the right to draw, under a credit only when the credit states that it is transferable or assignable. Credits governed by the Uniform Commercial Code (Domestic) maybe transferred an unlimited number of times. Under the Uniform Customs Practice for Documentary Credits (International) the credit may be transferred only once. However, even if the credit specifies that it is nontransferable or non-assignable, the obligee/beneficiary may transfer their rights prior to performance of conditions of the credit.
Sight and Time Drafts
All Trust Receipts require the obligee/beneficiary to present a draft and specified documents in order to receive payment. A draft is a written order by which the party creating it, orders another party to pay money.
There are two types of drafts: sight and time. A sight draft is payable as soon as it is presented for payment. The Surety and the Trustee is allowed a reasonable time to review the documents before making payment.
A time draft is not payable until the lapse of a particular time period stated on the draft. The Trustee is required to accept the draft as soon as the documents comply with credit terms. The Trustee then has a reasonable time to examine those documents. The Trustee is obligated to accept drafts and pay them at maturity.