Trust Receipts accomplish their purpose by substituting the credit of the Trust for that of the customer. There are basically two types: standby and evergreen. The standby Trust Receipts is a secondary payment mechanism and an evergreen Trust Receipt supports an on going/continuous transaction.

The Pacific Stock Exchange Rule 8.200 states that a Trust Issued Receipt is a security that is issued by a trust ("Trust") which holds specific securities deposited with the Trust.

Standby Trust Receipts
The standby Trust Receipts like a standby letter of credit serves as a secondary payment mechanism. A Trustee will issue a standby Trust Receipts on behalf of a customer to provide assurances of his ability to perform under the terms of a contract. The parties involved with the transaction do not expect that this Trust Receipts will ever be drawn upon.

The standby Trust Receipts assures the obligee/beneficiary of the performance of the customer's obligation. The obligee/beneficiary is able to draw under the credit by presenting a draft, copies of invoices, with evidence that the customer has not performed its obligation. The Trust is obligated to make payment if the documents presented comply with the terms of the Trust Receipts.

Standby Trust Receipts are issued by Trustee to stand behind monetary obligations, to insure the refund of advance payment, to support performance and bid obligations, and to insure the completion of a sales contract. The credit has an expiration date.

The standby Trust Receipts is often used to guarantee performance or to strengthen the credit worthiness of a customer. In the above example, the Trust Receipts is issued by the Trustee and held by the Obligee. The customer is provided open account terms. If payments are made in accordance with the Obligee' terms, the Trust Receipts would not be drawn on. If the customer is unable to pay, the Obligee presents a draft and copies of invoices to the Trustee for payment.

Evergreen Trust Receipts
The evergreen Trust Receipts like a standby Trust Receipt serves as a secondary payment mechanism. When as by the Surety to do so, the Trustee will issue an evergreen Trust Receipts where the customer has an on going or continuous transaction where a fee is paid periodically for the Trust Receipt to continue.

Trust Receipts

A Trust Receipts is the assignment/pledge of Trust collateral to an Obligee/beneficiary by the Trustee for a specific duration.

Elements of a Trust Receipts

• The assignment of Trust assets.
• By the Trustee.
• To an Obligee.
• For a specified time.
• For specified terms and conditions

Obligee
An obligee is the person or entity to whom an obligation is owed.

The obligee/beneficiary is entitled to repayment from the Trust as long as documentary evidence can be provides as required by the Trust Receipt. The Trust Receipt is a distinct and separate transaction from the contract on which it is based. All parties deal in documents and not in goods. The Trust is not liable for performance of the underlying contract. Upon requesting demand for payment the obligee/beneficiary warrants that all conditions of the agreement have been complied with. If the obligee/beneficiary conforms to the terms of the Trust Receipt, then the obligee/beneficiary must be paid by the Trustee.

Trustee
The Trustee's liability to pay and then to be reimbursed from its customer becomes absolute upon the completion of the terms and conditions of the Trust Receipts. Under the provisions of the Uniform Customs and Practice for Documentary Credits, the Trustee is given a reasonable amount of time after receipt of documents from the Obligee requesting payment.

The Trustee's role is to provide a guarantee to the obligee that if compliant documents are presented, the Trustee will pay the obligee the amount due and to examine the documents, and only pay if these documents comply with the terms and conditions set out in the Trust Receipts.

Trust Receipts deal in documents, not goods.

Escrow Agent

The Escrow Agent is an FDIC insured institution where the assets from the Trust have been placed into an escrow account with the Trustee as a signature on the escrow account.  The Escrow Agent’s role is to hold the assets and confirm Trust Receipts which have been issued by the Trustee. If the Trustee does not pay the obligee/beneficiary, the Escrow Agent is obligated to liquidate the assets held in the escrow account to pay the obligee/beneficiary.

Confirmation
The Escrow Agent will confirm the Trust Receipts to the obligee/beneficiary for the Trustee once the Trustee has provided contact information of the obligee/beneficiary.

Trust Receipts Characteristics

Negotiability
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.

Revocability
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.

Procedures for Using the Tool
The following procedures include a flow of events that follow the decision to use a Trust Receipts.

Step-by-step process:

Obligee and Trustee agree to conduct business. The Obligee wants a Trust Receipts to guarantee payment.

Trustee of the Trust issues a Trust Receipts in favor of the Obligee via the Surety.

The Obligee approves Trust Receipt

Obligee will authenticate the credit and the Trustee will forward the original credit to the Obligee via the Surety.

In the event of a default the Obligee presents the required documents to the Trustee to be processed for payment.

The Trustee examines the documents for compliance with the terms and conditions of the Trust Receipts.

If the documents are correct, the Trustee will reimburse the Obligee.

Standard Forms of Documentation
When making payment for product on behalf of its customer, the Trustee must verify that all documents and drafts conform precisely to the terms and conditions of the Trust Receipts.

Common Defects in Documentation
About half of all drawings presented contain discrepancies. A discrepancy is an irregularity in the documents that causes them to be in non-compliance to the Trust Receipts. Requirements set forth in the Trust Receipts cannot be waived or altered by the Trustee. The obligee/beneficiary should prepare and examine all documents carefully before presentation to the Surety for the Trustee to avoid any delay in receipt of payment. Commonly found discrepancies between the Trust Receipts and supporting documents include:

Trust Receipts has expired prior to presentation of draft.

Stale dated documents.

Changes included in the invoice not authorized in the credit.

Invoice amount not equal to draft amount.

Invoice must be paid in full before the Surety and /or the ITR to be valid.  No work may start on the project site before full payment is received in order for the surety to become activated and remain valid.

A document required by the credit is not presented.

Documents are inconsistent as to general information.

Names of documents not exact as described in the credit. Obligee/beneficiary information must be exact.

Invoice or statement is not signed.

Federal Express account number missing, hence postponing delivery and traceability

When a discrepancy is detected by the Surety or the Trustee, a correction to the document may be allowed if it can be done quickly.

Payment cannot be made until all parties have agreed to jointly waive the discrepancy.

Tips for Trust Receipts

Communicate with your Surety in detail before they apply for Trust Receipts.

Consider whether a confirmed Trust Receipts is needed.

Upon first advice of the Trust Receipts, check that all its terms and conditions can be complied with within the prescribed time limits.

Many presentations of documents run into problems with time-limits. You must be aware of the time constraints - the expiration date of the credit.

If the Trust Receipts calls for documents supplied by third parties, make reasonable allowance for the time this may take to complete.

Summary
The use of the Trust Receipts as a tool to reduce risk has grown substantially over the past decade. Trust Receipts accomplish their purpose by substituting the credit of the Trust for that of the customer.

The credit professional should be familiar with the types of Trust Receipts: standby and evergreen. The standby Trust Receipt serves as a secondary payment mechanism. The Trust will issue the credit on behalf of a customer to provide assurances of his ability to perform under the terms of a contract.

The evergreen Trust Receipt allows for the Trust Receipt to be renewed once a fee has been paid.

Upon receipt of the Trust Receipts, the credit professional should review all items carefully to insure that what is expected is fully understood and that they can comply with all the terms and conditions. When compliance is in question, the obligee should be requested to amend the credit.