<p>With the strong focus on trading in the United Arab Emirates (&ldquo;UAE&rdquo;), traders  often require short term financing and this is where banks and financial  institutions step in.&nbsp;<br /><br />While typically most banks and financial  institutions restrict short term financing to letter of credit facilities, the  financing of the retirement of the letters of credit is also in great demand and  more and more banks choose to extend the existing L/C facility to a trust  receipt facility to enable the customer to make payment towards the L/Cs and  retire them by taking on a further short term loan. This type of financing is  popular especially in the UAE where the options for creation of several types of  security (that are otherwise available in most commonwealth countries) are not  available. Financing by way of trust receipts does not amount to secured  financing. However, it does create certain rights and obligations that put the  lender in a better position than most other unsecured lenders.<br /><br />From the  customer&rsquo;s perspective, financing by way of trust receipts is particularly  relevant for importers of raw or semi-finished goods who require such materials  for their manufacturing process. Given that a customer who is an importance of  raw material would receive funds only once he sells finished goods in the  market, such customers often seek financing from banks or other financial  institutions for payments due to their suppliers&nbsp; during the manufacturing  stage.<br /><br />Typically under this structure, the financier pays the supplier of  goods on behalf of the customer at the time the customer takes delivery of the  goods (usually to retire the existing letters of credit). The ownership of the  goods (being financed) is transferred to the financier and the customer is  immediately provided with the authority to deal with such goods (under a trust  receipt), including use the goods for manufacturing and sell the goods or the  finished product.<br /><br />While the customer is permitted to use the goods  received from the supplier, the financier obtains and retains title to such  goods, with the customer acting as agent, trustee and/or bailee on behalf of the  financier in respect of such goods during the financing period. Any proceeds  received from the sale of the finished goods, shall, to the extent these are  related to the raw material supplied under the trust receipts, be held by the  customer for and on behalf of the financier and for remittance to the financier.</p>
<p><strong>What are Trust Receipts?<br /><br /></strong>Trust Receipts are not  defined under UAE law. In practice trust receipts are receipts issued by the  owner of the goods permitting another party to deal with the goods on behalf of  the owner.<br /><br /><strong>UAE Law and trust receipts<br /><br /></strong>The UAE is  a civil law jurisdiction and does not recognise common law trusts. However trust  receipts are commonly used in the UAE and would be recognised under UAE law  provided the ownership of the goods clearly lies with the financier and the  trust receipt issued by the bank clearly permits the customer to deal with the  goods as agent of the financier.<br /><br />Trust receipt facilities are commonly  used in the UAE as documentary credit financing.&nbsp; Banks and financial  institutions issue letters of credit on behalf of their customers in order for  the customers to avail their goods purchased (financed by such letters of  credit) and enter into a trust receipt arrangement so that the goods may be  released to the customer for sale in the local markets. The trust receipt  ensures that the bank retains its title in the goods while releasing the right  to deal in the goods to the customer.<br /><br />The UAE Commercial Code and the UAE  Maritime Code recognises bills of lading as the title and transport documents  for the transport and shipment of goods. In practice most trade finance  (including documentary credit) is based on either bills of lading in the name of  the importer (the customer) or bills of lading &lsquo;to the order of&rsquo; the financier.  We find that financiers in the UAE often require bills of lading to be made to  the order of the financier. In the event the bills of lading are issued &lsquo;to the  order of&rsquo; the financier then ownership and title in relation to such bills of  lading would already vest with the financier. When bills of lading are issued in  the name of the customer, it is essential (for the purpose of entering into a  valid trust receipt structure) that the ownership to the bills of lading and the  underlying goods be transferred to the financier. This may be achieved in the  UAE by using the appropriate structure and documentation. <br /><br />The Commercial  Code specifically permits banks to entrust their customers with taking delivery  of goods on a trust / agency basis and selling them on behalf of the bank (and  to the bank&rsquo;s account) under terms and conditions agreed between the bank and  the customer. The customer will act as commission agent and the bank shall have  all the rights of the principal on such goods or their value. To this end, the  customer and the bank may enter into a trust receipt arrangement whereby the  bank entitles the customer to release the goods under the bills of lading as a  commissioning agent on behalf of the bank.<br /><br />The term &lsquo;trust&rsquo; as referred  to in the Commercial Code is different from the concept of trusts as understood  in common law jurisdictions.&nbsp; The term &lsquo;trust&rsquo; is literally translated from the  term &lsquo;amanah&rsquo;. The term trust or amanah is derived from the UAE Civil Code and  relates to a custodianship or deposit arrangement created contractually where a  party entrusts or deposits its property to another party for safeguard and  preservation. The concept of amanah and/or a deposit contract would apply to the  operation of trust receipts.<br /><br />Note that in a trust receipt structure it  would be essential that the customer (as agent) should be required to abide by  the compulsory and express instructions of the bank (as principal), and if the  customer violates such instructions without an acceptable excuse, the bank may  reject the deal. The customer will also be responsible to the principal if the  goods perish or there is any damage to the goods and other things that are in  the customer&rsquo;s possession unless the damage or perish results from a foreign  cause beyond the control of the customer, or from an inherent defect in the  goods.<br /><br />The UAE Civil Code also contains detailed provisions on &lsquo;deposit  contracts&rsquo; under which a depositor authorises another person to take care of his  property and to maintain the said property (or use it under instructions of the  depositor) and make restitution thereof in rem. <br />Enforcement  Process<br /><br />The trust receipt structure does not amount to a security but  does place the financier in a better position for recourse than other unsecured  lenders so long as the goods related to the relevant bills of lading or the  proceeds thereof are adequately traced and identified.<br /><br />If the customer  trades with the goods in its custody with the permission of the bank, the  proceeds arising out of such trade shall then be transformed to a debt owed by  the customer to the bank and will not be discharged except by returning the  equivalent of the value of the goods to the bank.<br /><br />Also, if the goods  under the trust receipt arrangement are sold by the customer to a bona fide  third party then the bank may not be able to trace such goods in the custody of  such bona fide purchaser. Further, on insolvency of the customer, if the  proceeds of the goods have been co-mingled with the other assets of the  customer, the bank will need to claim in the insolvency, as an unsecured  creditor.<br /><br />Any breach or consequence of such arrangement attributable to  the customer may be seen as a breach of duties by the customer as the commission  agent under the Commercial Code and a breach of trust under the Penal  Code.&nbsp;<br /><br /><strong>Conclusion</strong><br /><br />To conclude, the trust receipt  structure is a viable option for banks and financial institutions looking to  fund short term requirements and for manufactures and traders in the UAE.  However, while entering into the relevant documentation care should be taken to  ensure that the title documents clearly pass ownership to the bank and that  subsequently, the parties execute the trust receipt agreement in respect of the  specific title documents granting rights of use to the customer.<br /><br />Please  contact the author for any further information on the subject of this  article.</p>