Pledge and trust receipts – are financial institutions really protected?


In a typical commodity business transaction, a buyer may be unwilling or unable to pay for purchased goods from a seller until the same goods have been resold to an end buyer. In this situation, the buyer may consider obtaining an import loan from a financial institution against a fiduciary receipt, also known as a fiduciary receipt loan.

A form of pledge and fiduciary receipt is therefore a classic trade finance instrument allowing a financial institution to deliver title to the goods to the buyer exclusively for the purpose of taking delivery and reselling the goods for use the proceeds of the sale to repay the loan. But how exactly are the interests of financial institutions protected when assets are handed over to their customers for this purpose?


When a financial institution (as a pledgee) takes possession of its client’s assets (as a pledger) as security for payment of the loan facilities granted to the client, a pledge is constituted.

The rights to the pledged property result from the surrender of possession (real or implied) necessary for the conclusion of a pledge contract. A pledge may be taken on any property which is capable of actual or implied delivery. While actual delivery involves physical delivery of the asset (e.g. pawning your watch), implied delivery can occur when there is a change in the ability to possess, for example, by:

a) symbolically give control of the asset by handing over to the financial institution a key to a place in which the asset is stored and locked;

(b) delivery of title (such as a complete set of duly endorsed original bills of lading) of the Asset to the Financial Institution;

(c) where the Asset is in the custody of a third party, the Customer notifies such third party requesting it to hold the Asset for the Financial Institution as custodian and such third party acknowledges that it holds the Asset as as depositary of the financial institution (otherwise known as a “power of attorney”, in which the third party is the agent and the financial institution is the agent); Where

(d) perhaps a lesser-known way of creating a pledge, where the customer declares to the financial institution that he holds the asset as the custodian of the financial institution, which also requires a concrete expression of the facts by the client as guarantor, addressed to the financial institution or its servant or agent as agent, to the effect that the property is henceforth held as agent and that the agent is henceforth the custodian of the agent. In the case of Hong Kong below, this method of recognition was examined in more detail.

Decision in Re Hang Fung Jewelery Company Limited

In Re Hang Fung Jewelry Co Ltd [2010] 2 HKLRD 1, Hang Fung Jewelery Co Ltd (the “Applicant“) applied to Standard Chartered Bank (the “Bank“) for a letter of credit (the “LC”) for the purchase of certain gold bullion (the “Goods“) of a seller (the “Seller“). The LC required, among other things, that a freight receipt be issued and signed by the applicant’s authorized signatory(ies) certifying receipt of the goods in good order and condition.

Pursuant to a trade finance supplement, the Applicant has agreed to pledge the Goods and all relevant documents to the Bank and hold them in trust for the Bank should any of them be delivered to the Applicant. A freight receipt issued by the Applicant, which showed that the Goods had been ‘in good order and condition in trust for [the Bank] (under [the Bank’s] L/C No. 315011445457-S)’, was then presented to the Bank through the Seller’s negotiating bank. Subsequently, the Applicant went bankrupt and the Bank sought to obtain the proceeds of the sale of the Goods from the Applicant’s provisional liquidators.

One of the key rulings in this case was that the freight receipt, which served both to identify the Pledged Goods and to acknowledge that the Claimant held the Goods in trust for the Bank, was sufficient to effect delivery. implied by means of a pledge and complete the pledge agreement. Therefore, a pledge was validly constituted.

It should be noted that Judge Kwan distinguished her decisions from the reasoning of Judge Le Pichon in Re Far East Structural Steelwork Engineering Ltd [2010] 1 HKLRD 156 (that, among other things, there was no escrow by the freight receipt in this case, as the escrow was made to the seller and not to the bank and the escrow receipt was only a pledge agreement) based on the following reasons:

(a) there was evidence that the Applicant was actually in possession of the Goods when the freight receipt was issued;

(b) the freight receipt should be considered together with other contractual documents which governed the relationship between the Bank and the Applicant, including the commercial finance supplement which evidenced the intention to pledge;

(c) the fact that the Bank did not receive directly from the Applicant the notice of acceptance in the freight receipt is immaterial, insofar as:

(i) all parties involved were aware that the freight receipt would be presented to the Bank; and

(ii) the cargo receipt would be invoked by the Bank as a condition to release payment under the LC; and

(d) delay in presenting the delivery receipt should not constitute a valid objection to the existence of a pledge if the possession was delivered within a reasonable time after the advance under the pledge agreement.

Trust receipt

As the validity of a pledge depends on the financial institution acquiring and maintaining possession, a pledge is extinguished when the financial institution loses possession of the pledged property by releasing it and returning it to the customer. . Therefore, in order to preserve the pledge after return, any release of the pledged property or its title must be made under a trust agreement and subject to the following conditions:

(a) the pledged property or title is returned to the customer for specific purposes only;

(b) the pledge constituted in favor of the financial institution is not affected by this restitution; and

(c) the Client shall hold the Pledged Asset, title to it and the corresponding sale proceeds in trust for the Financial Institution.

Please note that the security obtained by the financial institution comes from the pledge instead of the trust receipt arrangement.


The fact that customers execute a pledge and trust receipt form does not always mean that financial institutions have successfully taken a pledge over the goods or that it is safe to release the goods as a pledge to customers. Financial institutions can lose their security interest in pledged goods and documents, if any, if their pledge and trust receipt agreements are not properly documented. It is therefore important for financial institutions to review their existing templates to ensure that all of the following elements are present: (1) a pledge agreement; (2) concrete and appropriate wording for acquittal (eg, when a full set of duly endorsed original bills of lading cannot be obtained by financial institutions); and (3) a trust receipt arrangement.

Marianne R. Winn