There are some advantages and disadvantages of security of title to goods and all of them are described below in detail:
Advantages of security of title to goods
- An advance against the pledge of documents of title to goods is tantamount to the pledge of the goods themselves. Thus, in the case of advances against documents of title to goods, the ultimate security is the stock of goods represented by the documents and not the documents themselves. It is tangible security because, in case of default by the borrower, the bank can very well fall back upon the goods which are presently represented by documents. It is convenient because the borrower has not to worry about the storage of goods against which he is going to take advance; else he is assured of the goods having been properly stored, insured, and cared for. The custody of the relative documents is essentially less cumbersome.
- If the goods and products advanced against are necessaries of life, their prices in normal times are not liable to wide fluctuations as they have a worldwide market.
- Advances for a seasonal and short period: The banker is lending funds against them has not to lock up his money for a considerable length of time.
- The person who possesses the document can transfer the goods to any person by endorsement and /or delivery. The transferee, thereafter, is entitled to take delivery of the goods in his own right. He also obtains a legal title and such goods are taken “out of the order and disposition” of the insolvent.
- The instruments are easily transferable although they are only quasi-negotiable. The formalities involved are less than in the case of, say, a mortgage or assignment.
Disadvantages of security of title to goods
Possibility of frauds: The transporter issuing a railway receipt or bill of landing certifies that the goods have been received by him but he does not certify the contents or quality of the packages delivered to him.
An unscrupulous merchant may easily deceive the banker by giving a false description of the goods in the documents of title which are pledged with the bank.
The banker will have no remedy against the carrier if the packages contain worthless stuff, which is quite different from what they are supposed to contain. Moreover, the documents may be forged also or the figures therein may be raised fraudulently.
Not negotiable documents: The documents of title to goods are “Not negotiable” instruments like cheque, bill of exchange, or promissory note. The transferee of such instruments cannot obtain a better title than that of the transferor.
So, if the person who pledged the instrument has the only defective title the banker does not acquire a better title and he obtains only a defective title.
Unpaid vendor’s right of stoppage in transit: Under Section 50 of the sale of goods act, 1930, the unpaid vendor who has parted with possession of the goods has the “right of stoppage in transit” if the buyer becomes insolvent before the goods are delivered to him and in that case he can instruct the carrier not to deliver the goods at any time before delivery.
If such a right is exercised by the unpaid vendor, the banker cannot obtain the goods and his security becomes worthless.
Obtaining delivery on the basis of indemnity bond: The borrower may pledge the documents of title with the bank and, on the other hand, manage to obtain the delivery of goods on the basis of indemnity bond or some other device.
Thus, the banker’s risk increases. The bunker, however, can avoid this danger by giving notice to the carrier regarding his interest as a pledge.
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