This section of the book is from the "Canadian Banking Practice" book, by John T. P. Knight.
Question 588.— Referring to pages 63 and 63, Vol. II., of the Journal, Mr. Lash states: " The distinction between a debt and other liability is well known to the law. For instance, the liability of a guarantor is not a debt, but should the guarantor supplement his guaranty by payment, a debt would then arise; a bank therefore could not acquire or hold a warehouse receipt or bill of lading as collateral security for a liability which it might incur as the guarantor of a customer."
What is the position of a bank in the following case? The London (Eng.) agent accepts a 60-day draft drawn by some firm there under a credit established by one of the bank's branches in Canada. The branch gives up the draft and receives a warehouse receipt for the goods. Is the bank a guarantor, no payment having been made at the time of acquiring the warehouse receipt, and the acceptance in London not maturing for some time ?
Answer—The question asked is one which it is very difficult to answer definitely. At one time, as stated in the article quoted from, banks were authorized to take the warehouse receipts as security for a liability incurred by the bank on behalf of the holder, etc. This provision was afterwards deliberately dropped, and there is nothing in the present Act which empowers banks to acquire bills of lading or warehouse receipts as security for outstanding drafts drawn under letters of credit on which they are liable, and a bank's rights to hold the documents must depend upon considerations entirely apart from the warehouse clauses of the Act.
The general clause (section 64) under which banks are authorized to engage in any business pertaining to banking might be regarded as giving them power to acquire security in connection with letters of credit, the issue of which is beyond question part of their recognized business, but the concluding part of the section prohibiting the lending of money directly or indirectly on the security of the goods, except as provided in the Act, would seem to cut out such transactions from the powers covered by this section.
This question has been up for discussion many times, and the conclusion hitherto has usually been that the bank's rights, though not clear under the Act, are made reasonably certain by the circumstances which ordinarily prevail. The goods are shipped to the bank; they have never become the property of the customer, and could not so become until he pays the relative draft (or rather the title would not pass), and no creditor could attach the goods while the title to them is in the bank. They may be regarded as still subject to the vendors' rights, and the bank represents the vendors, having procured the payment to them of the purchase money and taken over the goods.
This is not very satisfactory, and an effort is not unlikely to be made to amend the Act in this and certain other directions.
There is one point to which we might draw special attention. If the documents were handed to the customer and the goods warehoused in his name, the assignment of the warehouse receipt to the bank might not give it a good title. The best practice would be for the bills of lading to be handed to the railway or shipping company, with instructions to deliver the goods at some warehouse on behalf of the bank, thus keeping the bank's title intact throughout.