The whole question of making advances under Sections 86-90 demands careful study of the Act, as well as of the definite instructions issued by every head office on the subject. Losses are generally made by banks in connection with loans under this section, due to carelessness in the details of taking the security. In some cases banks have lost their rights to the security. Security taken under this section gives a bank preference over other creditors because the bank created its own security by advancing the money, and in the event of the failure of a customer this preference may be attacked. If any flaws exist in the security a bank has practically no defense. Where this class of security is taken, therefore, it is essential that the procedure be strictly in accordance with the legal requirements, if the security is to be at all relied on.

The most important thing to remember is that the security under this section cannot be taken to secure any pre-existing debt, and to obtain title it is necessary that the pledge should be contemporaneous with the advance, or pursuant to a written promise to give security either prior to or at the time the advance is made.

When a manager has had little or no experience in this class of loan, it is advisable that in making application for the credit he should outline the necessary procedure as he understands it, referring to the forms he intends to use in this connection. Head office, in reply, will correct or confirm his conclusions. Assurance is thus made doubly sure.

As already mentioned, the above brief explanation of this important class of loan is not intended for direct application, but rather as a general commentary on the specific instructions, which are included in the rule book of every bank. It is hoped, however, that this chapter will prove helpful to any who have not had sufficient opportunity to grasp the spirit which actuates the law.

Review

Under what circumstances does the Bank Act permit banks to make advances to wholesale purchasers of goods? To wholesale manufacturers?

What is an assignment?

Why is a declaration important?

What information must the manager have before making advances?

What conditions govern loans on warehouse receipts?