Every borrower under this section should be required to furnish a statement at least monthly, even if estimated, showing what stock he is holding at that date under assignment to the bank. This declaration (Figure 51) is of importance, because if a manufacturer, the pledger may have changed the status of the goods from raw material to manufactured articles; or, if a dealer, he may have substituted other goods in the place of those originally pledged. The intention of the declaration is to show, periodically, just what the bank's security is at stated intervals. It also keeps in the borrower's mind his responsibility to a bank, and would show conclusively to a court that a bank was following these goods, according to the spirit of the act. The form also contains a statement as to the amount of wages or other privileged liens on the goods.
Particular attention is directed to the prior rights of wage-earners under an amendment incidental to the 1913 revision of the act. Even if the customer is not in a position to give periodically the information regarding quantities and values of the products, etc., assigned, the statement should nevertheless be taken with respect to wages, salaries and the like. When an exact inventory is taken, or a sufficiently detailed declaration made, it would be advisable, in most cases to utilize it as a basis of an assignment.
It is customary to make an examination of the security pledged at irregular intervals, and a manager should, at all times, keep himself informed as to the fact that the security is fully sufficient to protect the advances. At the same time, even with the best surveillance, so much depends on the integrity of the pledger that a bank should not consider making advances in this form unless the applicant is a person of unquestioned integrity, with a previous record which leaves no doubt on the subject.
..................................191... To The Manager. The......................BANK
The undersigned submits the following true statement of products, stock, merchandise, grain, etc., and values thereof as at............
.................., assigned to The..................Bank under
Section 88 of the Bank Act by the undersigned as security for advances made by the said Bank to the undersigned. The said products, stock, merchandise, grain, etc., are free from any mortgage, lien or charge thereon, except previous assignments to the Bank. The wages, salaries or other remuneration owing by the undersigned to persons employed do not now exceed $............, of which not exceeding $............are in arrears. The undersigned hereby agrees with The..................Bank that should this statement be found incorrect, then you or the Acting Manager for the time being may declare to be due and payable all moneys owing by the undersigned to the Bank and all bills and notes held by the Bank in respect thereof, and on such declaration being made, the said moneys and bills and notes shall thereupon become and be due and payable.
(Statement follows showing quantities, values, insurance, etc.)
Figure 51 Declaration
In making advances under promise to give security it is a general principle that the money the bank advances should go directly into the creation of the goods intended to be pledged. No portion should be diverted to any other purpose. This is an important matter and should be checked constantly, even if it is necessary to make a special visit in the early stages of the operations. The time to do it is at the beginning of operations before the money can be diverted into fixed assets or plant.
In the case of a large company the fact that the funds have been placed in actual production is often an intricate question to decide, being shown by the concurrence of several lines of evidence, the scale, inventory sheets, state of the books, etc. It is therefore advisable that there should be an understanding that these are open to the bank if it sees fit to send an auditor at any time.
Care should be taken to see that all workmen and artisans are paid within a reasonable time and that no privileged liens for wages are demandable, in fact, that no preferential claim exists on the stock. Full insurance in a bank's favor in satisfactory companies should always be held upon goods and the policies retained in the bank's possession.
Insurance held upon goods under assignment must not be regarded as effective security should fire occur, for if the goods were not there to be destroyed, the insurance company would not pay. The loss has to be proved. It must not be assumed that the existence of a policy of insurance is any evidence of the existence of the merchandise which it is supposed to cover.