Section 88 of the Bank Act authorizes a bank to allow pledged goods taken from a wholesaler, purchaser or shipper to be removed and other goods substituted therefor. The permission to substitute is accompanied by so many restrictions that its use should be avoided whenever possible, and never allowed until the individual conditions have been looked into and the proper procedure decided on.
WAREHOUSE RECEIPTS and/or BILLS OF LADING ACQUIRED BY THE ......................BANK as Collateral Security
W/R or B/L
Description of Goods
The above-mentioned Warehouse Receipts and/or Bills of Lading are to be held by the Bank as security for the payment of the indebtedness of the undersigned, as follows: Note dated..............191..... due................191...., $......
or renewal(s) thereof or substitution(s) therefor, and interest thereon. The goods covered by the above-mentioned securities may be realized by the Bank in such manner as may seem to it advisable, and without notice to the undersigned, in the event of any default in payment of the said indebtedness. The proceeds may be held in lieu of what is realized, and may as and when the Bank thinks fit, be appropriated on account of such parts of said indebtedness as to the Bank seems best.
It is important to note that the provision for substitution is, in the first instance, expressed as conditional upon the consent of the bank, and tho failure to obtain such consent does not affect the validity of the security, there should always be an understanding with the customer that the goods are not to be removed without the bank's previous consent. As a rule, in an active account, it is not feasible to require a customer to obtain the bank's consent to remove the goods for each day's shipment, and the only practicable plan appears to be to have a general understanding with the customer (Figure 56) that he may remove goods from time to time and substitute others of the same character and equal value; that is, of course, to such an extent as the proceeds of the goods removed are not applied directly to reduce the advances.
Under the system of taking a general promise (as well as a promise with each note discounted) to give security on all the goods which the customer may have from time to time in certain named places, and taking assignments at frequent intervals, the value of the clause respecting substitutions is, in many instances, not important. It would be of benefit, however, under certain circumstances, for instance, where goods have been removed and others taken into stock subsequent to the date of the last assignment and the borrower failed or was seized up. In such a case, if the goods were of substantially the same character as those which they replaced, the bank would have a right to hold them under the last assigmnent.
Speaking generally, it may be said that the benefit of this clause will be most felt when security has been taken upon any stock of grain, minerals, logs, live stock, etc., at a time when the quantity of stock is at the highest point. The removal, with the bank's consent, of a portion of the goods, and the substitution of other goods of the same character, would leave the assignments applicable to all the remaining stock.
THE ....................... BANK pursuant to
Section 88 of the Bank Act hereby, until this provision is withdrawn, allows ................................
to remove from time to time in the ordinary course of business, for the purpose of delivering the same to purchasers thereof, the products, goods, wares and merchandise, live stock or dead stock or the products thereof, or any portion or portions thereof, on the security of which the Bank has lent or may lend him/them money under the provisions of said Section, and to substitute respectively therefor other products, goods, wares and merchandise, live stock or dead stock or the products thereof, respectively of substantially the same character.
The undersigned, in consideration of the foregoing permission, hereby agree .. with The.....................Bank not to remove any of the said products, goods, wares and merchandise, live stock or dead stock or the products thereof, in respect of which the said permission is given otherwise than in accordance therewith, and within a reasonable time from any such removal (what shall be a reasonable time in each and any case to be determined by the Manager for the time being of The..........................Bank at
--------------------------------, whose decision shall be final) to substitute respectively for the products, goods, wares and merchandise, live stock or dead stock or the products thereof so removed other goods, wares and merchandise, live stock or dead stock or the products thereof respectively of substantially the same character as and of not less value than those so removed, and in case of breach of this agreement the undersigned agree .. that the said Manager may during the continuance of such breach 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.
Substitution Agreement 300
It will be observed that under this clause the right to substituted goods will not depend on an assignment being taken after the substituted goods are required, but on having an assignment covering the original goods for which the new goods have been substituted. This is an added reason for keeping all the assignments until all the advances to a customer are cleaned up for the season.