1.65     Query

Advances against usance bills discounted with a

bank—whether a secured loan or unsecured loan

 A company has arranged a facility for discounting the bills drawn by it on its customers for working capital needs.  Procedure followed for this purpose by the company is as follows:

When the company effects a sale, a usance bill is drawn on its customers favouring its banker or his order.  The Motor Receipt is also made out in the name of the concerned bank.  The bill of exchange accompanied with Motor Receipt is then forwarded to the concerned bank for discounting.  The bank on receipt thereof discounts the bill and credits the amount of the bill to the company’s Cash Credit Account.  The bank also debits the discounting charges for the usance period and other charges on the date of discounting of the bill.

The bank intimates the company in case of honouring/dishonouring of the bills discounted.  In the case of the drawee not honouring the bill on due date, the bank debits the company’s cash credit account with the amount of the dishonoured bill.

    For this facility, the bank has entered into an “AGREEMENT FOR DISCOUNTING BILLS” with the company.  A copy of the said agreement is reproduced hereinafter.

The company contends that the amount due to the bank at the year end in respect of the bills discounted but not presented by the bank for payment (since they are due for payment after the company’s year-end date) is a SECURED LOAN in view of the terms of their “Agreement for Discounting Bills”, with the bank.

The opinion of the Expert Advisory Committee is requested on the issue whether the company’s contention is correct in light of the terms of the Agreement.

  (COPY OF THE AGREEMENT)

To

            …………………………..(Bank)

 Gentlemen,

In consideration of your discounting from time to time, bills for……………….Ltd., a Joint Stock Company incorporated and registered under the Indian Companies Act and having their registered office at……………….., at your branch at…………….., we the undersigned hereby agree that all goods i.e. stocks of raw materials, packing materials, finished and semi-finished goods, consumable stores/mill stores, all bills of exchange, promissory notes, bills of lading, dock warrants, railway receipts, warehouse keeper’s certificates, wharfinger’s certificates, delivery orders or documents relating to which are now or may at any time hereafter be lodged with or held by you on account of us or which may be transferred to you or your nominees or registered in your name or names of your nominees by or for us whether lodged, held, treated or registered for collection, security or other specific purpose or generally shall be and remain a continuing security for the due payment and satisfaction of all our liabilities to you whatsoever for the time being and from time to time whether matured or not and whether incurred by us alone or jointly with others and whether principal or surety including liabilities in respect of advances whether on account current or otherwise and in respect of bills, notes and other negotiable or non-negotiable instruments drawn, accepted, endorsed, signed or guaranteed by us which you may have discounted, taken up, made advances on or has become interested in together with interest, commission, banking charges, law and other costs, charges and expenses and all moneys from time to time owing to you but not exceeding at any one time the sum or Rs…….all such moneys to carry interest at the rate of 16 (sixteen) percent per annum unless any special rate be agreed upon between you and us.  All property given to you as security shall be our absolute property free from any right or claim on the part of any other person and the offer of any property as security shall be deemed to be a representation to that effect.

   We will sign, endorse and execute on demand such promissory notes, bills of exchange, powers of attorney, transfers, documents of title to goods and other documents as you may from time to time require for better securing any money owing to you by us or for perfecting your title to property given to you as security or for vesting such property or any part thereof in any purchaser or other transferee.

  If we make default in paying on demand any money owing to you, you shall be entitled (without prejudice to your right of suit against us) to sell or otherwise dispose of the goods, documents of title thereto, negotiable instruments or other security held by you or any part thereof either by public auction or private contract and in such manner as you may think advisable without any reference to our consent or us and without being responsible for any loss or damage occasioned to us by reason of such sale or other disposition nor shall you be responsible for any loss arising from the employment by you of any auctioneer, broker or other agent.

   All moneys collected by you on our behalf in respect of negotiable instruments or the delivery of goods, and the proceeds of any sale or other disposition of the security held by you and of any insurance thereof may be applied by you in paying or reimbursing yourself all costs, charges, commissions and expenses of such collection sale or disposition and of keeping the security and all interest, commission, bank charges, law and other costs, charges and expenses due to us incurred by you in relation to the security and all moneys owing to you by us on any account whatsoever.

You shall not be responsible for any loss, damage, or depreciation of or to the security held by you while in your possession or control and in the event of a sale or other disposition of the security or any part thereof the account of such sale on disposition signed by a Manager or Agent or Acting Manager or Acting Agent of any of your offices shall be conclusive evidence of the matter therein stated and shall be binding on us.

In the event of any bill or bills discounted by you for us being dishonoured by non-payment or non-acceptance we hereby agree to pay you with interest the amount of such bills as also any loss which may be occasioned to you by reason of such dishonour as also any loss occasioned to you by reason of your having discounted the bill or bills for us.

            IN WITNESS WHEREOF……………………………….etc.

(Signed by two Directors of the Company)

                                                   Opinion                                                                     January 8,  1981

The querist has sought the opinion of the Committee on whether bills discounted by a company with its bankers can be disclosed in the Balance Sheet as a Secured Loan, where the maturity date of the bills on the Balance Sheet date has not expired.

            The entries in respect of the relevant transactions in the company’s books of accounts would presumably be as under: -

            1.         On preparation of sale invoice and delivery document.

                        Customer Account                    Dr.

                                    To Sales

            2.         On acceptance of Usance Bill by Customer.

                        Bills Receivable Account           Dr.

                                    To Customer

            3.         On discounting of Usance Bill by bank on presentation with Motor Receipt.

                        Bank Account                          Dr.

                        Interest/Discount etc.                Dr.

                                    To Bills Receivable

It will be seen that, as a result of the foregoing entries, ordinarily on the Balance Sheet Date, if it intervenes at this stage, there should be no outstanding balance in respect of these transactions in the Company’s books, either on the customer’s account or the Bills Receivable Account, as the company will have booked the Sale Price as realised and the interest/discount etc. charges as incurred before the Balance Sheet Date.

 Ordinarily, the total amount receivable at future dates by the bank on all such bills drawn by the company, accepted by its Customers, and discounted by the bank, will appear as a ‘Contingent Liability’ on bills drawn on Customers and discounted by the Bank, the primary liability on the Bill on the due date being that of the customer who has accepted it and the Company only being liable to the bank as Payee and Holder in due course in the event of dishonouring of the Bill by the Customer on presentation of it to him by the bank on the due date.  Hence, the question of treating this amount as a loan, whether secured or unsecured, in the company’s books and in the Balance Sheet drawn up as at a date during the currency of the Bill period does not arise.

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