Asset Recovery in Commodities: Know your Tools

Asset recovery is a vital aspect of any business that deals with a non-payment risk. In the volatile world of the commodities, knowing which tool to use from the toolbox is essential when dealing with a dishonest or financially troubled debtor. Asset recovery generally involves (i) liquidating the traded/financed goods, (ii) monetizing the debtor’s other assets, or (iii) getting payment from more solvent third parties.

The Toolbox: Practical Problems to Consider

Undoubtedly, the success of asset recovery depends on the contractual or security structure created from the onset but once faced with non-payment, consideration of the following questions will be useful:

  • Are you in possession or can you take possession of the traded goods in the local country?
  • Practical ramifications of taking possession including liabilities and the ability to resell the goods?
  • What happens if the buyer/borrower goes insolvent?
  • Can a third party be held responsible for redelivery of the goods or payment as a result?
  • Do you need the assistance of a foreign court to enforce/monetize your asset recovery?

Ultimately asset recovery in international trade largely depends on taking possession of goods. While legally taking possession will facilitate a sale and hence monetization of the debt, it does come with practical challengers including whether court assistance is needed to secure possession, issues relating to historic and prospective maintenance and storage charges; insurance, duties and taxes payable. Even the basic question as to whether a creditor needs a license to possess, resell or re-export the goods can sometimes be overlooked. Practical considerations of all the viable tools must be laid out and considered in depth before embarking on asset recovery (see: Practical Considerations Summary Table).

Pledges: Possession is King

The hallmark of an English law or Singapore law pledge is for the pledgee (the person receiving the benefit of the pledge) to have possession of the asset. But commodities might be fungible and commingled. Tank operators might store oil in a single tank belonging to different owners. Parties might envisage oil moving in and out of a tank, while still being notionally secured by a pledge which might affect an asset recovery exercise with competing claims or at least limit recovery to a percentage of what it is in the tank.  

Enforcement of pledges also requires understanding local law requirements, which may not necessarily recognise pledges based on possession or may otherwise involve a lengthy administrative process under local laws to facilitate a sale. The timing and costs involved are key factors in such recovery exercises.

Fixed Charges: Control, Control, Control. 

Fixed charges might be created over specific goods (typically pre-shipment) or over the collection accounts where the receivables for the sale of the goods are to be paid into. The key touchstone of fixed charges is not possession (which remains with the debtor) but control and often with specific contractual rights attached to the fixed charge such as the appointment of a receiver and subsequent resale in the event of default. Fixed charges in practice often fail if the element of control over the goods is compromised: if these underlying assets could move without the consent or knowledge of the chargee (the person receiving the benefit of the charge), the charge might prove futile in enforcement as assets are no longer secured. In the event of the debtor’s insolvency, a fixed charge on paper which doesn’t demonstrate the element of control is likely to be re-classified as a lower ranking floating charge.

Retention of Title: Good on paper but in practice?

Retention of title (ROT) clauses are common in trading contracts so that a seller still retains title to the goods on paper even though the physical goods have passed to the buyer, until it has paid. But an ROT may have limited practical utility in so far as commodities are concerned because commingling (e.g, oil, grain) or the use of a commodity to make a different product (coking coal into steel), as well as a subsequent sale down the chain to a buyer without notice, would defeat an attempt to enforce an ROT.

Claims against Third Parties: Vessel Owners, Warehouse/Tank Operators

Recovery might not just be limited to the buyer/borrower. The nature of international trade often involves commodities being held by third parties on transit, e.g. vessel owners or in storage facilities by tank or warehouse operators. The possession of an original bill of lading would allow its lawful holder to make a demand for delivery of the goods, failing which, a claim for misdelivery against the shipowner (possibly arresting the vessel). The gold standard of a BL pledge has however come under scrutiny as recent cases have gone against banks pursuing misdelivery claims when they might not have treated the bills as security in the first place.

Separately, warehouse receipts and tank receipts (while not title documents) might constitute attornments by the operators that goods are held by them on the account of the receipt holder. These structures effectively create a possible claim against third parties, independent of the the buyer’s default and are typically turned to if the buyer is insolvent as an additional means of recovery.

Third party rights can also manifest with a legal assignment of a debtor’s receivable which would allow a creditor’s asset recovery efforts to extend beyond the buyer but also to its receivables. However, fabricated receivables or multiple assignments of the same receivables to different debtors can turn this to a blunted exercise. Similarly, guarantees improve recovery by moving the credit risk to a third party.  

The freezing injunction

A freezing injunction is often described as the nuclear weapon of asset recovery – not because it freezes assets but because it prevents the debtor personally as well as third parties who hold assets on behalf of the debtor (eg banks), from dealing with the assets. The freezing injunction is a costly exercise that requires careful planning and consideration but its efficacy for recovery might not always be well understood. The injunction may require recognition in other jurisdictions where the debtor’s assets are located, which may not be automatic or straightforward. Even when recognised, the injunction does not prevent the debtor from paying debts in the ordinary course of business – in that regard, it doesn’t give the creditor a priority over other creditors. In injunction, does not give the creditor a proprietary right, fast track or priority to recover the assets – a creditor still needs to obtain the requisite judgments before enforcement and if the debtor becomes insolvent before a judgment is obtained, a creditor with a freezing injunction would have nothing more to show for that as it would still rank as an unsecured creditor.

Insolvency

Insolvency is a measure of last resort where it becomes clear a company is unable to pay its debts. Most creditors are reluctant to deploy it because the costs of applying for insolvency might outweigh the prospect of pari-passu recovery as unsecured creditors. A possible incentive to put a debtor into insolvency sooner rather than later would be to enable the liquidator to exercise its powers to review and claw back unfair preference or undervalue transactions within a certain time frame from the date of insolvency. While the legal process for insolvency is straightforward, in practice the ability to obtain asset recovery can be challenging as it would require creditors to invest more funds to support such recovery actions, which in itself depends heavily on the state of accounts and cooperation by the debtor’s directors.

Practical Considerations Summary

 Pledges Are local law court orders needed to facilitate possession, resale or re-export
 Retention of Title Goods needs to be identifiable. Unlikely to be effective if goods are resold, commingled, consumed or integrated into other products
 Third Party Claims Misdelivery claims against shipowners requires a careful analysis of time bars as well as factual/contractual matrix whether BLs were relied upon as security
Warehouse receipts and tank certificates do not operate as title documents; they require attornment by the operators to acknowledge goods are held for creditor.
 Freezing Injunction Evidence of dissipation of assets
Costly exercise and requires careful planning especially around location of assets and enforceability of freezing injunction in those countries
Payments can still be made by debtor in the ordinary course of business
Creditor doesn’t get priority or proprietary claim over assets. Judgment is still needed before enforcement and will be rendered nugatory if company becomes insolvent before
 Insolvency Costs of making company insolvent vs recovery
Liquidators have power to examine antecedent transactions and clawback certain transactions to third/related parties to improve recovery for all creditors
Recovery dependant on funding support given to liquidator, state of accounts of the debtor and cooperation of the directors.  

Insights

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