Unwinding Payments Under a Letter of Credit – Is a Financing Deal a Sham Trade?

Another bank scathed by Hin Leong’s collapse, UniCredit Bank AG (“UniCredit”), has failed in its attempt before the Singapore High Court to shift an approximately US$37 million loss from Hin Leong’s non-payment to another party. In UniCredit Bank AG v Glencore Singapore Pte Ltd [2022] SGHC 263, UniCredit failed to recover payments under a letter of credit it made to Glencore Singapore (“Glencore”) as seller of fuel oil cargo to Hin Leong as buyer (the “LC”). Among other things, Unicredit alleged that the LC should be rescinded because Glencore’s sale contract with Hin Leong was a sham used to obtain finance from UniCredit, or to deprive UniCredit of any security over the goods or the bills of lading.


On 27 November 2019, Hin Leong applied for a letter of credit with UniCredit to finance its purchase of 150,000 MT of high sulfur fuel oil from Glencore. On the same day, Hin Leong entered into two contracts with Glencore: one to purchase this cargo from Glencore, and another to sell it back to Glencore. Under these contracts, title in the cargo was to pass from Glencore to Hin Leong on 2 December and then immediately back to Glencore. On 28 November, Hin Leong told UniCredit that the letter of credit was for unsold cargo, even though Hin Leong had already contracted to sell the goods back to Glencore. Unicredit issued the LC available against the presentation of a Glencore’s commercial invoice and letter of indemnity (“LOI”) (which was to be addressed to Hin Leong, not UniCredit) if the usual shipping documents, including original BLs, were not available at the time of presentation. Glencore presented its invoice and LOI and received payment but up to this time, UniCredit did not know that Glencore had bought back the cargo. Indeed, up to late February 2020, Hin Leong kept telling UniCredit that the cargo remained unsold. Hin Leong’s precarious financial situation became apparent soon afterwards, and UniCredit’s belated attempts to obtain possession of the BLs in April 2020 came to naught – it was therefore left without payment, without goods and without BLs. To recover its losses, it claimed against Glencore seeking (among other things) recission of the LC on the basis that given the buyback arrangement, the sale contract from Glencore to Hin Leong was a sham. It also argued that Glencore had made fraudulent representations to UniCredit in the payment LOI as to locating and surrendering the BLs for the cargo and the genuineness of the underlying sale.

Financing deal not a sham

Unicredit argued that the motivation behind the buyback transaction, i.e., to allow Hin Leong to raise financing, meant that the sales contracts were a sham. The Court disagreed and noted that the motive of a transaction, e.g., to make arbitrage profits, leverage on credit terms, make use of available financing, is not determinative of whether it is a sham. UniCredit could not establish that parties did not intend to create the rights and obligations on the face of the documents, as evidence suggested that parties performed their rights and obligations as to title and payment under the sale contract. In particular, evidence of Glencore’s purchase contract and its communications with its own seller demonstrated that Glencore had in fact checked that it had title before the time for passing it to Hin Leong arose.

The fact that Hin Leong did not take delivery of the cargo or receive BLs was irrelevant. The court considered that if Hin Leong has resold the goods (which was envisaged under the structure), it may not have required delivery to itself. As regards delivery of BLs, since Glencore had bought back the cargo, it might not have expected to surrender the BLs to Hin Leong. That did not however mean that it never had an obligation to surrender the BLs or that it never had an intention to perform such an obligation. Glencore’s witness evidence was clear that if Hin Leong had asked for the BLs (which it never did), it would have supplied them to Hin Leong.

The court also endorsed the distinction drawn in the earlier case of Goodwood Associates Pte Ltd v Southernpec (Singapore) Shipping Pte Ltd [2020] SGHC 242(see earlier update here) between a situation where no delivery of goods is contemplated and where no trading is contemplated. In the former case, parties intend legal title to pass and the intention to be bound by the trade contract is present. In the latter however, parties do no not intend to trade in any commodity (take legal title or to pay for the trade) at all, e.g., where parties seek to manipulate their financial performance by purporting to trade in commodities which do not in fact exist or which they know are not available to them to trade by virtue of not being owned by any of them. This, the Court noted was not a case where no trading was contemplated, or one involving fictitious goods, or goods known to not be available for trading. It involved real oil, which Glencore had purchased and confirmed it had title to before transferring title to Hin Leong.

No fraudulent representations in the letter of indemnity

UniCredit also argued that Glenore made two fraudulent representations in the LOI it presented to obtain payment from it, the first of which that it had agreed to locate and surrender the original BLs and the second to the effect that there was “only a purchase” of goods and not a financing deal. Both arguments were rejected for several reasons including that any such representations were made in favour of Hin Leong and not Unicredit. Ultimately in a letter of credit context, the beneficiairy and the bank are dealing with documents only and not the underlying sale (except in the case where the beneficiary can be said to have presented documents fraudulently).

Observations: Structured vs Fictitious Trades

The case has garnered much attention but its uncontroversial in its application of a bank’s obligation to pay under a letter of credit against compliant documents presented by the beneficiary. The circularity of the sale in itself, did not make the sale contract a sham and whether it was intended for financing purposes was irrelevant to the bank’s obligation to pay under a letter of credit. In that regard, Unicredit’s grievance over not being told about the financing nature of the trade laid with its borrower and applicant, Hin Leong and not the beneficiary of an LC. Attempts to draw parallels with trade credit insurance claims, runs the risk of missing the fact that while a beneficiary under an LC owes no duties of disclosure to the bank, an insured is required to disclose material facts affecting the risk, which would presumably extend to whether an insured trade is purely a financing deal.

While the lack of original BLs was not indicative of a sham sale contract, the Court did not make a statement that all commodities trades without original BLs are genuine. Indeed, the commercial practice of oil trading, where at times, cargo is traded without original BLs being circulated, was one observed by the Court to explain the absence of original BLs. But in the absence of available original BLs, the oil trade has also developed the practice of payment letters of indemnity demonstrating that parties envisaged that they may not be in a position to transfer original BLs. Critically, the Court considered what Glencore described as “the most important email”, in which Glencore’s supplier, Glencore UK confirmed that title would pass to Glencore a few minutes before Glencore passed title to Hin Leong. In addition, the Court accepted Glencore’s evidence that if required, it would have surrendered the original BLs. Such factors, were critical in setting it apart from a case where no trading was contemplated, for example, if parties entered into a contract without any credible basis as to whether the goods are owned by any of them.


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