Bond and Credit Corporation (BCC), a trade credit insurer, lost an appeal against a judge’s order requiring it to pay A$7.2 million (US$4.9 million) to a trade financier for refusing to pay out on a policy covering transactions with the since-defunct trader Phoenix Commodities.
Phoenix’s inability to repay the money lent to it by Sydney-based Thera Agri Capital under a trade finance agreement constituted a “covered loss” under the insurance policy offered by BCC, two out of a panel of three New South Wales Court of Appeal judges decided on February 20.
The judgment upholds a ruling from the New South Wales Supreme Court from May 2022, which held that the policy should be honored notwithstanding material differences between the deal’s supporting paperwork and how it was actually executed.
Thera finance Dubai-based Phoenix buy agricultural products from two traders in 2019, but it was later found that no such transactions were made and the money was distributed within the Phoenix organization instead.
Thera sued BCC in October 2020 after rejecting the financier’s initial claim. BCC is a Tokio Marine company that is separately dealing with a slew of other lawsuits following the collapse of commodities merchants in Asia and the Middle East.
BCC was compelled to pay Thera A$7.2mn following proceedings where it became clear that several of the deals it had financed were, unbeknownst to the financier, “shams” supported by falsified or absent evidence. BCC then challenged the decision.
The legal squabble in Sydney brought attention to the continuing global repercussions of Phoenix’s collapse in April 2020, a large conglomerate that purportedly owed more than US$1 billion in debt when it was said to have been destroyed by hedging operations gone wrong.
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Following the market instability in 2020, which saw several traders fall, some amid charges of fraud, the ruling may give other financiers more confidence to use the legal system to enforce trade credit claims they have made with BCC and other insurers. In addition, BCC is involved in continuing legal disputes related to the failure of supply chain finance provider Greensill.
The definitions in the insurance policy, which was arranged by Ed Broking’s Singapore branch, were a major focus of the appellate judges’ attention, much like they were in the original Supreme Court decision. They particularly considered whether the existence of an “advance payment” meant that Phoenix’s debt obligation and its role as guarantor were not engaged.
In accordance with Justice Robert Macfarlan’s findings, “The loss that the insured suffered by reason of its inability to enforce the counterparty’s [Phoenix’s] contractual obligation to pay the purchase price… was a loss against which the insured was covered by the policy,”
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According to Justice Richard Weeks White, “advanced payment”, “the [insurance] policy is engaged because the guarantor failed to honour its obligation to repay the payment advanced to [Phoenix] by Thera in accordance with the trade finance agreement as it was implemented in accordance with the proposal”
Both judges also concurred with the Supreme Court that the presence of fictitious contracts between Phoenix and the commodities dealers it was ostensibly purchasing agricultural commodities from did not result in the policy being void.
According to Ustice Macfarlan, “The loss that the insured suffered by reason of its inability to enforce the counterparty’s [Phoenix’s] contractual obligation to pay the purchase price… was a loss against which the insured was covered by the policy”
Judge John Basten, who dissented from the majority opinion, said that the Supreme Court’s prior ruling in favor of Thera should be overturned.
He determined that the obligations Phoenix defaulted on were not obligations created in accordance with the master agreement and that the policy did not respond to the default because the transactions Thera and Phoenix ultimately undertook differed significantly from the structure envisioned in the documents provided to BCC.
BCC refuses to respond to inquiries on the Court of Appeal ruling. Thera “is satisfied with and unsurprised by the dismissal of the BCC appeal,” a representative for the business told GTR.
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