Trade credit insurer Bond and Credit Company (BCC) has lost an appeal against an Australian judge’s decision forcing it to pay A$7.2mn (US$4.9mn) to a trade financier, after refusing to pay out on a policy covering deals with since-defunct trader Phoenix Commodities.
Two out of a panel of three New South Wales Court of Appeal judges found on February 20 that Phoenix’s inability to repay funds advanced to it by Sydney-headquartered Thera Agri Capital under a trade finance agreement constituted an “insured loss” under the insurance policy provided by BCC.
The ruling affirms a May 2022 decision by a New South Wales Supreme Court judge, who found the policy should be honoured despite significant variations between the documentation underpinning the deal and how it was carried out in practice.
In 2019, Thera provided financing for Dubai-based Phoenix to purchase agricultural commodities from two traders, but it was later discovered that no such purchases took place and the funds were disseminated within the Phoenix group.
BCC, a Tokio Marine subsidiary which is separately facing a raft of other lawsuits following the collapse of commodities traders in Asia and the Middle East, was sued by Thera in October 2020 after rejecting the financier’s initial claim.
Following hearings in which it emerged that some of the transactions financed by Thera were – unbeknownst to the financier – “shams” underpinned by faked or missing documentation, BCC was ordered to pay A$7.2mn to Thera, a ruling it then appealed.
The legal wrangle in Sydney highlighted the ongoing global fallout from the April 2020 demise of Phoenix, a sprawling conglomerate which reportedly owed more than US$1bn to creditors when it was said to have been sunk by hedging transactions that went awry.
The decision may embolden other financiers turning to courts to enforce trade credit claims filed with BCC and other insurers following the market volatility in 2020, which saw several traders collapse, some amid allegations of fraud. BCC is also embroiled in ongoing court battles stemming from the collapse of supply chain finance provider Greensill.
Two out of three
Much like in the original Supreme Court decision, much of the appellate judges’ attention focused on the definitions contained in the insurance policy – brokered by Ed Broking’s Singapore branch – particularly whether the existence of an “advance payment” mean that Phoenix’s debt obligation and its role as guarantor were not engaged.
“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,” Justice Robert Macfarlan found.
Similarly, Justice Richard Weeks White found that whatever the definition of “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 agreed with the Supreme Court that the policy was not voided because of the existence of sham contracts between Phoenix and the commodities traders it was purportedly buying agricultural commodities from.
Justice Macfarlan found: “It is not in my view significant that, without the knowledge of the insured, [Phoenix] created, or was a party to the creation of, false or sham documents purporting to record [Phoenix]’s acquisition of goods from third parties. In particular this did not affect the validity or enforceability by the insured of its contracts” with Phoenix.
In contrast the dissenting judge, Justice John Basten, said the court should quash the Supreme Court’s earlier decision in favour of Thera.
He found that because the transactions Thera and Phoenix ultimately undertook deviated widely from the structure envisaged in the documents provided to BCC, the “obligation upon which Phoenix defaulted was not an obligation created in accordance with the master agreement and therefore the default was not one to which the policy responded”.
BCC declined to comment on the Court of Appeal judgement. A spokesperson for Thera tells GTR the company “is satisfied with and unsurprised by the dismissal of the BCC appeal”.