A Singapore judge has rejected Banque de Commerce et de Placements’ (BCP) bid to claw back US$19mn paid out to jet fuel buyer China Aviation Oil, after a circular trading deal went awry during the collapse of commodity trader ZenRock.

Geneva-headquartered BCP is one of many trade finance banks that turned to Singapore’s courts to recoup losses sustained when a rash of commodity traders in the city-state collapsed in early 2020, many mired in allegations of fraud.

BCP issued a letter of credit (LC) to China Aviation Oil’s Singapore entity in January 2020 to finance the sale of 260,000 barrels of gasoil to ZenRock, the bank’s client.

BCP was supposed to be repaid when the cargo was on-sold to PetroChina, but ZenRock did not tell the lender that the sale had been cancelled, and the trader collapsed before the LC could be repaid.

BCP then sued China Aviation Oil in Singapore’s High Court, alleging its contract with ZenRock was a sham transaction that did not involve a true sale of physical cargo or transfer of title. The bank claimed China Aviation Oil deceived the bank into issuing the LC and should be forced to return the proceeds.

But in a judgment published on June 6, Judge Goh Yihan ruled that China Aviation Oil is not liable for the bank’s loss. Instead, the judge found that ZenRock caused the loss by falsely telling the lender the cargo had been sold to PetroChina.

“In my judgment, the proximate cause of BCP’s loss was actually ZenRock’s fraud and subsequent insolvency,” Justice Yihan wrote, adding that the contract “was not a sham or fraudulent transaction”.

Justice Yihan ruled that China Aviation Oil is not liable on any of the counts brought by the bank: deceit, misrepresentation, breach of contract, unjust enrichment or unlawful conspiracy.

BCP never received the original bills of lading for the sale and instead disbursed the LC based on a letter of indemnity from China Aviation Oil addressed to ZenRock. The judge said the available evidence showed that BCP treated the expected receivables from PetroChina as the main security for the LC, rather than the original bills of lading.

BCP, which specialises in commodity trade finance and wealth management, was also unable to convince the judge that the so-called fraud exemption – where a bank can refuse to honour an LC if fraud has occurred – should apply.

Justice Yihan found that the available evidence showed China Aviation Oil’s staff treated the deal as a genuine transaction, for example by applying normal risk management procedures and appointing an independent inspector to verify the loading of the oil onto a vessel.

ZenRock entered judicial management in May 2020 after a successful court petition by HSBC, and was later placed into liquidation.

Banks which have since sued large traders or ship owners to recoup money lost in the market turmoil have met mixed results. BCP joins the ranks of Banque Cantonale de Genève and Italy’s UniCredit among those that have been unsuccessful, while Standard Chartered, OCBC and Crédit Agricole emerged victorious from litigation in Singapore.

A BCP spokesperson tells GTR: “The bank is considering this first instance judgment and will not comment further.”

The board of China Aviation Oil (Singapore) Corporation released a statement summarising the judgment, which said: “The board is pleased to announce that the court had dismissed all of BCP’s claims against the company.”


No double financing

The disputed transaction was part of a circular series of back-to-back trades involving several parties, with ZenRock acting as both the initial seller and ultimate buyer.

Justice Yihan found that China Aviation Oil had not been aware of the circular nature of the trade, but even if it was aware, “the fact that the… contract is part of a circular trade does not mean that it is ipso facto a sham or fraudulent transaction”.

“This is because a number of Singapore cases have recognised the legitimacy of circular trades, and I am persuaded that there are legitimate commercial reasons for circular trades.”

BCP also argued that China Aviation Oil was a knowing party to a double financing fraud against the lender. Double financing involves using a single cargo to raise short-term loans from multiple banks, meaning at least one lender will have no security if the loan is not repaid.

BCP said documents analysed by KPMG, ZenRock’s interim judicial managers, showed that at the time of the deal between ZenRock and China Aviation Oil, ZenRock had also agreed to buy the same cargo from the trading arm of Petronas, Malaysia’s state-owned oil company.

It would then sell the cargo to Vietnamese conglomerate Petrolimex, in a deal financed by an LC from French bank Natixis.

But Justice Yihan dismissed the bank’s case that the circular trades constituted a double financing fraud because the two sets of trades happened consecutively rather than at the same time, so there was no point at which title to the goods was held by more than one party simultaneously.

In any case, the judge found, there was no evidence China Aviation Oil was aware of the broader structure of the deals and so “could not be complicit in some scheme involving a fictitious chain of contracts for ZenRock to obtain double financing from and defraud BCP”.

The judge also ruled that the evidence from ZenRock’s interim judicial managers was “inadmissible hearsay evidence” and did “not advance BCP’s case”.

Justice Yihan also noted in the judgment it was “curious” that BCP chose not to pursue PetroChina for payment of the LC debt, instead of China Aviation Oil.

In court, a BCP staff member described a tripartite agreement between ZenRock, PetroChina and Petrolimex as “tricky”. The judgment shows the bank sent PetroChina a letter in April 2020 which said in part: “It appears that [PetroChina] is acting with full knowledge of the facts as an accomplice of Zenrock”.

PetroChina has been contacted for comment.