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UniCredit cannot hold global commodities giant Glencore liable for a US$37.2mn loss it suffered from fraud committed by collapsed trader Hin Leong, an appeals court in Singapore has ruled.

The Italian bank sued Glencore in 2020, claiming the company deceived it into issuing a letter of credit (LC) by failing to disclose the existence of a back-to-back transaction with Hin Leong.

In 2022, UniCredit lost the suit on all six counts it brought against Glencore, but appealed the ruling. The Singapore Court of Appeal emphatically confirmed the previous judgement on November 27, finding that it can “not be seriously contended on the facts here that UniCredit had suffered damage as a result of relying on any alleged representation made by Glencore”.

The case is among a wave of litigation following the collapse of Singapore-based traders such as Hin Leong, ZenRock and Agritrade in early 2020. Courts in Singapore have heard how some traders had engaged in systematic fraud against lenders, which finally came to light as liquidity dried up during the first months of the Covid-19 pandemic.

Much of the litigation is still underway, but so far has mostly gone in favour of lenders, including the Court of Appeal’s recent overturning of a previous ruling involving ZenRock that went against French bank Crédit Agricole. In August, Singapore’s OCBC clinched a legal win over Winson Oil, which was hailed as a “significant victory” for banks.

The dispute between UniCredit and Glencore stems from November 2019, when Hin Leong applied for an LC to purchase 150,000 tonnes of fuel oil from Glencore.

Hin Leong told the bank it did not yet have a buyer for the cargo. But in reality, the transaction was purely for financing purposes, and the trader had already arranged to immediately sell the goods back to Glencore.

Following that transaction, UniCredit paid Glencore under the LC in early December 2019. According to the judgement, over the next three months, the bank asked Hin Leong for updates on the cargo, and each time Hin Leong falsely told the bank that the oil hadn’t been sold to avoid having to repay the LC.

This fiction was maintained until Hin Leong was placed under judicial management in April 2020 as unpaid debts piled up and the company’s founder revealed it had failed to disclose trading losses and sold goods that had been kept as collateral.

UniCredit sued Glencore in October 2020, seeking reimbursement of the funds the bank paid it under the LC. All six of its legal arguments were rejected by the Supreme Court in 2022.

The lender’s appeal revived only one of those: that Glencore deceived the bank into issuing the LC.

To further that argument, UniCredit invoked the “fraud exception” to making a payment through an LC. That well-established legal principle allows a bank to refuse payment, or be reimbursed, if it can prove that it was fraudulently induced into issuing the LC through false representations.

UniCredit’s chief argument was that it should be considered an addressee of the letter of indemnity Glencore issued to Hin Leong, in which it promised to locate and surrender the original bills of lading. UniCredit accepted the letter of indemnity in place of the bills of lading when it disbursed the funds to Glencore.

But the appeals court found that Glencore’s letter of indemnity did not constitute representations, false or otherwise, to UniCredit.

“No representation, as formulated, was made by Glencore let alone was any lie told to UniCredit,” chief justice Sundaresh Menon wrote on behalf of the panel of three judges. “In any event, the facts also demonstrated that UniCredit’s loss could not be laid at Glencore’s door.”

“UniCredit could have, but did not, structure the payment [letter of indemnity] in terms that the [bills of lading] be delivered to the bank. In the final analysis, UniCredit accepted the risk that came with such a payment,” the court found.

Even if there had been a representation, Glencore had no “fraudulent intention” because the sale and buyback was a legitimate transaction allowing Glencore to optimise its working capital and Hin Leong to effectively receive a loan, the judges found. The only “wrinkle”, the court found, was Hin Leong’s lie about the repurchase of the cargo.

The court ordered UniCredit to pay costs to Glencore of S$100,000 (US$75,000).

Spokespeople for UniCredit and Glencore declined to comment when contacted by GTR.

A criminal trial against Hin Leong founder Lim Oon Kuin, better known as OK Lim, began in April and remains ongoing. A civil trial brought by the trader’s liquidators commenced in August and is expected to last for around six months, according to the Straits Times.