The sudden downfall of supply chain finance (SCF) heavyweight Greensill was triggered after US$4.6bn in insurance cover fell away overnight, court documents reveal.

Problems with Greensill’s trade credit insurance cover first arose in July 2020, when Australia’s Bond and Credit Company (BCC) said it did not intend to renew or extend policies due to expire this month.

Though Greensill continued to push for renewal, and later sought alternative cover through its broker Marsh, those efforts were unsuccessful.

On March 1, the company sought a last-ditch, out-of-hours ruling from the supreme court of New South Wales that would force the renewal of its insurance cover – but was unsuccessful.

That caused an immediate chain reaction, with Credit Suisse choosing later the same day to freeze funds that provide more than US$10bn to Greensill – prompting concerns the London-headquartered company could go bankrupt within days.

A source close to Credit Suisse has confirmed to GTR that the non-renewal of that insurance cover was a factor in its decision, as it made it more difficult to value the funds properly.

It has since emerged that although Greensill is seeking insolvency protection in Australia and the UK, its core SCF business will likely be sold to private equity investors, and according to multiple GTR sources the company has informed participants in those programmes that they remain healthy.

Sources close to the deal have confirmed that higher-risk assets, including much publicised exposure to companies linked to steel magnate Sanjeev Gupta, are being shed.

Court documents seen by GTR reveal the way cover provided by BCC – whose parent company is insurance giant Tokio Marine Management – unravelled over the last eight months.

The policies themselves covered non-payment by Greensill clients and account debtors, applied to “some 40 clients” and totalled around US$4.6bn. They did not provide for automatic renewal.

The court decision focuses on communications between Greensill and its insurers between July and September 2020.

In July, a representative of Tokio wrote to Greensill’s insurance broker expressing doubt that the policies would be extended or that new limits would be granted.

The reasons are not set out in the court documents, though they do refer to an unnamed individual who was found not to have had the required authority to approve a renewal.

Later the same month, Tokio informed Marsh that “given the current situation… we will not be able to bind any new policies, take on any additional risk nor extend or renew any [Greensill] policy past what had previously been agreed”.

In August, Tokio reiterated in a letter to Greensill that “investigations were ongoing” around the unnamed individual whose authority had been questioned.

And on September 1, Tokio wrote to Greensill confirming that BCC “does not wish to renew” its cover for Greensill transactions, and that policies would expire the following March.

Greensill disputed in its submission that the September letter amounted to 180 days’ notice of non-renewal, as required, but that argument was rejected by the court.

The company also sought to emphasise the “catastrophic” consequences should cover not be renewed.

“If the policies are not renewed, Greensill Bank will be unable to provide further funding for working capital of Greensill’s clients,” the company said in its submission. “In the absence of that funding, some of Greensill’s clients are likely to become insolvent, defaulting on their existing facilities.

“That, in turn, may trigger further adverse consequences on third parties, including the employees of Greensill’s clients. Greensill estimates that over 50,000 jobs including over 7,000 in Australia may be at risk.”

But for Insurance Australia Limited (IAL) – which, under Greensill’s application, would have been the entity required to provide cover – the court ruled there could also be “very serious” consequences, including being exposed to claims for which it has no reinsurance cover.

The ruling also points out that despite the insurers’ position being “made clear eight months ago”, Greensill only sought legal advice on the issue in late February – just days before the policies were due to expire.

That suggests it knew the September notice was valid “and therefore… understood that their policies would expire on March 1, 2021”.

A further directions hearing is scheduled in the court for Friday this week, according to the Australian Financial Review.

Greensill and Tokio did not immediately respond when contacted by GTR.