A Singapore court has rejected an appeal by BP to strike off fraud accusations levelled by Bank of China, which was left out of pocket after failed circular oil sales involving disgraced trader Hin Leong.
Bank of China’s Singapore branch filed a High Court lawsuit against BP last year, accusing the company of knowingly engaging in fake oil trades with Hin Leong – an independent trading house that has since collapsed into insolvency amid allegations of widespread and systematic fraud.
BP had appealed to have several charges – including fraud, negligence and conspiracy – struck off by the court on the basis the bank’s claims had “no reasonable cause of action”.
Though some of the claims were initially dismissed by court registrars, a High Court ruling made public last week has reversed that decision, with judicial commissioner Andre Maniam concluding that the bank “does have an arguable case” against the trading giant.
The ruling does not make any judgment on the allegations themselves, but rather gives the bank’s lawsuit permission to proceed. BP said last year it “strongly refutes the allegations… and will defend its position”.
BP did not comment further when contacted by GTR. Bank of China Singapore did not respond to a request for comment.
The lawsuit concerns back-to-back gasoil trades between BP and Hin Leong, which took place in early 2020. Under the arrangements, BP would purchase cargo from Hin Leong then immediately sell it back at a fractionally higher price.
A witness statement from BP from January this year, not public but cited by the recent ruling, explained that such transactions made commercial sense for both parties: BP would benefit from the difference between purchase and sale price, while Hin Leong would obtain vital access to liquidity.
But Bank of China now alleges that the underlying cargo did not actually exist in the first place, and that BP’s arrangement with Hin Leong was instead a “fictitious purchase scheme”.
The lawsuit says that when Hin Leong fell into financial distress in April 2020 it was unable to pay for the repurchase part of the trade, leaving the bank – which had provided finance via three letters of credit – out of pocket and with no real-world assets it could seize instead.
It claims this could amount to BP making fraudulent misrepresentation to the bank, potentially through conspiring with other defendants in the case, or to negligence by not ascertaining whether the cargo was real in the first place.
Initially, only the fraud and conspiracy allegations were approved by the registrar, with negligence and other charges struck off.
But last week’s ruling said the case has given rise to a legal question: whether a bank could recover a payment made under a letter of credit if the beneficiary had “negligently misled the bank into making payment”.
“At first instance, it was held that the law did not allow such a claim, and that claim was struck out,” the ruling says.
The court also decided not to strike off the fraud claims, despite BP’s appeal.
Bank of China had argued it did not know the transactions were back-to-back repurchase agreements, nor that Hin Leong would later be found to have relied on fake trades on a vast scale. BP, however, “would or ought to have known that the representations were false”, it claims.
The ruling concluded that the bank therefore “does have an arguable case on whether BP was fraudulent, at least in the sense of BP being reckless in not caring whether the goods existed and/or lacking an honest belief in the existence of the goods”.
A paper by Kyri Evagora and Joyce Fong – a managing partner and associate at Reed Smith – describes the ruling as “an interesting decision which highlights, for determination at trial, unusual issues in the context of structured trade finance involving the sale and buy back of goods and letters of credit”.
“This case gives rise to important issues whose determination may have far reaching consequences for banks and beneficiaries under Singapore law-governed letters of credit,” the lawyers say.
“Depending on how far the Singapore courts go in deciding these issues, the decision could potentially redefine the relationship between banks and beneficiaries by imposing a duty of care on beneficiaries in the documents they prepare and/or tender for the purpose of obtaining payment under letters of credit.”
If the court rules that such a duty of care exists – which in this case, would have applied to BP’s presentation of documents to Bank of China, including sales invoices and letters of indemnity – then the “burden on beneficiaries and traders could be far reaching”, Evagora and Fong say.
The Bank of China lawsuit is seeking damages totalling US$125.7mn. The bank has also sought repayment of around US$187mn from Hin Leong founder Lim Oon Kuin for deals involving BP, as well as overdue payments on short-term trade credit facilities.