Legal challenges against Greensill are centring on its controversial future receivables financing product, which involved issuing loans against invoices from non-existent customers – but was not disclosed as debt.

London-headquartered Greensill, which filed for insolvency in mid-March after a dramatic collapse, faces a criminal complaint in Germany and a lawsuit from a mining company in the US, both of which relate to products that strayed well beyond the boundaries of traditional supply chain finance (SCF).

In Germany, financial regulator BaFin announced in early March it had carried out a “special forensic audit” of operations at Greensill Bank, the company’s Bremen-headquartered financial institution.

The regulator found Greensill Bank “was unable to provide evidence of the existence of receivables in its balance sheet that it had purchased from the GFG Alliance Group”, referring to a network of companies linked to steel magnate Sanjeev Gupta.

“For this reason, BaFin has already taken extensive measures to secure the bank’s liquidity and to limit risks for Greensill Bank and has appointed a special representative for the bank,” it said.

BaFin also filed a criminal complaint against Greensill with the public prosecutor’s office in Bremen, though details are not yet public.

Shortly afterwards, a US mining company that had benefited from Greensill financing filed a lawsuit against the lender’s UK outfit, accusing it of breaching contract and fiduciary duty.

West Virginia-based Bluestone Resources had also borrowed through Greensill’s future receivables product, and its lawsuit shines more light on how that model worked in practice.

In a typical receivables finance programme, a financial institution would provide funding based on invoices issued by a supplier, but where the buyer would be expected to pay at a later date. Bluestone, however, says its RPA programme was “based predominantly on prospective receivables”.

Rather than being underpinned by real invoices, the receivables had “not yet been generated by Bluestone” but were expected to be produced in the future. It says future and current receivables were subject to the same definition in RPA documentation.

Astonishingly, Bluestone says the list of future receivables approved by Greensill was not limited to existing customers, but applied to “other entities that were not and might not ever become customers of Bluestone”.

“This list of account debtors was created by [Greensill] by providing Bluestone with a list of potential buyers,” it says.

The company would then identify firms it believed “could potentially be buyers of Bluestone’s met [metallurgical] coal in the future”, and Greensill would determine the value and maturity date of each receivables purchase.

In effect, the lawsuit says, Greensill was providing financing “not on the existence and collectability of Bluestone’s then-existing receivables, but rather based on Bluestone’s long-term business prospects”.

In total, Greensill advanced US$850mn to Bluestone, the company says, though US$127mn went straight back into Greensill’s accounts in the form of fees and initial discounts.


Unsecured debt

Lending against future receivables is not unheard of, with the practice featuring in guidance produced by the Global Supply Chain Finance Forum (GSCFF), an industry association comprising several influential trade finance bodies including the International Chamber of Commerce.

The GSCFF says that if the relevant receivables exist when a loan is made, that loan can be considered a secured form of finance. Where lending is provided against the “expectation of such receivables arising at a future date, the loan is akin to working capital finance” instead.

If financing does not contribute “to the operation and integration of supply chain activity… it may be viewed as a type of corporate lending” rather than SCF, the forum says.

Sean Edwards, chair of the International Trade & Forfaiting Association (ITFA), says some companies allow unbilled future receivables but generally as a “quite conservative subset of a receivables facility, maybe 5% or something like that”.

That subset of future receivables would also likely be based on historical data, and would therefore relate to existing clients only. Vitally, Edwards adds, the programmes would generally have to be accounted for as unsecured debt.

“Done at the right scale, in the right way, and properly accounted for, there is nothing wrong with this product,” he tells GTR. “What Greensill was doing was quite edgy, pushing this product out to new limits.

“Greensill often talked about using artificial intelligence and data analytics to anticipate future cashflows, and effectively to use that as a borrowing base. But what we see now is Greensill put receivables purchasing programmes in place where the sale or even the client did not exist – yet this was not classified as unsecured debt.”

Michael Jünemann, a partner at Bird & Bird law firm and head of its Frankfurt-based financial regulation team, agrees that from a legal perspective “it’s perfectly possible to trade future receivables”.

“But from a credit risk perspective, you would only pay for those future receivables once the trade has been done and the receivables were assigned to you,” he tells GTR.

“In plain English, you would agree on payment versus delivery in such a contract. All you are doing up front is setting the price; then, if the receivables are effectively delivered, you have a deal and pay for it.

“If you deviated from this concept and started making advance payments, you would not have the typically relatively safe factoring anymore; the arrangement comes closer to an unsecured line of credit.”

In a statement issued by Greensill after BaFin’s criminal complaint was filed, the company said it started booking future receivables assets in June 2019. At the time, its auditors approved the way the assets were classified, it says.

In late 2020 and early 2021, the regulator “advised that they did not agree with the way the assets were classified by Greensill Bank and directed that they be changed”. Greensill says it “immediately complied” with this request and reclassified those assets.