The UK Supreme Court has ruled in favour of OW Bunker (OWB) and ING against PST Energy, in a case that reaffirms the validity of receivables financing.
To recap: OWB was the world’s biggest supplier of marine fuel before it went into insolvency in November 2014 following the discovery of alleged fraud in a Singapore subsidiary. PST Energy had received bunker supply before OWB went into insolvency, but never paid for it. PST Energy argued that they did not have to pay under the fuel supply contract with OWB because OWB had not paid the physical supplier for the fuel, basing their argument on the belief that their contract was ruled by the Sale of Goods Act 1979 (SOGA).
PST Energy, and other shipowners in its position, had been concerned about the possibility of claims both from the physical supplier and the lenders, which would effectively result in them having to pay twice for the same supply.
“The way the payment streams should have worked if the OWB group had not gone insolvent was that the customer would pay OWB, and OWB would pay the physical supplier. The two payment obligations had different credit terms: typically 30 days for the customer and 60 days for the physical supplier (which is how OWB’s business model worked) and the two contracts were completely separate, back to back agreements,” explains Jennifer Marshall, restructuring partner at Allen & Overy, who acted on behalf of the receivers and ING.
The UK Supreme Court unanimously held that the OWB contract with the shipowners was not a typical SOGA contract, but a unique type of contract which was not about the sale, but about fuel provision for immediate use by the shipowners before they acquired title to the fuel or paid for it. Once the fuel was consumed, title could never be passed in goods that did not exist.
“It is not uncommon to have these back-to-back contractual relationships. I think it is going to be very good news to the industry that the court ultimately held that the contracts worked like they said they did, upholding the contractual relationship that the parties had agreed between them,” Marshall tells GTR.
Her colleague, Niels de Ru, partner in the Amsterdam office and head of the trade and commodities finance practice, emphasises the significance of the case: “It is a landmark ruling, and it is very clear on the issues at hand. This a good ruling the trade finance community, both lenders and borrowers, because it reaffirms working capital financing against receivables is a good product.”
PST Energy will now have to pay ING, who has been acting as security agent for a syndicate of lenders that financed OWB and claims as assignee of any legal procedure OWB has pending with customers.
Other shipowners in PST Energy’s position will now have to revise their contractual relationships, looking out for the risk of double payments. “If there turns out to be a risk of double payment in other jurisdictions, that is something that the owners will need to look at carefully in the future but there does not seem to be a significant risk at present,” advises Marshall, adding that neither in the UK nor in the US there has been a successful case in which a physical supplier went after a customer to be paid directly.
“Given how clear the Supreme Court decision was, I am very hopeful that a lot of owners will now say the game is up, we need to pay OWB, and the risk of double payment, at least in the UK, is fairly remote – but if they don’t pay OWB, then there will have to be further proceedings against those owners,” says Marshall.