Banks and traders are still trying to claw back lost funds after the collapse of numerous commodity traders since the start of 2020. In some cases, clarity has come from the courts, but where insurance is involved several key questions remain unanswered. John Basquill reports on the areas of ongoing legal uncertainty, and examines five key lawsuits filed against a single insurer in Australia.


When Glencore agreed in late 2019 to enter into a two-legged oil trade with Hin Leong, there was little remarkable about the transaction. Hin Leong, then one of Asia’s largest independent trading houses, would purchase 150,000 tonnes of high-sulphur fuel oil from Glencore, financed with a US$37mn letter of credit (LC) from UniCredit. The Swiss trading giant would then immediately repurchase the goods.

Transactions like this are not unusual in the commodities market, serving as a way of extracting value from inventory that is in storage or in transit. By carrying out back-to-back or even circular trades, parties involved can gain vital access to liquidity, while financing banks earn a margin on what should be low-risk transactions.

But with Hin Leong, things were not what they seemed. Court documents have since revealed that when UniCredit approached Hin Leong in February 2020 upon maturity of the LC, the trader did not reveal the sale back to Glencore, claiming instead the goods remained unsold. Within weeks Hin Leong collapsed, and it emerged the company had become dependent on fake trades, forged documents and dubious financing to help cover up vast accumulated losses.

Hin Leong was one of several commodity traders that became engulfed in scandal during 2020. As governments rushed to contain the spread of Covid-19, demand for commodities plummeted and liquidity evaporated from the market. Other fraud scandals were exposed, and at the smaller end of the market, numerous traders not accused of any wrongdoing also found themselves unable to generate fresh working capital and repay debts as they fell due.

Though over two years have passed since that liquidity crisis, the longer-term impact on the commodities market is still taking shape. In some cases, traders and lenders have turned to the courts to recover funds lost following a default, filing lawsuits against financiers, trade counterparties or shipping companies.

In others, where trade credit insurance cover was in place, disagreements have arisen over whether or not the insurer is required to pay out.

This flurry of litigation has exposed legal uncertainty in the trade finance market, not least around the relationship between the physical trade of goods and the structuring of transactions purely as a means of generating liquidity. Meanwhile, a growing number of cases are emerging that could be transformative for trade credit insurance.


Liquidity transactions

The legislative fallout from the Glencore-Hin Leong transaction does not involve trade credit insurance, but is expected to feature in other cases where payment under policies is disputed. That is in part because it addresses whether a financing arrangement that exists primarily for liquidity purposes is legally considered a valid trade transaction.

In proceedings filed in Singapore, UniCredit argued that the simultaneous sale and repurchase of the goods “was for the purposes of obtaining cheaper working capital” and so “was not a regular trade and there was no genuine sale and purchase of the goods”. The LC it issued was therefore part of a “sham” transaction, it said.

When UniCredit paid Glencore under the LC, it did not know the trader had regained title to the goods, and Hin Leong’s subsequent failure meant – in the words of the court – UniCredit “found itself without repayment from Hin Leong, without the goods, without the BLs [bills of lading], and without security over the goods or the BLs”.

However, in October 2022, the court ruled against UniCredit. It said the rights and obligations under the sales contract were real, and the transfer of title and payment were performed as agreed. The motive for a transaction – in this case, to generate liquidity rather than physically move goods – is not “in itself determinative of whether the transaction is a sham”, the court said.

The case drew on another Singapore ruling from January 2022, which could also have ramifications for future proceedings. In that case, Crédit Agricole turned to the court in an attempt to force Japanese trader PPT Energy to return US$23.6mn paid under an LC applied for by ZenRock, another trading house that collapsed amid fraud allegations in 2020.

The court ruled against the bank, finding there was no evidence PPT Energy knew about, or was “wilfully blind” to, the use of forged documentation by ZenRock. But the case also addressed the extent to which parties in a string of back-to-back trades should take delivery of the original shipping documents.

“As a matter of commercial practice, traders in legitimate unquestionable chains did not always insist on this,” the ruling said. “In pre-structured back-to-back transactions this appeared nearly always to be the case. Title would pass without any issue, whether described as marketable or otherwise, without regard to the original shipping documents.”


The insurance question

Those two rulings have already sent ripples across the insurance market, say multiple sources who cannot be named due to their involvement in ongoing litigation.

Several cases have emerged where a financier had trade credit insurance in place to cover non-payment by a buyer that later defaulted, but where the insurer refused to pay out the subsequent claim. Arguments vary across different cases, but often hinge on whether the trade transactions taking place are considered genuine under the terms of the insurance policy.

GTR understands that the UniCredit ruling has been welcomed by insured parties seeking reimbursement under disputed claims. They argue that if a trade is considered legitimate enough to justify payment under an LC, even if it was only undertaken to generate liquidity, if original BLs were not presented or even if the goods themselves did not move, it is also legitimate enough to be covered by an insurance policy.

“Essentially, the UniCredit case says it does not matter if the transaction is just for financing purposes; it’s still a trade, and that means in the context of an LC payment, the bank still has to pay,” one source says.

“But that statement, if you take it into the insurance context, may or may not fit in the same way. There’s a fair bit of confusion now. If you would be required to pay under an LC, does it necessarily mean that you are required to pay under an insurance policy? If a policy talks about the physical movement of goods from A to B, does it still cover pure financing arrangements?”

Another complication is that the UniCredit and Crédit Agricole claims were both for oil transactions, where letters of indemnity (LOIs) are widely used as a substitute for original BLs. If disputes relate to other commodity types, it is possible that the demands around documentation will be different.

Also important will be the representations that were made up front by the parties involved “so that all insurers and insureds enter with eyes open on what is being covered”, another source says. “I think in the end this comes down to scope of cover. Motivation and existence of a trade are core tenets of underwriting.”


BCC: The insurer on the front line

Bond & Credit Company (BCC), an Australian subsidiary of Tokio Marine, is involved in several disputes where it has refused to pay out under an insurance policy following the failure of a commodity trader.

GTR has obtained documents from five lawsuits against BCC filed between October 2021 and October 2022 that, as of press time, are making their way through the Federal Court of Australia.

The oldest of those cases relates to an insurance policy provided by BCC to Marketlend, a Sydney-headquartered trade finance platform and supply chain financier.

In January 2020, Marketlend agreed to extend a supply chain finance facility to Singapore trader Kams. The financier would pay invoices submitted to the firm from another Singapore trader, Quantum Impex, for the purchase of commodities such as maize, soybeans and cashews, to be repaid by Kams after 90 days.

But Kams only repaid A$1.4mn of the A$3.1mn due, and was wound up through insolvency in September the same year. That prompted Marketlend to file a claim with BCC, which it argues is obliged to cover 90% of the insured loss.

BCC refuses to pay that claim. In a defence filed in November 2022, it says that in order to receive payment under the policy, Marketlend must establish that it “had physical control of the goods”. The wording of the policy defines an insured loss in relation to a “shipment” of goods, it says, which suggests having title to goods through documents alone is not sufficient.

The insurer adds that Marketlend’s loss was “as a result of its own failure to take reasonable care”, arguing that it did not undertake a suitable review of the terms of the policy or ensure it provided appropriate and effective cover.

Marketlend, however, says BCC was aware it provides financing rather than engages in the trade of goods.

The insurer also knew that commodity traders often trade goods back-to-back – including while they are in transit – and so do not take physical possession of the goods at any stage, it argues.

BCC should have been aware that any requirement to have “actual physical possession of the goods was never going to be satisfied”, it asserts in a September 2022 filing.

Otherwise, the policy “would be rendered substantially, if not entirely, worthless and never put BCC at risk”, Marketlend argues, and that providing such a policy amounts to “misleading or unconscionable conduct” under Australian law.

The company has also added Chief Trade Credit Insurance, which brokered the policy, as a respondent in the case. It says the broker was required to make its own assessment of Marketlend’s needs and arrange adequate cover, and that at no stage did it inform the financier that actual physical possession of the goods may be required.

Meanwhile, Marketlend is seeking payment from BCC and Tokio Marine in a separate but similar case.

Court filings show BCC provided insurance cover to Singapore trader Apies Ventures and two of its subsidiaries, Zircon Australia and Three Alps. Marketlend then purchased invoices from Three Alps for sales to Dubai-based Green Trees General Trading in early 2020, but later in the year, Green Trees was unable to repay.

Marketlend is now seeking reimbursement of US$7.2mn from BCC, via Zircon, but the insurer has refused to pay.

Again, the financier argues that the insurance policy does not require that Zircon, Three Alps or Apies had “actual physical possession of the goods”, but that it was able to obtain title to the goods by way of documents including sales contracts and BLs. It has also told the court it intends to add the policy’s broker as an additional respondent.

Three other cases are related but remain in their early stages. Two were filed in 2022 by an Australian subsidiary of commodities trader Bluetag, with the involvement of Marketlend, while the other has been filed by Marketlend itself.

In one, Bluetag argues that BCC and Tokio Marine are required to reimburse it for losses associated with several debts from invoices unpaid by commodity traders. It says US$3.15mn is owed by Blue Ribbon, US$8.46mn by Longview, US$3.59mn by Max Arabian, US$5.85mn by Prosperity Enterprises, US$2.67mn by Welta and US$2.7mn by Pritt & Co.

In another, the insured parties are Bluetag and Alzys Global, with the lawsuit relating to invoices totalling around €5mn issued to Bat Universal.

In the most recent case, Marketlend says BCC and Tokio Marine are obliged to pay out on claims totalling around US$18mn associated with unpaid debts by Prime International, Welta General Trading and Word Trading.

In May 2022, an Australian court ordered BCC to pay a claim of A$7.2mn filed by trade financier Thera Agri Capital Management, rejecting the insurer’s argument that the relevant transactions were not compliant with the terms of the policy in place.

BCC and Marketlend declined to comment when contacted.

Reporting also contributed by Jacob Atkins.