Protecting against fraud in trade finance

• Published date: 13 July 2022
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Insurance, Criminal Law, Charges, Mortgages, Indemnities, Contracts and Commercial Law, Insurance Laws and Products, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Holding Redlich
• Author: Mr Nathan Cecil and Isabella Costa

The decision in Thera Agri Capital No 2 Pty v BCC Trade Credit Pty Ltd t/as The Bond & Credit Co [2022] NSWSC 669 handed down last month ordered a trade credit insurer to pay out an insurance claim to a financier defrauded by a customer.

Trade credit insurance is a product that indemnifies a seller against losses from non-payment of a commercial trade debt. It covers all contracts entered into or goods and services provided on credit terms within the policy period. The insurer agrees to pay a percentage of an outstanding invoice or receivable owed arising from a customer's insolvency, bankruptcy or "protracted default" (overdue contract payment).

In this case, the insured purchased trade credit insurance which provided cover for supply chain finance it gave to an international customer to fund the shipment of agricultural commodities overseas under an Islamic "Murabaha" finance contract. The customer submitted false documents, on the basis of which the insured advanced payment and the customer went into liquidation.

The insurer refused to provide cover because the transactions were not conducted strictly in accordance with Islamic law and the terms of the finance documents between the insured and the customer. The insured defeated the insurer's refusal to honour the indemnity, despite falling victim to fraud, because the customer had contractual obligations in the finance documents to repay the funds.

Takeaways

When providing trade credit to customers, businesses should:

• clearly draft the policy and finance documents
• ensure the defined terms in the above are consistent to avoid the court applying different constructions to the same terms in each document
• be mindful that brokers should thoroughly check financial documents in transactions, in particular, that they are conducting due diligence when setting credit limits
• be wary of the different debt funding structures available for supply chain finance and the process required to validly draw down on it. For example, what contractual arrangement will it involve if it is structured as conventional finance or Sharia-compliant finance?
• be mindful to include in the finance documents that your customers have separate contractual obligations to repay the finance on termination, cancellation, illegality, fraud or misrepresentation, so that if the transaction is considered void you still have alternative rights to payment and the funds remain covered under the trade credit policy.

Facts

In February 2020, an Australian non-bank lender specialising in agricultural commodities and products, Thera Agri Capital No 2 Pty (insured) purchased trade credit insurance (insurance policy) from the Bond and Credit Company (BCC) (insurer).

The policy insured performance of a guarantee for supply chain finance (SCF) under a loan provided by the insured to two subsidiaries of parent company and guarantor, Phoenix Commodities Pvt Ltd (Phoenix; guarantor).

The $8 million loan was given to fund the pre-export of grains and pulses (goods) from Australia for sale in South-East Asia and India using a Sharia-compliant facility. The insured's finance was secured against a trade receivable, being money owed under invoices for goods that have been delivered but not yet paid for. The insurance policy provided cover in the event Phoenix failed to pay due to insolvency.

Under the proposed SCF transaction, the insured was to prepay funds to Australian farmers up to 30 days before the goods were delivered to a warehouse leased by Phoenix. Over a 120-day trade cycle, the goods would be shipped on various Incoterms (standard export trade terms) and paid for before they were received (cash on delivery). Title was to pass to...