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Note: Rabobank (Lender) extended trade finance to Jialing Xin Tuo Int'l Ltd. (Borrower). When Borrower was unable to pay its debt of HK$19,753,629 Lender petitioned to have its affairs wound up. Borrower approved the petition. Finding there was no bona fide dispute, High Court of Hong Kong, Kwan, J. gave an order to wind up Borrower. The debt included trade finance facilities, interest, and legal costs incurred in Borrowers action against Bank of China (Issuer) to collect on a back to back LC that Lender had financed.

The legal action involved a claim by Lender that it had negotiated documents presented in conjunction with a back to back LC and was entitled to recover from Issuer as a negotiating bank. In Raiffeisen- Boerenleenbank B.A. v. Bank of China, abstracted 2005 Annual Survey pg. 269, an action by Lender against Issuer for wrongful dishonor, Stone J. concluded that although the claimed discrepancies were not valid, that Lender did not negotiate the documents and that the draw was illegal since the Chinese Courts had frozen payment. Lender accepted this decision for purposes of its claim.

Borrower claimed that there was a substantive dispute regarding the debt, namely an overstatement of the amount due. Noting the adjustments agreed to by Lender, the court noted that the balance of the debt was sufficient to justify winding up Borrower.

Borrower also claimed that by being found not to have negotiated the documents under the bank of China LC, Lender, "had wrongfully breached 'the agreement for negotiation', and/or was negligent, and is liable to indemnify the [Borrower] for its loss. Further, [Lender] had held the master letter of credit as security but had wrongfully released the security to BOC and [Borrower] had lost the 'right of subrogation'."

The court rejected this claim. It noted that there was no assertion by Borrower of an express agreement to negotiate but only an implied one. Reviewing the terms of the agreements, the court stated, "I fail to see how such a term could be implied where it would be inconsistent with the express terms... [Borrower]'s own rights to claim against BOC under the master letter of credit are not affected by [Lender]'s failure to negotiate. [Borrower] has chosen not to take legal action against BOC."

[JEB/tjb]

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