Article

Note: To assure installment payments of 13,250,000,000 Philippine pesos (PHP) for the assets of a bankrupt company, the purchaser, AAR (Applicant/Purchaser), provided standby LCs issued by ANZ Philippines (Issuer) in favor of the collateral trustee (Beneficiary) on behalf of the bankrupt's creditors. The purchase agreement provided that the standbys were to be in force for one year and ten days from their issuance date and range in amounts from PHP250,000,000 to PHP1,000,000,000.

Alleging that Beneficiary and the liquidator had failed to deliver certain assets free of liens in violation of the purchase agreement, Applicant/Purchaser initiated arbitration under its terms and also sought and obtained an injunction excusing it from making further payments or providing additional LCs until the dispute was resolved.

Beneficiary than sought to vary the injunction with respect to the standby that had been issued, which would expire within a month. The court ordered that the standby be renewed or its proceeds remitted to Beneficiary's account.

Beneficiary then sought an order further varying the injunction, requiring that Applicant/Purchaser make a cash payment of PHP1,000,000,000 to Beneficiary's bank account, an amount equivalent to the standby required by the agreement for the next installment.

The High Court of Singapore, Ang, J., refused to grant Beneficiary's application, reasoning that granting the variation would be inequitable, as it would fail to preserve the status quo that had arisen as a result of the dispute. The court stated that granting the variation would not only undermine the injunction which sought to restrain Beneficiary from calling upon Applicant/Purchaser to fulfill its obligations regarding furnishing the standbys and making the installment payments, but also that the variation would place a greater burden on Applicant/Purchaser than required by the terms of the purchase agreement.

Comments: The question before the court was whether the injunction should have been varied, and the court's decision was not surprising. What is shocking, however, is that an injunction was ever issued in the first place. Of course, there may be facts not disclosed in the opinion which would have justified the injunction, but it appears that the claim was that there was a breach of the purchase agreement in that certain assets were delivered subject to liens. On its face, this breach does not amount to letter of credit fraud. The implication is that there was a transfer of assets and not an utter failure to transfer them. Only the latter could constitute LC fraud.

It is a matter of small comfort that the court required the standby to be kept in force of paid, but the beneficiary should have been paid on presentation of complying documents. The risk undertaken by the applicant in causing a letter of credit to be issued was that there might be a dispute over performance. This decision turns the arrangement of the parties inside out.

[JEB/anf]

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