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Note: As part of a long-term course of dealing, Xing FA (Hong Kong) Importer & Exporter Ltd. (Buyer/Applicant), purchased goods from suppliers specified by Lonkey Industrial Co. Ltd. Guangzhou (Ultimate Buyer), a Chinese company, whereby Buyer/Applicant would resell the goods to Ultimate Buyer. This relationship was apparently due to Ultimate Buyer’s limited credit facilities.

Under sixteen prior transactions, Ultimate Buyer facilitated the purchase of detergents and other industrial products between Buyer/Applicant and Sungsan International Co. Ltd. (Seller/Beneficiary), a Korean company. Ultimate Buyer informed Buyer/Applicant and Seller/Beneficiary of its desired orders and Buyer/Applicant would apply for and obtain “90-day term” letters of credit from Industrial and Commercial Bank of China (Issuer) in favor of Seller/Beneficiary. Seller/Beneficiary would deliver the goods to Shanghai Pinju International Logistics Co., Ltd. (Warehouse) and Warehouse would issue a certificate of title to Seller/Beneficiary. Accordingly, Seller/Beneficiary would present documents to Issuer and receive payment. After Buyer/Applicant reimbursed Issuer, Issuer would release the presented documents to Buyer/Applicant who in turn would deliver the documents to Ultimate Buyer so Ultimate Buyer could take possession of the goods. Under each transaction, Ultimate Buyer would pay Buyer/Applicant prior to the expiry of each relevant LC.

Subsequently, Zhejiang Maxway Import & Export Co. Ltd. (Intermediary) proposed a “business opportunity” to Seller/Beneficiary involving Long Contin (Third Party Seller).Seller/Beneficiary and Third Party Seller entered into seven contracts for the sale of industrial products while Seller/Beneficiary separately agreed to resell the goods to Buyer/Applicant to continue the course of dealing with Ultimate Buyer.

As part of these transactions, Seller/Beneficiary “did not have to manufacture or ship the goods but would take a commission for its services from the price difference between the sale and resale.” Under these seven contracts, however, Seller/Beneficiary received digital documents from Intermediary, not Third Party Seller, with which Seller/Beneficiary then “prepared similar sales and purchase agreement[s] between [Buyer/Applicant] and [Seller/Beneficiary] by amending the price to give [Seller/Beneficiary]a profit which [it] called ‘commission’.”Buyer/Applicant similarly obtained LCs in favor of Seller/Beneficiary and Seller/Beneficiary presented documents to KEB Hana Bank (Negotiating Bank) to receive payment. Seller/Beneficiary used those proceeds to discharge loans taken to pay Third Party Seller prior to the expiry of each LC. The scheme unraveled, however, when Ultimate Buyer informed Buyer/Applicant that documents prepared by Seller/Beneficiary on two of the seven contracts were forged and that Warehouse had not received any such goods. Accordingly, Buyer/Applicant applied ex parte for and obtained an injunction stopping payment on the remaining five LCs. When Seller/Beneficiary applied to discharge or vary the injunction, the High Court of Hong Kong, To, J., continued the injunction and dismissed Seller/Beneficiary’s application.

To maintain the injunction, Buyer/Applicant had to first demonstrate its “good arguable case based on fraud”. In addition to the forged documents, there was evidence taken from Seller/Beneficiary’s general manager in which he stated that “from [Seller/Beneficiary’s] perspective, there was never any physical trading or delivery of the cargo. [Seller/Beneficiary] never delivered any [goods] to [Warehouse], neither did [Seller/Beneficiary] enter into any contract with [Warehouse]”. The Judge concluded that “[t]here was no underlying sale and purchase of goods and [Seller/Beneficiary] knew it. Had [Issuer] known there was no underlying sale…it certainly would not have issued the letters of credit. If that was not fraud, what else could be?”

Buyer/Applicant also forwarded a claim based on money had and received and unjust enrichment. The Judge noted that “there can hardly be an argument” that Buyer/Applicant had not met the substantive elements of this claim, having already found Buyer/Applicant subject to Seller/Beneficiary’s fraudulent scheme. Moreover, the structure of the scheme suggested that Seller/Beneficiary intentionally positioned itself to be judgment-proof as the Judge summarized:

[T]he whole purpose of the arrangement of paying [Third Party Seller] before funds under the letters of credit were released was to make the money out of reach of [Buyer/Applicant] and to make [Seller/Beneficiary] judgment-proof. To put it crudely, [Seller/Beneficiary] was just printing documents and selling them. There is no such commercial practice as trading on documents simpliciter. It is monstrous to suggest that the parties were involved in trading in a few pieces of paper for millions of US dollars. Fraud is written on the face of these documents generated by [Seller/Beneficiary].

Based on this evidence, the Judge also found that the risk of dissipation of assets was “high”, another requirement in maintaining the injunction. The Judge rejected arguments forwarded by Seller/Beneficiary that Buyer/Applicant had failed to demonstrate that Seller/Beneficiary had assets available within or outside of the jurisdiction because the circumstances suggested that Seller/Beneficiary “was capable of conducting business to the tune of [USD]6 million solely with [Buyer/Applicant]” and thus the “inference must be that [Seller/Beneficiary] has substantial assets”.

[MJK]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.