Note: Silversea Properties Ltd., a builder, provided New Home Warranty of British Columbia Inc. with a CAD 29,000 standby LC issued by HSBC for its account in order to obtain warranty protection for the purchase of 29 condominium units. When the beneficiary/warrantor became insolvent, the builder applied to the trustee in insolvency for the return of the LC which had never been drawn on prior to the bankruptcy. The applicant trustee disallowed the claim, and applicant filed an action to set aside the disallowance. The British Columbia Supreme Court, Neilson, J., considered whether the LC should be characterized as a trust, in which case it must be returned. The court noted binding precedents in which intent to create a trust was found to exist because of promises of the beneficiary to hold and return a security deposit and only to use money drawn on the LCs for the purpose for which they were issued. In the instant case, the judge concluded that the applicant was unaware of the promises to return or apply the proceeds when the LC was issued. As a result, it concluded that the LC was not a trust and that there was no need to return the LC. The court denied the appeal from the trustee's disallowance.

Comment: As is often the case in insolvency, the context is bizarre. The opinion does not indicate whether the LC has been drawn on. Nor does it indicate what, if any, statement had to be made under the LC. Either way, it is strange to think of an LC as being held in trust.


The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.