The Singapore High Court has upheld Switzerland-based resources giant Glencore's right to payment under a US$37 million letter of credit (L/C) provided by UniCredit to finance the purchase of high-sulphur fuel oil from collapsed Singaporean oil trader Hin Leong.

The court's decision is significant in relation to the controversial issue of sales and buybacks - or so called circular trades - that have been in the limelight recently with traders being refused payment by banks on the grounds of purported sham, fraudulent or fictitious transactions.

Claim against Glencore

UniCredit commenced court proceedings against Glencore to recover payment of the L/C which featured in a transaction involving a sale by the Swiss trader to Hin Leong followed by a buy-back by Glencore.

The bank argued that this was a sham or fictitious transaction because the purpose of Glencore's simultaneous sale and buyback of goods under the contracts was to obtain finance.

Reasons to disagree

The bank's case failed to convince the court. It found that Glencore was entitled to the payment received from UniCredit under the L/C because the Swiss trading house did not defraud or deceive the bank, neither did it conspire with Hin Leong to injure the Milan-based financial institution.

Glencore was not unjustly enriched by the deal - which took place five months before Hin Leong's collapse - and did not breach its obligations to UniCredit according to the court.

It determined that UniCredit was therefore not entitled to rescind the L/C or recover any payment made to Glencore.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.