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Singapore Court affirms that contract of sale and buyback intended for financing purposes was not a sham transaction

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Wee Teck Lim

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15 December 2022

The Singapore High Court considered a round trip sale-and-buyback transaction paid using a letter of credit facility in UniCredit Bank AG v Glencore Singapore Pte Ltd [2022] SGHC 263.

The transaction was essentially a means to provide the seller of the goods with financing. When the bank sought to rescind the letter of credit on the basis that the transaction was the sham, the Court had to consider when a transaction would be a sham under the law.

 Key takeaways: 

  • For a transaction to be sham, it is necessary for all parties to that transaction to have a common subjective intention that the transaction documents are not to create the legal rights and obligations which they give the appearance of creating.
  • If the documentation appears genuine, and there is no evidence that the parties did not intend the rights and obligations to be real ones, the transaction would not be a sham.
  • If the circumstances are such that the parties do not expect to have to perform an obligation (such as the delivery of shipping documents from one party to another), that does not mean the obligation is not a real one.

In the case of UniCredit Bank AG v Glencore Singapore Pte Ltd [2022] SGHC 263 (21 October 2022), a company, Glencore Singapore Pte Ltd (Glencore), entered into a sale and buy-back transaction for the purpose of obtaining cheaper financing via a letter of credit. The issuing bank, UniCredit Bank AG (Unicredit), found itself unable to claim the amount paid from the buyer, Hin Leong Trading (Pte) Ltd (Hin Leong), as it was being wound up. It also found out that the goods had been sold back to Glencore almost immediately upon the initial sale and that Hin Leong had lied to it that the goods had not been resold.

Unicredit therefore brought a claim against Glencore. Its claim was premised on six different grounds, and it failed in all of them. However, this update will focus only on the claim for rescission of the letter of credit on the basis that the sale contract was a sham or fictitious transaction. 

The transaction was not a sham: the goods were real and title was intended to pass 

The Court noted that for a transaction to be a sham, it is necessary for all parties to that transaction to have a common subjective intention that the transaction documents are not to create the legal rights and obligations which they give the appearance of creating. Accordingly, it was necessary for it to determine whether Hin Leong and Glencore did not intend to create the following legal rights and obligations under the sale contract: 

  • Glencore’s obligation to transfer title to the goods to Hin Leong (and Hin Leong’s corresponding right to such transfer of title); and
  • Hin Leong’s obligation to pay for the goods (and Glencore’s corresponding right to such payment).

Here, the evidence showed that the goods (a cargo of oil) were real and that Glencore had ensured that it had obtained title to those goods in time for it to pass title to them to Hin Leong. There was a documented transfer of title and Hin Leong arranged to pay for them via the mechanism of the letter of credit. This was not a situation where the goods did not exist or where Glencore only obtained title to the goods to sell to Hin Leong after the fact. 

The Court emphasised the following: 

  • If the documentation appears genuine, and there is no evidence that the parties did not intend the rights and obligations to be real ones, the transaction would not be a sham.
  • If the circumstances are such that the parties do not expect to have to perform an obligation (such as the delivery of shipping documents from one party to another), that does not mean the obligation is not a real one.

Factors that did not amount to an indication that the transaction was a sham

The following were held to not amount to evidence (on these facts) that the transaction was a sham: 

  • The fact that the cargo had been resold by Hin Leong back to Glencore one minute after it had been sold to Hin Leong. Here, the Court noted that Hin Leong could have sold the cargo to a third party by way of an immediate resale or it could have resold the cargo to Glencore a few days later. So, the timing of the resale was neither here nor there. 
  • The fact that the transaction was a round trip transaction. The Court noted that round tripping has been upheld in the past by the courts in both Singapore and England. The mere fact that a transaction ended up with the goods back in the hands of the original seller was no indication in itself that the transaction was a sham. 
  • The fact that the goods were never physically delivered. It was common in many transactions that physical delivery of goods was never intended or never intended to be made to intermediate buyers. That too was no indication that the transaction was a sham. 
  • The fact that the bills of lading were never transferred to Hin Leong by Glencore. Here, the Court noted that Glencore’s employees had stated that there was no expectation that they would transfer the bills of lading. However, that there was no expectation that they would transfer the bills of lading was that this was not expected to have to happen in the circumstances. The employees also stated that if Hin Leong had asked for the bills of lading, they would have arranged for their transfer. Accordingly, the Court found that Glencore would have transferred the bills of lading if the circumstances so required, but such circumstances never came about. This was not an indication that the transaction was a scam. 

While UniCredit made much of the fact that Hin Leong had told it that the goods had not been resold when in fact they had been resold to Glencore, it could not show that Glencore knew of this or even colluded with Hin Leong on this. 

It is also worth noting that the reason UniCredit never obtained the bills of lading is because the terms of its letter of credit allowed for payment to be made on presentation of a commercial invoice by Glencore and the provision of a letter of indemnity from Glencore made out to Hin Leong, in lieu of the presentation of bills of lading. 

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