A court has ordered Tokio Marine’s Australian subsidiary, the Bond & Credit Company (BCC), to pay an insurance claim of A$7.2mn to a trade financier which fell victim to a fraud carried out by Phoenix Commodities.
Phoenix Commodities, a group of companies in the United Arab Emirates, Singapore and British Virgin Islands, collapsed in April 2020, reportedly owing more than US$1bn to creditors.
The debt includes some A$7.3mn advanced to it by Australia’s Thera Agri Capital Management under a commodities financing deal.
The February 2020 arrangement between Thera and Phoenix involved the export of soft commodities such as lentils, chickpeas and wheat from Australia and was financed through a murabaha contract, a form of Islamic financing. Phoenix was to make deferred payments to Thera, plus an additional 10%, in June and July of that year.
When Phoenix became insolvent and failed to repay, Thera filed a claim under a trade credit insurance policy it had purchased from BCC, which it believed would cover the loss. But BCC refused to pay out, arguing that the transactions between Thera and Phoenix were not compliant with the terms of the insurance policy.
In a judgement published on May 31, New South Wales Supreme Court Justice Kelly Rees found that Phoenix’s failure to repay Thera constituted an “insured loss” under the policy and that BCC must honour the claim.
BCC had argued in March court hearings in Sydney that Thera had not complied with the policy because the transaction did not follow the process originally envisaged, in which Thera would advance Phoenix funds to purchase commodities as its agent – in fact, the commodities had already been purchased when the financing was arranged.
But Justice Rees found that the wording of the policy did not require Thera to strictly comply with the finance documents. The purpose of the wording was “to describe the payments contemplated by the Master Murabaha Agreement and related documents, not to impose a condition on cover”, she wrote.
Justice Rees also found that while the murabaha agreement at the heart of the deal did not actually appear to be sharia-compliant, that did not mean that the transaction was not covered by the policy or that Thera had not complied with “applicable material laws”, as BCC had argued.
Under the deal financed by Thera, Phoenix purchased the commodities from two traders: Singapore’s Avon International and the UAE’s ACME Summit General Trading.
But Justice Rees found that key documents underpinning those transactions “were a sham”, orchestrated by Phoenix. “In short, the insured was the victim of a fraud practised by its customer, perhaps to ‘prop up’ their parlous financial position,” she wrote.
During three days of hearings in March, the Sydney court heard from Avon’s Singapore liquidator and the former head of ACME that documents in some of the transactions between Phoenix and the two traders could not be located or were fabricated.
“It appears that the commodities existed and had been shipped under the bills of lading but were not, in fact, the subject of the purchase contract and commercial invoice,” presented by Phoenix to Thera, Justice Rees wrote.
“That is, the purchase contract and commercial invoice were created by the Phoenix Group, presumably in order to satisfy the requirements of the Master Murabaha Agreement and thereby obtain finance.”
There is no suggestion that Thera knew the documents were not genuine or even unusual at the time, or that it could have been expected to do so.
Thera’s chief executive, Mark Allen, declined to comment on the judgement. A BCC spokesperson says: “We are in the process of reviewing the judgment and reserve the right to appeal in due course.”
Phoenix, which billed itself as one of the world’s top rice traders, reportedly owed some US$1.2bn to creditors including HSBC, Emirates NBD and First Abu Dhabi Bank at the time of its collapse.
Fimbank, a Maltese lender, secured a US$19mn judgement against Gaurav Dhawan, Phoenix’s executive chairman and majority shareholder, in January this year due to the company’s failure to repay a trade finance facility which he guaranteed.
BCC is also facing two lawsuits from Australian trade finance platform Marketlend over its failure to honour claims resulting from the collapse of other commodity traders in Asia during 2020.
The insurer has also been dragged into litigation in Australia flowing from the collapse of Greensill. BCC’s decision not to renew US$4.6bn of insurance policies to the disgraced supply chain finance firm precipitated the company’s collapse last year.
Tokio Marine, which acquired BCC in 2019, has since accused Greensill of “material misrepresentations and non-disclosures” when seeking insurance.
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