Security of Banks in Trade Finance – Fact and Fiction

On 20 March 2023, a seminar titled ‘Security of Banks in Trade Finance – Fact and Fiction’ was presented by Michael Collett KC, Andrew Fulton KC and Arvin Lee in his capacity as senior adjunct research fellow at the EW Barker Centre for Law & Business. This seminar was moderated by Mark Cheng.

In the first part of the seminar, Michael Collett KC discussed from a practitioner perspective five security devices banks could create. These were bills of lading, sale contract letters of indemnity, trust receipt loans, assignments of sale proceeds, and floating charges. He highlighted the underlying principles of each security device based on UK and Singaporean case law. He also discussed their advantages and disadvantages based on various trade finance scenarios such as modern commodities trading in oil.  For instance, it was not always easy to show loss caused by misdelivery in the modern usage of bills of lading based on recent UK and Singaporean cases.

The second part of the seminar by Andrew Fulton KC focused on challenges to the fundamental honesty of transactions and its effects on bank security. He began with a brief exposition on the concept and principles of documentary credits before highlighting its vulnerability to fraud arising from forgeries, duplicates or copies of the shipping documents, as well as in the case of genuine but stale shipping documents. He then discussed legal issues arising from structured arrangements, differentiating between physical trade flows and the instantaneous movement of title between traders. The speaker also touched on the position of confirming banks and insurance in structured trade finance arrangements.

In the final part of the seminar by Arvin Lee, he delved into a case note written by Daniel Ang Wei En and Professor Hans Tjio titled ‘Case Note – The Inherent Weakness of Floating Charges: Malayan Banking Bhd v Bakri Navigation Co Ltd [2020] 2 SLR 167’ in (2021) 33 SAcLJ 625. Among the issues considered were the scope of ‘dealing outside the ordinary course of business’ and the nature of the floating charge as a non-proprietary interest. He also explained that the doctrine of apparent authority continues to operate in the background of issues relating to priorities of the floating charge.

During the question and answer session which followed after, a participant enquired as to how a floating charge could be strengthened so as to maintain its flexibility despite its weaknesses. The response was that perhaps lawyers had a warped view of the success of floating charges since cases only featured instances in which the floating charges were challenged in court. A further relevant consideration was the question of the jurisdiction of the court which would determine the validity of the floating charge.

A group photo with the attendees

Michael Collett K.C. presenting

An article “Illusory security of banks in trade finance” resulting from this seminar is published in Butterworths Journal of International Banking and Financial Law.