Trade finance: lender recovers under collateral management agreement despite invalid pledge

Trade finance: lender recovers under collateral management agreement despite invalid pledge

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In a recent case that will be very welcome to trade finance providers, it was held that a lender could rely on a breach of contract by a collateral management agent for lost goods, even if a local law pledge over the goods was not valid.   

In Scipion Active Trading Fund v Vallis Group Ltd (formerly Vallis Commodities Ltd) [2020] EWHC 1451 (Comm), Scipion acted as the lender and Vallis acted as the collateral management agent.

Vallis discovered that there was a large discrepancy between the amount of copper it was reporting on a daily basis as being on site (nearly 2000 tonnes) and the actual amount (30 tonnes).  It was not clear exactly what had happened to this copper, nor whether 2000 tonnes of copper had ever been at the site.

However, the collateral management agreement (“CMA”) between Scipion, Vallis and the borrower made clear that Vallis represented and warranted that its warehouse receipts were based on the actual quantity and value of copper on site, and so it was liable whether the copper had ever been there or not.

Vallis argued that if the pledge granted in favour of Scipion failed, Scipion no longer had a possessory interest in the goods, and that it was a matter of Moroccan law whether or not that interest existed.  The court disagreed, finding that whether or not there was a bailment relationship was a matter of contract, according to the Rome I convention, and that the CMA (which was governed by English law) clearly established such a relationship. In any case, Vallis was estopped from denying such an interest as it had expressly acknowledged the existence of such an interest in the CMA.

Scipion was entitled to recover from Vallis the value of the missing goods, capped at the value of the amount it had failed to recover under the facility agreement less the value of certain remaining goods and products.

Jonathan Porteous, head of banking and finance at Stevens & Bolton, comments: “This case shows the importance to trade finance providers of ensuring they have a robust collateral management agreement under English law to establish remedies against the collateral manager if there are breaches on its watch. Pledges of goods under local law should also be taken of course, but it is a comfort to lenders to know that there is a fall-back position under the CMA if there are problems with the local law security, which are not uncommon”.  

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