In a late 2020 judgment ( Aegean Baltic Bank SA v Renzlor Shipping Ltd and Ors  EWHC 2851 (Comm)), the High Court provided important guidance on the position of a bank under security documents relating to a loan agreement, and its obligations when exercising its rights as assignee to the insurance policies over a vessel. The case also highlights the intricacies of disputes involving multiple applicable laws, and the difficulties faced by a party in breach of its disclosure obligations and subject to an order pursuant to which they are not entitled to adduce or rely upon any factual or expert evidence.
Aegean Baltic Bank ("Bank") had entered into a shipping loan facility agreement ("Loan Agreement") with the owners of the M/T "Starlet" ("Owners" and "Vessel", respectively) as borrowers. The Loan Agreement was governed by English law.
In return the Bank had received a security package, which included:
- An assignment of the Vessel's insurances, which was governed by English law ("Assignment"). As is common in such agreements, the Assignment included a power of attorney in favour of the Bank, allowing the latter to collect, recover, compromise, and give a good discharge for all claims arising under those insurances;
- A corporate guarantee from the managers of the Vessel ("Managers"), which was governed by Greek law; and
- A personal guarantee from the managing director of the Managers ("Personal Guarantor" and, together with the Owners and the Managers, the "Defendants"), which was also governed by Greek law.
The Vessel was insured against H&M risks under two different policies for a total amount of US$10.75 million. Under the first policy, which was governed by Italian law, Generali Italia SpA ("Generali") underwrote 20% of the risk ("Generali Policy"). The balance of the risk was underwritten by various Lloyd's syndicates under a second policy governed by English law ("Lloyd's Policy").
On 31 July 2015, the Vessel suffered ingress of water in Yemen. The Owners served a notice of abandonment on Generali only on 10 June 2016 ("NOA"). Having received the NOA, Generali rejected the abandonment also on the basis that the NOA was time-barred under Italian law.
The Bank settled the claim against Generali on a partial loss basis, and signed the settlement agreement in its own name (as assignee of the Generali Policy) and in that of the Owners (under the power of attorney in the Assignment). The settlement sum was just less than half of Generali's liability for a CTL under the Generali Policy.
The Bank then claimed for the unpaid balance under the Loan Agreement against the Owners and the guarantors.
Mr Adrian Beltrami QC ("the Judge"), sitting as a judge of the High Court, gave judgment for the Bank.
The Defendants did not challenge the fact that the debt was due under the Loan Agreement and the guarantees. Instead, they sought to defend the Bank's claim on a number of grounds, including the following:
- The Bank's settlement with Generali was unreasonable: the Bank ought to have either settled on the basis of a CTL or sued Generali to judgment. Further, the Bank had failed to make any recovery under the Lloyd's Policy either at all or within a reasonable time. Accordingly, the Bank's action ought to fail by reason of circuity and/or it entitled the Owners to damages and/or payment on account which could be set off against the amount claimed by the Bank.
- As a matter of Greek law, the corporate and personal guarantors
were relieved from liability because the Bank:
- By its own gross misconduct, caused the Owners' inability to repay the debt; and
- Dealt with the H&M insurance claims in a manner contrary to good faith, morality, and/or the purpose for which such rights had been granted.
- It is notable that the Defendants were debarred from adducing or relying on factual or expert evidence due to having breached an 'Unless' disclosure order. The Judge highlighted that this was deemed to be a choice not to adduce such evidence on the part of the Defendants, and the Court was to ensure that the gaps did not enure to the Defendants' benefit – i.e. it should draw adverse inferences as appropriate. In terms of disclosure, the Judge was aware that he had to remember that the record was not complete and that the Bank and the Court had been prevented by the Defendants from finding out whether any documents which may be adverse to the latter's position may exist.
In allowing the Bank's claim, the Judge made the following important findings:
- As a starting point, the assignment of the Vessel's
insurances to the Bank meant that the Bank owed the following
equitable duties towards the Owners when it exercised its powers to
settle the assigned claim:
- To exercise its powers in good faith for the purpose of obtaining repayment;
- To take reasonable care to obtain proper recovery.
- Notably, there is no duty as to when to exercise such rights, even if the timing of the exercise or non-exercise may occasion loss or damage to the borrowers (Owners in this case).
- Liability under the above equitable duties had been permissibly restricted by a clause in the Assignment to circumstances where the Bank had showed wilful misconduct. Such wilful misconduct had not been alleged by the Defendants and, therefore, the Defendants' defence must necessarily fail.
- The Greek law defences were not established.
What can one take home from the judgment?
The judgment serves as useful guidance to shipping lenders and borrowers on the following points:
- The starting position is that, where rights are assigned to a lender on the condition that these will be re-assigned upon repayment, equity will place various types of duties on the lender in exercising those rights. This means there is no need to formulate implied terms. Those duties will be modelled on the duties owed by a mortgagee, but how these will be adapted to suit the nature of an assignment by way of security will likely be the subject of judicial consideration in the future.
- When negotiating security documents, the parties will need to pay close attention to the wording of waiver clauses, in order to ensure that such equitable obligations are (or are not) waived to the desired extent.
- In an older client alert, we had suggested that parties should be mindful of the particularities of Greek law when involving both English and Greek law in their financing arrangements. Greek law is considerably more borrower-friendly than English law and is less permissive to waiver clauses than the latter. Having multiple laws apply to different security documents may lead to situations where the same conduct is permissible under one agreement but not under another. Consider whether appropriate wording can harmonise any inconsistencies.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.