Charter default: the mortgagee’s perspective
Presentation to The Propeller Club, Piraeus
Charles Buss
23 January 2013
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The mortgagee’s security: the mortgage
> Secures borrower’s duties and obligations under the loan agreement
> The loan agreement: potential ‘events of default’:
– Payment defaults? Is borrower dependent on hires to service loan
debt?
– Breach of ‘asset maintenance ‘ or ‘loan to value’ covenant:
undoubtedly as vessel in US$15m negative equity. Waiver?
– Breach of covenant to procure release of arrest within x days.
– Charter termination.
– MAC/MAE (BNP Paribas –v- Yukos Oil [2005] EWHC 132) and Dalkia
v Celtech [2006] 1 Lloyd’s Rep. 599)
– Borrower’s insolvency (failure to pay debts; threatening to cease
payment; seeking an arrangement with a group of creditors etc.)
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The mortgagee’s security: the charter/earnings
assignment
> The charter assignment/earnings assignment:
– Nature of the bank’s assignment: specific charter assignment or general
earnings assignment? Quiet enjoyment?
– Absolute or suspensory? (The Balder London [1980] 2 Lloyd’s Rep 489).
– Legal or equitable? (The “Mount I” [2001] 1 Lloyd’s Rep. 597).
– Enforcing an assignment by notice following an ‘event of default’.
– Procedural requirements (Bexhill UK Limited –v- Razzaq [2012] EWCA Civ.
1376).
> Uses/value of an earnings assignment:
– Protection of secured earnings where borrower diverting freights/hire away
from ‘operating account’ maintained with mortgagee.
– Protection of secured earnings in foreclosure scenario.
– Insurances: e.g. charter default insurance.
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Attitude of mortgagees to arrest of borrowers’ ships
> Starting point: operational matter between borrower and
charterer/sub-charterer/cargo interests and other maritime trade
creditors.
> Mortgagee usually only concerned if arrest not lifted for a prolonged
period or if borrower requests finance to secure or settle claim.
> Need for transparency: bank/owner relationship one of trust and
confidence.
> Golden rule: keep bank informed; waive privilege in legal advices,
even if not totally favourable.
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Considerations likely to determine attitude of bank
in present scenario
> Can owner withdraw vessel and terminate time charter? Is charterer’s Singapore
insolvency relevant?
> If owner bound by bills of lading, and must deliver cargo, can owner exercise lien over
cargo in port of discharge? Risk of Indian arrest by receivers for delayed delivery.
> Can owner bond or set aside bunker arrests?
– US bunker supplier’s arrest for $6m.
– Owner’s arrest for $20m for breach of charter.
– Ship agents’ and suppliers’ arrests for $20m.
– Ownership and value of bunkers r.o.b.
> Can creditors of the time charterer obtain a ‘sister ship’ arrest of the Vessel itself (The
Span Terza [1982])
> Risk of Australian arrest by shippers.
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Considerations likely to determine attitude of bank
in present scenario (cont.)
> Financial and working capital position of borrower and owner group
> Loan default position of owner
– cross defaults on other loans
– attitude to remedy of LTV breach
> Chapter 11 risk
> If borrower in serious default and/or relationship with bank breaking
down, what are bank’s other options?
– Restructuring
– Sale of vessel
– Foreclosure
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Foreclosure procedure
> Australia is a mortgagee-favourable jurisdiction for arrest and judicial sale.
Advantages:
– Experienced lawyers.
– Specialist Admiralty courts.
– Swift and efficient judicial sale process – ships sold ‘pendente lite’.
– Priority ranking system favours mortgagee.
> Special considerations:
– cargo discharge/transhipment costs (The Myrto (No.2) [1984] 2 Lloyd’s Rep. 341).
– Tortious interference (Anton Durbeck –v- Den Norske Bank ASA [2006] 1 Lloyd’s Rep. 93)
– Applicable law (The “Tropical Reefer”[2002] 2 All ER (Comm.) 318).
– Is sale of laden vessel an option?
> Does bank have ‘white knight’ buyer? Is bank in position to finance bidder/purchaser
or to ‘warehouse’ the Vessel? Is there any advantage to the bank to do so?
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Conclusion: borrower checklist
> Usually it is strongly advisable to keep mortgagee informed and to give
visibility.
> Engage with mortgagee on covenant compliance.
> Make mortgagee believe you are its best option.
> Difficulties faced by banks in current market:
– Limited further credit.
– Change of direction away from shipping.
– Approval process (credit committee/legal/compliance/restructuring teams).
– Dysfunctional syndicates.
> Remember: foreclosure is a bank’s option of absolute last resort
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Contact us
London
Charles Buss
Partner, Litigation Group
cbuss@wfw.com
+44 (0)20 7814 8072
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