Charter default: the mortgagee’s perspective

Presentation to The Propeller Club, Piraeus Charles Buss 23 January 2013 wfw.com

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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.) wfw.com

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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. wfw.com

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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 wfw.com

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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 wfw.com

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Contact us

London

Charles Buss

Partner, Litigation Group [email protected]

+44 (0)20 7814 8072 wfw.com

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