The High Court has granted a claim brought by a bank against two companies (and the managing director of one of them) to recover outstanding sums due under a USD 9 million loan agreement and related security agreements (the Finance Agreements): Aegean Baltic Bank SA v Renzlor Shipping Ltd & Ors  EWHC 2851 (Comm).
In doing so, the court confirmed that the bank owed an equitable duty in exercising its enforcement rights under the Finance Agreements. However, that duty was capable of amendment and constriction by contractual agreement and, on the facts, there had been no breach by the bank of its equitable duty.
In light particularly of the complex impact of the current COVID-19 pandemic on borrowers including the likely increase in default and therefore enforcement, this decision will be of significance to financial institutions considering the exercise of contractual rights. The decision provides a helpful reminder of the extent to which: (a) a duty can be imposed on a bank in respect of the exercise of its enforcement rights under various finance agreements; and (b) certain actions linked to the exercise of enforcement rights will not be considered to be in breach of such a duty. Please also see our previous blog post on a related decision considering whether a bank would have a duty of care akin to that which a mortgagee would have when exercising a power of sale over its security.
The claimant bank entered into Finance Agreements with two shipping companies and the managing director of one of the shipping companies (together, the defendants). The purpose of the Finance Agreements was to enable the financing of repairs and provide liquidity for a shipping vessel.
Following damage to the vessel – which was abandoned – in 2015 the defendants ceased to make repayments due under the loan agreement. In 2018, the bank subsequently sent a notice of default and acceleration notice demanding full repayment under the Finance Agreements. The bank also issued a claim for outstanding indebtedness under the Finance Agreements.
The defendants sought to resist the claim on the basis that the bank had acted negligently or otherwise in breach of duty in its conduct of certain insurance claims following damage to the shipping vessel in 2015.
The court granted the bank’s claim.
The key issues which are likely to be of broader interest to financial institutions are summarised below.
Issue 1: Was a duty owed when exercising rights under the Finance Agreements?
The defendants argued that the bank owed duties of care at law and/or equity towards the defendants to exercise its rights under the Finance Agreements to ensure a fair and reasonable recovery of insurance proceeds. The defendants said these duties arose: (a) by way of implied term; (b) as a duty of care at common law; and (c) as a duty in equity.
The court held that the bank did owe a duty in equity (as a matter of law and by reason of its status as security holder) in respect of the exercise of its relevant rights under the Finance Agreements, though not at common law or by way of implied term.
In the court’s view, the position of the bank under the security documents was akin to that of a mortgagee seeking to exercise its rights over security, and the bank’s enforcement of the defendants’ claim under the relevant insurance policy was analogous to the exercise of a power of sale over a mortgaged property. This gave rise to an equitable duty.
The court remarked that the equitable duty was owed to the defendants. As per Downsview Nominees Ltd v First City Corporation Ltd  AC 295, such an equitable duty would involve: (a) the exercise of powers in good faith and for a proper purpose; and (b) if exercising a power of sale, taking reasonable care to obtain a proper price.
However, the court underlined that such a duty was capable of amendment and constriction by contractual agreement. The court held that on the facts of the present case the parties by contract had restricted the bank’s liability for any breach of duty in the exercise of its rights under the security agreement to losses caused by the wilful misconduct of its officers and employees.
Issue 2: Was there a breach of duty?
The defendants argued that the bank had breached its equitable duty as it had entered into a wholly unreasonable settlement with an Italian insurance company on the basis that it was for less than 50% of the constructive total loss value notwithstanding that a full and proper recovery was possible. Additionally, the defendants argued that the settlement contained false and unreasonable admissions, the bank had failed to make a recovery within a reasonable time, and the bank had excluded the defendants from participation in negotiations with the insurers.
The court rejected the defendants’ submissions and held that the bank had not breached the equitable duty it owed to the defendants.
In reaching its conclusion, the court cited the following factors, amongst others, as influential in its decision on this particular issue:
- there was no allegation that the bank did not exercise its powers in good faith;
- there was no allegation that the bank acted with wilful misconduct;
- although a creditor must exercise its powers in good faith and for a proper purpose, it does not owe a duty as to when to exercise its powers, even if the timing of the exercise or non-exercise may occasion loss and damage to the mortgagor (as per China and South Sea Bank Ltd v Tan Soon Gin  1 AC 536);
- compliance with an equitable duty did not require the bank to engage in litigation at its own financial risk, i.e. it was entitled to look after its own interests (as per General Mediterranean Holding SA SPF v Qucomhaps Holdings Ltd  EWCA Civ 2416, in which the Court of Appeal observed that a creditor would not be obliged to incur any sizeable expenditure or to run any significant risk to preserve or maintain a security); and
- there was nothing in the Finance Agreements requiring the bank to call for, or permit, the active participation of the defendants in any negotiations it chose to conduct, nor was there any evidence to suggest that the defendants’ participation would have had a beneficial effect in influencing the Italian insurance company in relation to the constructive total loss claim.