The High Court found has found that the equitable duty owed by a bank when exercising enforcement rights under a loan agreement is capable of amendment (and restriction) by agreement. The bank's claim in this case, to recover outstanding sums under a loan agreement and related security agreements, was granted as there had been no breach by the bank of its duty on the facts.
The claimant in this case was a Greek bank, Aegean Baltic Bank SA (the Bank). In 2007, the Bank had made available a loan of up to USD 9 million to Renzlor Shipping to finance the cost of repairs to an oil and chemicals tanker and to provide liquidity. The loan was guaranteed by the company that acted as manager of the tanker and that company's managing director.
In July 2015, the tanker suffered damage and was abandoned. Renzlor Shipping subsequently stopped making the repayments due under the loan agreement. In April 2018, the Bank sent a notice of default and acceleration notice demanding full repayment under the loan agreement and/or related security documents (the Finance Documents). The Bank also issued a claim for outstanding indebtedness under the Finance Documents.
The defendants (Renzlor Shipping and the two guarantors) resisted the Bank's claim on the basis that the Bank had acted negligently or in breach of its duty in relation to its conduct of various insurance claims relating to the tanker following the damage. In short, that the Bank was required (and failed) to exercise its enforcement rights to ensure a fair and reasonable recovery of insurance proceeds when negotiating a settlement.
KEY LEGAL POINTS
- The Court found that the Bank's enforcement of Renzlor Shipping's claim under the insurance policy was analogous to a mortgagee seeking to exercise its rights over security. As a matter of law, a mortgagee owes certain duties to the mortgagor (and to others with an interest in redemption). The Bank was required by this duty to exercise its powers in good faith and for a proper purpose, and to take reasonable care to obtain the true market value when exercising a power of sale.
- However, the Court made clear that the duty to take reasonable care is not absolute and that the Bank was entitled also to look after its own interests. For example, it was not obliged to incur a sizeable expenditure or run any significant risks in order not to breach its duty.
- The Court also said that it is possible to amend and/or constrict the duty by contractual agreement. In this case, a clause in the loan agreement excluded any liability of the Bank when exercising its rights under the security documents (unless the liability was caused by the Bank's wilful misconduct).
- The Court found on the facts that the Bank had not breached its duty, however the judgment indicates that even if the duty had been breached, it would have been open to the Bank to argue that it did not have any liability as a result of the exclusion in the loan agreement.
The duty that can be imposed on financial institutions in the exercise of enforcement powers should be borne in mind when enforcing security. As this decision shows, the contractual position should be carefully considered ahead of any enforcement action, as liability for potential breaches of the duty may have been amended and/or restricted in the finance documents.
This is particularly significant in light of the ongoing economic impact of the COVID-19 pandemic, as borrower defaults are likely to continue at higher-than-normal levels, leaving financial institutions to determine the extent of the equitable duty owed and their contractual rights of enforcement.