1. wfw.com Charter default: the mortgagee’s perspective Presentation to The Propeller Club, Piraeus Charles Buss 1 23 January 2013

2. wfw.com 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.) 2

3. wfw.com 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. 3

4. wfw.com 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. 4

5. wfw.com 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. 5

6. wfw.com 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 6

7. wfw.com 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? 7

8. wfw.com 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 8

9. wfw.com Contact us Charles Buss Partner, Litigation Group cbuss@wfw.com +44 (0)20 7814 8072 9 London