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Attempt to Avoid Personal Guarantees for Ship Finance Loans Fails

  • 09 January 2020 09 January 2020
  • Marine

Earlier this year, the High Court ruled in HSBC Bank Plc v Pearl Corp & Ors. [2019] EWHC 231 (Comm) that HSBC Bank PLC could enforce its claim for USD 9 million against the personal guarantor of two ship finance loan agreements despite attempts to resist under Greek law.

Attempt to Avoid Personal Guarantees for Ship Finance Loans Fails


In 2010, HSBC Bank PLC (The Bank) provided two ship-finance loan agreements to finance the acquisition of two bulk carriers. The first loan was made to Pearl Corporation SA (Pearl Corp.) for the financing of m.v. "AURORA PEARL" and the second loan was made to Onyx Corporation SA for the financing of m.v. "AURORA ONYX". Each loan agreement was governed by English law. The security package for each loan included guarantees, two of which were personal guarantees provided by Mr Dimitrios Kritsas and governed by Greek law.

Throughout the term of the loans, the dry bulk shipping market deteriorated. Over the two year period 2014 and 2015, the Baltic Exchange Dry Index fell from over 2,000 to under 500, arguably hitting a 48-year low in February 2016.

Negotiations over the course of 2015 and 2016 failed to resolve the borrowers' breaches of the loan agreements, so that eventually the Bank accelerated the loan agreements in April 2016, and the vessels were sold. The Bank then sued each guarantor for the outstanding amounts owed under each loan. Default judgments were entered against the first to fourth defendant guarantors but various Greek law defences were submitted by Mr Kritsas, questioning the validity and enforceability of his guarantees. The Court nevertheless found Mr Kritsas's guarantees were valid and enforceable.

Greek Law Defences

Mr Kritsas argued that the personal guarantees could not be enforced in accordance with Articles 862 and 281 of the Greek Civil Law code because the Bank did not accept or respond to his proposals for restructuring the loans for the sale of the vessels.

Article 862

Article 862 provides that the guarantor is released, if by reason of fault of the creditor, the satisfaction of his claim by the debtor has been rendered impossible. The following factors are relevant:

(i) the borrower is unable to satisfy the lender;

(ii) the lender is at fault; and

(iii) the lender's fault is the cause of the borrower's inability to satisfy the lender.

“Fault”... includes simple and gross negligence[:]

(i) Simple/minor negligence: a failure to take the care that would be taken by the average prudent and diligent person acting within the same professional environment; which cannot exist unless it is possible to predict and avoid the unlawful consequence of the action [; and]

(ii) Gross negligence: as above, but the deviation from the behaviour of the average prudent and diligent person must be very great, manifesting total indifference for the consequences for other parties.”

Article 281

Article 281 provides that the guarantor is released if, by the Bank exercising its right, such exercise involves “an indisputable or obvious breach” of the requirements of either:

(i) good faith – (trust, honesty and integrity necessary in transactions, taking into consideration the justified interests of a contracting counterparty); or

(ii) the boni mores – (the morality of the average prudent, honest person); or

(iii) the social and economic purpose of the right – (the more general economic interest that the law seeks to satisfy in the provision of a given right).

The proposals

1. The “First Proposal” - April 2015

In 2015, following a previous relaxation of the ACR covenants from 2013-2014, the ACR covenants were breached.

The borrowers’ first proposal provided for interest to continue to be paid, a grace period of a year on capital repayments, followed by a further 18 months of half repayments, an earnings recapture clause and additional security in the form of cross collateralisation.

The Bank and the borrowers reached a compromise for the instalments to be reduced to one-third, the ACR covenants to be relaxed but for additional security over a third vessel (already mortgaged to another bank) to be provided. The borrowers' proposal to sell AURORA PEARL was dismissed by the Bank because it would have released Pearl Corp. from liability.

The Court held that the Bank was not in breach of the Articles, noting that:

  • it was a fair position for the Bank to want to maintain adequate security, other than a relationship based on unsecured lending;
  • the Bank was not bound to a particular course of action because it had relaxed the ACR covenants as part of its restructuring in 2013;
  • failure to sell the vessels in April 2015 was not negligence by omission. The Court determined that it was reasonable;
  • there was no breach of Article 862 because the Bank behaved in a manner akin to the “average prudent and diligent person acting within the same professional environment”;
  • the time taken for negotiations was not a breach of Articles 862 or 281 either – the Bank’s representative had tried to sustain the relationship, and was mindful of the borrowers’ interests too within the Bank’s policy guidelines; and
  • even if bad faith had been established under Article 281, it would not have been possible to identify causation because there were multiple factors which led to the borrowers’ inability to repay the Bank in the following year.

2. The “Second Proposal” - February 2016

The borrowers’ second proposal in 2016 was to sell the vessels to ensure maximum recovery before their value declined again and to release the borrowers and guarantors from further claims.

The Court held that the Bank was not in breach of the Articles, noting that:

  • the Articles do not require the Bank to give “haircuts”, i.e. release the borrowers and the guarantors from their obligations and liabilities;
  • the Bank (rightly) only had limited access to Mr Kritsas’s assets to check his liquidity status and Mr Kritsas did not make the business case required to consider a relaxation of his personal liability; and
  • although it was noted that the Bank did eventually sell the vessels, it was for as much, if not for more than the borrower was able to obtain in February 2016.

3. The “Third Proposal” - April/May 2016

The borrowers sought to increase the prospects of satisfying the loans by selling the vessels to Newlead Holdings Ltd (Newlead) (sold without receiving the Bank’s prior consent) where Newlead would continue to make the loan repayments. This was on the basis that Newlead could financially afford to run and support the vessels and await a rise in the market value of the vessels.

The Court held that the Bank was not in breach of the Articles, noting that:

  • the Bank was entitled to resist the sales to Newlead – the borrowers were in breach of their loan agreements and did not have the Bank’s prior approval;
  • the Bank was entitled not to want Mr Zolotas of Newlead as a customer because he did not have a good relationship with other lenders;
  • no sums had been received by the Bank into the earnings account since Newlead had taken over and Pearl Corp. missed the first loan repayment during Newlead’s involvement;
  • nobody knew when the markets would improve, only that they would do so in the next few years;
  • the Bank only accelerated the loans when the vessels were sold in breach of the loan agreements; and
  • the Bank obtained prices for the vessels which were more than Newlead was willing to pay.


The Court carefully analysed the parties' negotiations in order to establish whether the Bank’s behaviour met the standards imposed by Articles 862 and 281 of the Greek Civil Code. The lender had to ensure that it acted in good faith, honestly, socially and economically responsibly, and with the care that would be taken by the average prudent and diligent lender acting within the same professional environment (noting that it must also be possible to predict and avoid the unlawful consequence of the action). Whilst the case demonstrates that the Articles do not require a lender to take a "haircut" on its rights, it serves as a reminder that, before accelerating a loan agreement, a lender must give proper consideration to any proposals or attempts made by the borrower to resolve the default.


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