Personal Guarantors Watch Out!

What happens when judges get it wrong? | BDM Blog | BDM Law

The personal guarantee is a mainstay of traditional ship finance. However, it is rare for banks to enforce such guarantees. In a recent case (1) the Commercial Court handed down a judgment upholding a bank’s claim against a personal guarantor. The case concerned HSBC’s claim for approximately USD 9 million against Mr Kritsas under personal guarantees he had given. In 2010 the bank had advanced two USD 15 million loans to two single ship-owning companies to assist in the purchase of vessels. Both loans had to be repaid over a 10-year period. Mr Kritsas gave personal guarantees for both loans to cover the bank’s exposure.

During the period of the loans there was a dramatic deterioration of the dry bulk shipping market. The Baltic Exchange Dry Index fell from over 2,000 to under 500 over the two-year period from 1 January 2014 until 31 December 2015. The market hit a 48-year low in February 2016 and it was as a result of this collapse in the market that the value of the two vessels fell to levels that breached the Asset Cover Ratio covenants in the Facility Agreements triggering Events of Default. Subsequent actions by the owners led to further breaches of additional covenants and Events of Default.

In April 2016, HSBC demanded that the outstanding loans were repaid in full. A notice of acceleration was served on Mr Kritsas by way of demand under the provisions of the personal guarantees. Although the loan agreements and other finance documents were governed by English Law, the personal guarantees were governed by Greek law, subject to English jurisdiction. Mr Kritsas defended the claims by reference to various provisions of the Greek Civil Code, but the Commercial Court dismissed in full those defences. As Mr Kritsas had not pleaded any other defences nor advanced a case on quantum, the bank was granted judgement against the defendants on the basis of the losses it had calculated.

It is important to note that that even where such personal guarantees exist one tends to find that many ship owners around the world (despite the yachts and other trappings of wealth) structure themselves so that they personally own very little or seek to avail themselves of bankruptcy laws leaving banks with a paper judgment and no means of enforcement.

At BDM, our team has considerable experience of advising clients regarding the drafting of personal guarantees and the enforcement of such guarantees against wealthy individuals. Many years ago we secured a US$47M judgment against a prominent Greek ship owner for a French bank in the wake of the collapse of his shipping empire.

(1) HSBC Bank Plc v Pearl Corp & Ors. [2019] EWHC 231 (Comm)

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