PK Airfinance SARL and Another (Appellants/Cross Respondents) v Alpstream AG and Others (Respondents/Cross Appellants)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Christopher Clarke,Sir Bernard Rix,Lord Justice Underhill |
| Judgment Date | 21 December 2015 |
| Neutral Citation | [2015] EWCA Civ 1318 |
| Docket Number | Case Nos: A3/2013/3378 & 3379 |
| Court | Court of Appeal (Civil Division) |
| Date | 21 December 2015 |
[2015] EWCA Civ 1318
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION (COMMERCIAL COURT)
MR JUSTICE BURTON
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Underhill
Lord Justice Christopher Clarke
and
Sir Bernard Rix
Case Nos: A3/2013/3378 & 3379
Stephen Moriarty QC and Rosalind Phelps (instructed by Clifford Chance LLP) for the First Appellant/Cross Respondent
Akhil Shah QC and Deborah Horowitz (instructed by Allen & Overy LLP) for the Second Appellant/Cross Respondent
Charles Béar QC, James CutressandAlex Barden (instructed by Bird & Bird) for the Respondents/Cross Appellants
Hearing dates: 14 th, 15 th, 16 th and 17 th July 2015
(Additional submissions 20 th, 24 th and 30 th July 2015)
A mortgagee of seven aircraft sold them at auction after the mortgagor's default. Another three aircraft were mortgaged by another mortgagor to secure both the Senior Loan made in relation to those three aircraft and also the Senior Loan made in respect of the seven. The proceeds of sale of the three aircraft (if it were to take place) were intended to satisfy a number of debts including the Senior Loans in respect of all 10 aircraft and then (if the proceeds were enough) to pass to an ultimate recipient, which was the Junior Lender (unsecured) in respect of the three aircraft. A principal issue in this case is whether the mortgagee of the seven aircraft owed a duty to the ultimate recipient of the balance of the proceeds of the three aircraft to take reasonable steps to obtain best value when selling the seven and, if so, whether it was in breach of that duty.
The parties
The claimants are part of a group ("NRC") ultimately based in Russia and controlled by Mr Lebedev. The First Claimant — Alpstream AG ("Alpstream") — owns, directly or indirectly, Alpstream Aviation Ltd (" AAL"). Both are Irish companies. The Second Claimant — Alpstream Aviation Malta — owns Betastream Ltd (" Betastream"). Both are Maltese companies.
The first defendant is PK Airfinance SARL ("PK"), a Luxembourg company which provides aviation finance and which has since 2000 been part of the group headed by General Electric Company ("GEC") in the United States. The second defendant is GE Capital Aviation Services ("GECAS"), one of GEC's European subsidiaries. It is located in Ireland and some of its employees are in the United States. PK lends money and provides finance. GECAS leases, and manages the leasing of, aircraft.
The Blue Wings Aircraft
In 2007 AAL purchased five Airbus A320 jet aircraft from JetBlue ("JB"). Finance for the purchase was provided principally by PK by a Senior Loan of US $ 120 million. The third claimant — CIS Interfincom AG ("CIS") — provided a Junior Loan of $ 38.5 million. The aircraft were leased out to Blue Wings, a German low cost airline, of whose shares AAL is said to have owned about 48%. The aircraft were mortgaged to PK to secure payment of the $ 120 million Senior Loan.
In 2008 Betastream bought two further Airbus A320 aircraft which it also leased out to Blue Wings. PK provided a Senior Loan of $ 51 million and CIS a Junior Loan of $ 18.482 million. These aircraft were mortgaged to secure payment of the $ 51 million loan.
I call AAL and Betastream "the Borrowers".
The seven aircraft purchased by AAL and Betastream were between six and nine years old.
The debts owed by the Borrowers to CIS as Junior Lender were subordinated to those owed to PK as Senior Lender. CIS was entitled to receive payment of its loan from the balance of the proceeds of sale of the aircraft remaining after payment of the amount due to PK in respect of the aircraft ("the Blue Wings debt"). In addition to the mortgages of the seven aircraft Alpstream AG mortgaged its shares in AAL to PK and Alphastream Aviation Malta pledged its shares in Betastream to PK to secure the Senior Loans made to their respective subsidiaries. The finance provided to AAL and Betastream was essentially non-recourse. Save in limited circumstances, such as fraud or gross negligence, neither Borrower was bound to make up any shortfall if the security proved insufficient.
The Caelus Aircraft
Caelus Aviation Ltd ("Caelus") is an Irish special purpose company owned by Deutsche International Finance (Ireland) Ltd ("Deutsche Ireland"), an Irish subsidiary of Deutsche Bank. In 2009 it purchased three more A320s ("the Caelus aircraft") which it leased out to Olympic Airways. PK provided Caelus with a Senior Loan of $ 84 million and the fourth Claimant — Alphastream Ltd ("Alphastream") — agreed to provide a Junior Loan of $ 75 million, subordinated to that of PK. (There was no evidence of how much Alphastream actually provided and how much remains due). These aircraft were much newer and more valuable aircraft than those leased to Blue Wings such that there was substantial equity available over and above the amount advanced for those aircraft by PK which was available for cross collateralisation in respect of the Blue Wings debt.
Caelus mortgaged the Caelus aircraft to secure both the amount it owed PK in respect thereof ("the Caelus debt") and also the amount that AAL and Betastream owed PK in respect of the Blue Wings debt. Alphastream was entitled to the proceeds left after payment of the Blue Wings and Caelus debts.
As the judge recorded:
" 4 Unfortunately, the Blue Wings airline ran into financial difficulties by 2009 1, and, after various attempts to stay afloat, it foundered when, on 13 January 2010, its certification was suspended, for the second time in a year, for financial reasons, such that 4 weeks later Blue Wings filed for insolvency. PK's power of sale arose in respect of the Blue Wings Aircraft, which in the event it exercised in a way complained of by the Claimants in this action in respect of six of the seven aircraft. The seventh aircraft, 1464, was in a very poor condition and featured only peripherally at the trial. The other six were in the event purchased by PK, transferred to the order of GECAS and leased to JetBlue Airways Corporation ("JB"), a successful US airline.
5 The six Blue Wings Aircraft were repossessed from Blue Wings in poor condition, in breach of their redelivery conditions, and were put by PK into effectively 'good as new' condition for the leases to JB, at a net cost, charged to the mortgage account, of $49m, and were purchased by PK at a price, credited to the mortgage account, of $146.8m, transferred to GECAS' order on an inter-company basis, and leased to JB, where they still remain. The mortgage account was thus in substantial arrears, and the outstanding balance was set off/cross-collateralised against the equity on the Caelus
aircraft, which have not yet been sold and remain operating, although now leased out to another Greek airline than Olympic".
The contractual structure
The contractual arrangements are of some complexity. Appendix 1 expresses them diagrammatically.
The Senior Loan and the mortgage in respect of the five aircraft purchased in 2007 were the subject of separate documents, which it is not necessary to consider further.
The 2007 Deed of Proceeds
A Deed of Proceeds dated 4 October 2007 was entered into between AAL, as Borrower and PK and CIS as Lenders. PK also executed the Deed in the capacity of Agent and Security Trustee. By clause 2.1. PK and CIS agreed that the Junior Debt (i.e. the debt owed to CIS) should be subordinated to the Senior Debt (i.e. the debt owed to PK), and that CIS' rights to receive, and of the Borrower to make, any payment or distribution in respect of the Junior Debt would be subordinated to the Senior Debt. By clause 2.2 that subordination was to continue throughout the Security Period notwithstanding a number of matters that, but for that clause, might operate to affect the priorities provided for in the Deed, including (at clause 2.2.2) " any failure to realise the full value of any Security Interest".
Clauses 4, 5 and 6 contained the following provisions:
" 4 UNDERTAKINGS OF THE BORROWER
4.4. No Security Interests
Except as contemplated or provided by the Finance Documents the Borrower shall not create or permit to subsist any Security Interest over any of its assets for the Junior Debt.
" Security Interest" is defined in the Facility Agreement of 3 September 2007 as "a mortgage, charge, pledge, lien or other security interest securing any obligation of any person or any other agreement or arrangement having a similar effect."
4.5 No guarantee
The Borrower shall not permit to exist any guarantee or other assurance against loss in respect of the Junior Debt.
5 UNDERTAKINGS OF THE JUNIOR LENDER
5.2. No payment of Junior Debt
The Junior Lender shall not demand or receive payment, prepayment or repayment or any distribution in respect of (or on account of), the Junior Debt in cash or in kind from the Borrower or any other source or any money or property in discharge of the Junior Debt except as permitted by Clause 12.
….
5.4 No Security Interests or guarantee
The Junior Lender shall not permit to subsist or receive any Security Interest or any guarantee or assurance against financial loss for, or in respect of, the Junior Debt."
6 TURNOVER
6.1. Non-permitted subordinated payments
If, during the Security Period:
...
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