Alpstream AG & Ors v PK Airfinance Sarl & Anor

A mortgagee selling mortgaged property to a connected purchaser bears a heavy onus. It must show that it used its best endeavours to obtain the best price reasonably obtainable and that obtaining that price was given absolute preference over the purchaser’s interests. A merely formal or half-hearted sale process will not suffice. The mortgagee may acquire the asset for a connected party, provided that the transaction is conducted transparently and at a properly established value. The duty may extend to a residual beneficiary of sale proceeds within the same contractual structure. Loss may crystallise when the mortgage account is improperly diminished, even before related collateral is sold. Wilful misconduct requires intentional wrongdoing or reckless indifference to whether the conduct is wrong or causes loss.

The claim arose from aviation finance transactions involving seven aircraft financed by PK Airfinance Sarl. Following the insolvency of the lessee, PK enforced its security and acquired the aircraft at an auction. The aircraft were then transferred within the GECAS group and leased to JetBlue Airways.

The claimants alleged that the auction was arranged to secure that outcome, rather than to obtain the best available price. Alphastream, which stood to receive residual value from cross-collateralised aircraft, claimed loss caused by the reduced credit to the mortgage account. The issues included breach of mortgagee’s duty, wilful misconduct, liability of GECAS for procurement and conspiracy, and the proper calculation of loss.

1. Liability and connected sale. PK’s acquisition was, in substance, a sale to a connected party. Under Australia and New Zealand Banking v Bangadilly (1978) 139 CLR 195 and Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349, PK bore a heavy onus to show that it used its best endeavours to obtain the best price reasonably obtainable. The desire to obtain that price had to receive absolute preference over GECAS’s desire to acquire the aircraft.
2. PK and GECAS had committed themselves to the JetBlue transaction. The auction was arranged to obtain formal control of the aircraft, involved minimal marketing, and was conducted without independent valuation advice. The court found that PK and GECAS had gone through the motions and had deliberately preferred GECAS’s interests. The appropriate price for the six relevant aircraft was $158m, rather than the $146.8m bid.
3. The mortgagee’s duty extended to Alphastream as the known residual beneficiary of the Caelus equity within the same contractual structure. No trust arose, but the contractual arrangements did not exclude the duty. Alphastream’s loss crystallised in May 2010 when the mortgage account was improperly diminished; it did not have to await sale of the Caelus aircraft.
4. The exemption clauses required proof of wilful misconduct. The applicable test, derived from National Semiconductors (UK) Ltd v UPS Ltd [1996] 2 Lloyd’s Law Rep. 212 and Lacey’s Footwear (Wholesale) Ltd v Bowler International Freight Ltd [1997] 2 Lloyd’s Law Rep. 369, required intentional wrongdoing or reckless carelessness in circumstances where the actor appreciated the risk and nevertheless took it. PK’s conduct satisfied that test.
5. GECAS procured PK’s breach, knowing or being reckless as to the relevant duties. PK and GECAS were also liable for conspiracy: they acted pursuant to a common design, used unlawful means, and deliberately intended the resulting loss. Alphastream recovered $10.175m plus interest. The additional swap-break charge was allowed, the HPT-blade claim succeeded, and the wasted-cost and EGT-margin claims failed.

First-instance judgment in the High Court (Commercial Court). No appellate history was stated in the judgment.