Duties on disposal of security: Court of Appeal confirmation

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The recent case of Alpstream v PK Airfinance and GW Capital Aviation Services [1] concerned the secured financing of several aircraft. Whilst the factual background seems far removed from high street residential mortgage lending, the legal principles are the same. As Richard Sandford explains, lenders will welcome this recent Court of Appeal clarification of the duties owed by a mortgagee upon disposal of its security.

Security and disposal

The first defendant lender in this case had secured mortgage loans over seven aircraft. The security was cross-collateralised and the claimant was a junior, unsecured, creditor of three of the planes, who was entitled to receive proceeds of the sale of those planes once all mortgage debts were discharged. When the borrower defaulted, the first defendant conducted an auction, at which one of its affiliated company’s bought all seven aircraft. The claimant alleged that the sale was at an undervalue; that the sale to an affiliated company was void for being a sale to itself; and that the first defendant had breached a duty to an unsecured creditor to obtain the best price. The claim failed on all counts.

Mortgagee’s duties

Alongside a mortgagee’s general duties to act in good faith, with reasonable care and skill and to act fairly towards a borrower [2], the Court of Appeal confirmed the following principles in respect of a mortgagee’s duties upon disposal of security:

  • A mortgagee is under an equitable duty to take reasonable care to obtain the best price reasonably obtainable at the date of sale.
  • However, it is for the mortgagee to decide whether, how and when to sell.
  • In addition, the mortgagee’s duty is owed only to those with a registered interest in the property. (This duty does not extend to unsecured creditors.)
  • The court also held that this was not a ‘sale to self’, but rather it was a connected party transaction. In a connected party transaction there is a risk of conflict of interest and so a duty arises for the mortgagee to show that it has obtained the best price reasonably obtainable. Here, expert evidence actually showed that the first defendant’s affiliated company had paid more than anyone else would have been willing to pay in the circumstances. (The claimant’s case did not take account of either the fact that the mortgagee can decide upon the timing of sale, or the inevitable forced sale discount.)


[1] Alpstream AG & Ors v PK Airfinance Sarl (1) and GW Capital Aviation Services Ltd (2) [2015] EWCA Civ 1318
[2] Downsview Nominees Ltd & anor v First City Corporation Ltd & anor [1992] UKPC 34; Standard Chartered Bank Ltd v Walker [1982] 1 WLR 1410; Palk v Mortgage Services Funding plc [1993] Ch 330