ON APPEAL FROM HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
MR JUSTICE BEATSON
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE GROSS
| 1. MAHAN AIR
2. BLUE SKY AVIATION CO FZE
|- and -
|1. BLUE SKY ONE LIMITED
2. BLUE SKY TWO LIMITED
3. BLUE SKY THREE LIMITED
4. BALLI GROUP PLC
5. CRYPTON LIMITED
6. BLUE SKY SIX LIMITED
7. BLUE SKY FOUR LIMITED
8. BLUE SKY FIVE LIMITED
|1. BLUE SKY ONE LIMITED
2. BLUE SKY TWO LIMITED
3. BLUE SKY THREE LIMITED
|- and -
|1. BLUE AIRWAYS LLC
2. MAHAN AIR
3. BLUE SKY AVIATION CO. FZE
|- and -
|1. BALLI GROUP PLC
2. CRYPTON LIMITED
3. BLUE SKY SIX LIMITED
4. BLUE SKY FOUR LIMITED
5. BLUE SKY FIVE LIMITED
|PK AIRFINANCE US INC
|- and -
|1. BLUE SKY TWO LIMITED
2. BLUE SKY THREE LIMITED
3. BALLI GROUP PLC
|4. MAHAN AIR
5. BLUE SKY AVIATION CO. FZE
Philip Shepherd QC and Bajul Shah (instructed by Norton Rose LLP) for Balli Group Plc, Blue Sky One Ltd, Blue Sky Two Ltd, Blue Sky Three Ltd, Blue Skey Four Ltd, Blue Sky Five Ltd, Blue Sky Six Ltd and Crypton Ltd
Stephen Moriarty QC and John Passmore (instructed by Clifford Chance LLP) for PK Air Finance US Inc.
Hearing date: 31 January 2011
Crown Copyright ©
Lord Justice Stanley Burnton:
(1) Balli Group Plc as "Balli".
(2) Blue Sky One Ltd, Blue Sky Two Ltd, Blue Sky Three Ltd as "the SPV companies".
(3) Blue Sky Aviation Co. FZE as "FZE".
(4) Balli Group Plc, the SPV companies, Blue Sky Four Ltd, Blue Sky Five Ltd and Blue Sky Six Ltd as "the Balli Parties".
(5) PK Airfinance US Inc as "PK".
(6) Mahan Air as "Mahan".
(7) Mahan and FZE, which is owned by Mahan, as "the Mahan Parties".
(1) He declared that the mortgage of aircraft 2 to PK was valid.
(2) He ordered the Mahan Parties to deliver up aircraft 1 to Blue Sky One by 22 April 2010; if they failed to do so (and they have not done so), they were ordered to pay to Blue Sky One about $35.5 million plus interest, plus user damages of US$795,000 per month from October 2008.
(3) He ordered the Mahan Parties to deliver up aircraft 2 to PK as mortgagee by 22 April 2010. If they failed to do so, they were to pay damages of some US$35 million, plus interest, plus user damages, apportioned between PK as mortgagee and Blue Sky Two as owner.
(4) He declared that the mortgage of aircraft 3 to PK to be valid as between PK and the Balli Parties, but not as against the Mahan Parties.
(5) He ordered the Mahan Parties to deliver up aircraft 3 to PK as mortgagee by 22 April 2010. If they failed to do so, they were to pay damages of some US$43.6 million, plus interest, plus user damages, apportioned between PK as mortgagee and Blue Sky Three as owner.
(6) He dismissed the Blue Sky companies' claims for consequential damages and the counterclaim of the Balli Parties (which for this purpose included claims by other Blue Sky SPVs).
(7) He declared that Balli and Crypton were entitled to set off specified claims against the Mahan Parties' counterclaim of some US$58 million, but he stayed their counterclaim on account of their contempt of court, and held that they could apply to lift that stay only if they delivered aircraft 1, 2 and 3 in accordance with his order and paid the sums ordered to be paid by them and explained why they had not complied with the grounding orders before the aircraft were grounded by the Iranian CAA and had not since been able to obtain their release.
(8) He ordered the Mahan Parties to pay 90 per cent of the Balli Parties' costs of the trial, with a payment on account of some £290,000, and 85 per cent of PK's costs of the trial, with a payment on account of some £350,000, and the Balli Parties' and PK's costs of the contempt application on an indemnity basis.
The pending appeals
(1) Beatson J's finding that the Balli Parties owe them only US$57.8 million.
(2) His assessment of damages for conversion of the aircraft.
(3) His finding that Crypton was entitled to any set off against their counterclaim.
(4) His finding that the Option Agreement had ceased to exist.
(5) The order referred to at paragraph 14 above.
The present applications
The contentions of the parties
(1) They lack the means to comply with any substantial condition imposed pursuant to CPR 52.9(1)(c), or to provide more than (unquantified) "limited funds" as security for costs. Any substantial order made on the Balli Parties' and PK's applications would stifle their appeals, for which permission has been granted, would be wrong as a matter of domestic law and would infringe their rights under Article 6.
(2) The amounts of security for costs sought are excessive and disproportionate. In addition, they relate in part to costs already incurred.
(3) The orders sought under CPR 52.9(1)(c) may be made only if there is "a compelling reason to do so". That there is no such reason. Furthermore, the applications were not made promptly, and are no more than tactical manoeuvres designed to prevent the appeals being heard. As such, they are an abuse of the process.
(1) Dispute Mahan's evidence of its financial straits. They say that it is inconsistent with Mahan's acquisition of 7 additional aircraft after the Phase 2 trial, with the assistance of external funding, and with its claim, made in a press announcement in January 2011, that it had added new domestic and international routes to its network, and that its turnover and passenger numbers had increased.
(2) Assert that the Mahan Parties have failed to make full and frank disclosure of their financial position.
(3) Assert that Mahan's reliance on its dispute with EDBI causing its inability to deliver up the aircraft apparently grounded in Teheran is difficult to reconcile with the fact that there is no evidence that EDBI has commenced proceedings in Iran for the repayment of the moneys due to it.
(4) Point out that there is no evidence of any attempt by the Mahan Parties to raise any moneys from its shareholders or the joint board members referred to in its accounts.
(5) Contend that their estimates of their costs of responding to the Mahan Parties' appeals are reasonable, and submit that security for costs may and should be ordered in respect of costs already incurred as well as those to be incurred.
"… it was suggested in the course of oral submissions that Mahan does not have sufficient means to pay the sum which is likely to be assessed in Phase II. …. Putting aside … Mahan/FZE's submission in Phase II will be that the assessed sum should be nominal, Mahan does in fact have the means to pay."
"… EDBI have declared that they are willing to drop the complaint against Mahan, if the outstanding sums were settled or alternative security offered. … Mahan is willing in principle to meet EDBI's demands for alternative security for the loan, and thereby create the possibility of an application by EDBI to set aside the Court Order in the near future to releasing (sic) the Aircraft. All that is needed is some more time (I estimate 28 days from today) to finalise the details and then some time for EDBI to apply to the Court to have the recall Order removed. …. The CAO has declared that it is happy to comply with whatever is agreed and will allow the Aircraft to leave once the current Order is set aside."
"There is good evidence to suggest that the talks between the Mahan Parties and the EDBI are close to resolution and the Iranian Court Order can be lifted."
Despite these assurances, it appears that the Iranian Court Order has not been lifted. There is a lack of documentary evidence of the negotiations between Mahan and EDBI. None of the aircraft has been released; none has been flown to Schiphol as ordered by the judge; none has been delivered up to PK (or to the Balli Parties).
"The payment of approximately US$140,000,000 by way of damages would place a severe strain on Mahan Air finances, particularly as they are not able to use the Aircraft to generate revenue in the meantime."
This is very different from Mahan being unable to make that payment. Similarly, although as I understand it the Mahan Parties' present position is that they wish to pay damages for conversion of the aircraft if they are substantially less than their value (see their skeleton argument dated 24 January 2011 at paragraphs 109 and 110), in their solicitors' letter dated 20 April 2010 it was stated that they had "decided to return them (subject to any question of appeal against the Phase 1 and 2 judgments)".
"8. From 21st December 2009 when the Phase 1 judgment was handed down, the Mahan parties have consistently stated they would elect to keep the aircraft and pay damages in lieu of delivery up. The Phase 2 judgment made findings as to the value of the aircraft, by reference to which the Mahan defendants would have to pay damages if they did not return the aircraft. And when handing down the judgment, I gave the Mahan parties an extra seven days inter alia because leading counsel said that due to the Iranian new year the Mahan parties needed the extra time. Given their stance, I surmised that this was in order to get the money. There was a reference at the hearing as to whether banks were open or not."
22. It is impossible for Mahan at present to offer alternative cash security or pay the damages ordered by the Court to be paid (subject to appeal). The loans to the Balli owned companies involved have also not been repaid despite the services of loan termination notices in September 2010. It would appear that the Balli companies are seeking to retain an award of damages amounting to the full market value of the Aircraft but without repaying the loans.
23. Given the situation with the non-operation of the Aircraft and the non-payment of the loans made to the Balli companies, it is not possible at this time for Mahan to pay back the EDBI loans.
(6) Due to the matters set out above Mahan is unable to pay the substantial damages under appeal. Any costs orders which have been assessed and interim payment orders on account of costs have been paid. In particular the Mahan parties have paid £1,039,426.20 on account of the Balli parties' costs and £349,421.67 on account of PK's costs.
"Contrary to the accounting standards, some of the transactions during the year between the Company and the related parties have not been properly disclosed in the financial statements."
Clearly, this qualifies the reliability of those statements.
(1) The Mahan Parties' appeal against the orders made by the judge in favour of PK will be stayed unless within 21 days they pay into Court (or into an account in solicitors' names on terms agreed in writing between their solicitors) the sum of £100,000 a security for PK's costs.
(2) The Mahan Parties' appeals against the orders made by the judge in favour of the Balli Parties will be stayed unless within 21 days they pay into Court (or into an account in solicitors' names on terms agreed in writing between their solicitors) the sum of £250,000 as security for the Balli Parties' costs.
Lord Justice Gross: