Following the Russian invasion of Ukraine in February 2022, the UK government imposed broader and stricter financial and trade sanctions against Russian nationals and businesses “for the purposes of encouraging Russia to cease actions which destabilise Ukraine, or undermine or threaten the territorial integrity, sovereignty or independence of Ukraine”.[1]
The Russia (Sanctions) (EU Exit) Regulations 2019 and the Russia (Sanctions) (EU Exit) (Amendment) (No. 17) Regulations 2022 (“the Regulations”) contain a series of prohibitions and requirements applying to all individuals and companies in the UK and branches of UK companies operating overseas.
The impact of the Regulations is significant, particularly on UK companies which are fully or partially owned by Russian citizens or companies. Companies which are impacted by the Regulations can be left struggling to maintain business continuity, fulfill contractual obligations and satisfy their financial obligations. In this article, we look at the options available to the directors of companies impacted by the Regulations, and how the High Court is dealing with companies affected by the Russian sanctions.
1. Administration
In the case of Re CargoLogicAir Ltd (“CLAL”)[2], the sole director had no option but to apply to the High Court for an administration order after CLAL and its ultimate majority shareholder, Mr Alexey Isaykin, were subject to the full asset freezing sanctions imposed by the UK government. Mr Justice Green held that the administrators should take immediate control of CLAL which, despite being balance sheet solvent, was unable to pay any of its debts rendering it cash flow insolvent. CLAL faced a number of issues as a result of the sanctions:
(i) Citibank, CLAL’s bankers, were intending to close CLAL’s only operational bank account at the end of November 2022, even though it held a balance of over £13 million. From this point, CLAL would have no operational bank account, would not have access to its funds, and could not pay its creditors (including its employees) who were owed £2 million as a result of payments not being processed by Citibank.
(ii) CLAL no longer had access to its cargo aircraft. CLAL leased two aircraft but both leases were terminated after the aircraft were made subject to an operating ban, causing the company to cease to trade. CLAL also required an Air Operator Certificate, a Route Licence and Operating Licence to run its cargo airline business. As a result of the sanctions, there was a risk that the UK Civil Aviation Authority would suspend or revoke CLAL’s licences meaning CLAL would not be able to operate even if they were able to lease other aircraft.
(iii) The sanctions prevented CLAL from transferring ownership and control from the parent majority shareholder to preserve the business. The UK Office of Financial Sanctions Implementation (OFSI) refused to grant a licence which would allow the business to be transferred to a UK-based employee-owned trust. This meant that CLAL could not be rescued as a going concern without exploring insolvency procedures.
(iv) The parent company’s accounts had not been signed off by its auditors resulting in Companies House commencing mandatory strike-off action.
These are just some examples of how sanctions can impact the ownership and operation of a business. As a result of these issues, the director had limited options but to explore administration and insolvency procedures. To make the order for administration, the Court had to be satisfied that CLAL was unable to pay its debts and one of the following prescribed objectives of administration was possible:
a) The administrators could rescue CLAL as a going concern;
b) By entering into administration, CLAL’s creditors would achieve a better result on the whole than if CLAL was wound up; or
c) The administrators could realise property to make a distribution to one or more preferential creditors.
The OFSI had already refused the licence required to sell the business of CLAL as a going concern; however, as a result of the administrators’ broad powers to manage the affairs of CLAL, the Court agreed it was likely to be possible to engage the services of other commercial banks, realise CLAL’s assets and make a distribution to creditors. All parties agreed this was preferable to the disorderly wind-down that would inevitably occur with no intervention.
Mr Justice Green referred to his earlier decision in Re Sherbank CIB[3], where he praised the role of insolvency practitioners stating that, “there is a positive reason for putting companies such as these into administration, namely that independent, experienced insolvency practitioners will take control of the Company and ensure an orderly winddown of the business whilst respecting the sanctions and not making any distribution to the Company’s shareholders directly or otherwise”.
Whilst the director of CLAL rightfully decided that an application for an order of administration was in the company’s best interests, there are other options available to companies that are impacted by the sanctions.
2. Schemes of Arrangement
In Re VEON Holdings BV (“VHB”)[4], the Court sanctioned a scheme of arrangement which would enable VHB to extend the maturity dates of a series of notes by 8 months to allow completion of a management buyout of a Russian subsidiary. VHB was an intermediate holding company acting as the treasury company in a group. VHB had raised finance through a series of notes, of which 60% in value were held through the national settlement deposit (NSD) of the Russian Federation.
Unsurprisingly, the NSD was sanctioned in its entirety, including its clearing systems, which meant that, on maturity of the notes, VHB risked being unable to access 60% of the unpaid cash. In addition, VimpleCom (a Russian subsidiary company within VHB’s group) was subject to a Presential Decree in Russia requiring VimpleCom to fulfil obligations owed to Russian bond holders. This risked double payment, as it was not clear whether this would discharge the payment obligations or be recognised by the NSD clearing systems. Further, as a result of the sanctions on VimpleCom, VHB was not able to raise further finance on the international capital markets.
VHB therefore agreed to a management buyout of VimpleCom’s entire share capital. The buyout, along with the scheme of arrangement to extend the notes’ maturity dates, would remove the risk of double payment and reopen international capital markets. Thus, this is an example of a case where insolvency was not a factor, but where the Court recognised that a scheme of arrangement was required to deal with the difficulties caused by sanctions.
Conclusion
Ultimately, the High Court views favourably restructuring and insolvency proposals which are proportionate and reasonable in the circumstances. Applicants are praised if they apply with a considered, well thought-out, and organised plan of action for dealing with companies which face unprecedented difficulties as a result of sanctions.
If you are unclear about how the Regulations impact your business, and would benefit from advice on insolvency and restructuring generally, please contact John Harvey by email on john.harvey@laytons.com.
[1] Russia sanctions: guidance - GOV.UK (www.gov.uk)
[2] [2022] EWHC 3316 (Ch)
[3] [2022] EWHC 1059 (Ch)
[4] [2023] 1 WLUK 336 (Ch)
