On 1 August 2022, the English High Court granted the administrators of Petropavlovsk PLC (the “Company”) permission to enter into a sale of its Russian assets to Russian entity UMMC-Invest (the “Proposed Sale”) amidst sanctions concerns. The decision demonstrated that the English courts are reluctant to reach decisions that bind the Office of Financial Sanctions Implementation (OFSI) in cases where OFSI is not itself represented before the court, but may still find it appropriate to provide administrators with liberty to act where a sanctions risk is present.

Background

The Company is an English holding company owning a group of gold mining and exploration companies operating in Russia. Because of the international sanctions and restrictions applied against Russia following its invasion of Ukraine, the Company's business operations were significantly impaired and it subsequently entered administration. There was also uncertainty as to whether some of its Russian stakeholders were designated persons under the relevant UK sanctions legislation, the Russia (Sanction) (EU Exit) Regulations 2019 (as amended) (the “Regulations”). Although the Company and its directors were not considered to be designated persons under the Regulations and UMMC-Invest was not deemed to be a designated person or owned/controlled by one, the administrators recognised that sanctions may be relevant to the Company's ability to distribute the sale proceeds to stakeholders if some are designated persons (as the identity of all of its stakeholders remained uncertain). The High Court was asked to permit the administrators to enter into the Proposed Sale, giving appropriate directions under paragraph 63 of Schedule B1 of the Insolvency Act 1986, confirming that, as officers of the court, the administrators were not acting “dishonourably”. Although the administrators, advised by counsel, did not consider that it would breach any sanctions, they appreciated there was a risk in that regard.

Judgment

In its decision, the High Court applied one of the tests laid out in Public Trustee v Cooper  (which refers to trustees, but is also used for administrators), which is appropriate to apply in situations when there is no real doubt that the proposed course of action (in this case, the Proposed Sale) is a proper exercise of the trustees' powers, but where, due to the significance of the action, the trustees wish to obtain the blessing of the court before proceeding. 

The Court affirmed that there was nothing dishonourable in the Proposed Sale, and instead described the decision as “rational” and one that showed the administrators were discharging their duties by entering into a transaction they considered to be in the interests of the Company's creditors. Further, the Court expressed its view that the actions proposed by the administrators did not appear to breach the Regulations, and that the level of legal risk to the contrary was not such that it would be inappropriate for the administrators to enter into the Proposed Sale. Ultimately, the Court granted the requested permission to enter into the transaction.

The Court, however, was explicit in its intention not to bind OFSI through its declaration, stating that it would not be proper to make a decision that binds OFSI as to the correct construction of the Regulations in circumstances where the Court had not heard a full contrary argument, OFSI was not represented, and it was not necessary to make such a decision to give the administrators the relief they were seeking. The judgment also referred to the fact that the Company, through its solicitors, wrote to OFSI on numerous occasions (mostly without response) to notify OFSI first of the administration and later of the Proposed Sale, and to invite OFSI to inform the Company if it took the view that the transactions would breach the Regulations. The eventual response received from OFSI stated that the administrators should take their own view on whether a licence was required, and make any necessary application. The Court considered the possibility of withholding its declaration until the administrators applied for a licence to be sure of sanctions compliance (and until OFSI determined the application), but decided against this, noting the likely delay in OFSI determining the licence application and the likelihood of the business failing whilst waiting for the licence.

Key takeaways

The effect of sanctions -  Insolvency has become an increasingly common by-product of the current sanctions landscape. Regardless of whether entities and individuals themselves are subject to sanctions under the Regulations, the effect of the Regulations, particularly on businesses with a Russian nexus, is being seen to have a potentially paralysing effect. In this case, the effect of sanctions was twofold - it both crippled the Company's business commercially and caused legitimate concerns of breach in the administrators' attempts to find the best solution for the Company's stakeholders.

OFSI's role -  OFSI generally takes the view that  persons will need to form their own view, and not rely on requested guidance from OFSI, as to whether a licence is required vis-ŕ-vis the Regulations. This was the response received by the administrators from OFSI when they sought to engage with OFSI regarding whether the Proposed Sale was compliant with the Regulations. 

A matter of urgency - A prominent note throughout the judgment was the urgency of the matter due to circumstances surrounding the Proposed Sale. In other cases without such an urgent nature, the court may wish to hear from the shareholders, OFSI, and/or other relevant parties before deciding on the matter.

Femi Omisore, London trainee solicitor, contributed to the drafting of this alert.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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Mr Howard Morris
Morrison & Foerster LLP
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E-mail: mcervantes@mofo.com
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