The UK is one of many countries which have introduced extensive sanctions against Russia, its individuals and entities in light of the military action in Ukraine which began on 24 February 2022. The application of the sanctions is generally limited to the territory of the UK and the conduct of UK persons (as defined) inside or outside the UK, but their practical effect is nevertheless wide-ranging.
An area where the UK sanctions regime may have significant impact, but which is not often discussed, is the effect on proceedings in the English court involving sanctioned Russian parties. Whilst UK sanctions generally do not restrict court proceedings against Russian individuals or entities subject to sanctions, the effect of the overall sanctions regime means that pursuing such claims may involve practical difficulties, such as delays to the proceedings or issues with enforcement. Those who wish to pursue claims against sanctioned Russian persons in the English courts therefore need to understand how to navigate the relevant sanctions in order not to be caught off-guard by such difficulties.
Background to the sanctions regime
The sanctions regime imposed in response to Russia's invasion of Ukraine comprises mainly the Sanctions and Anti-Money Laundering Act 2018 (which provides for sanctions regulations to be made, and sets out some relevant definitions) and the Russia (Sanctions) (EU Exit) Regulations 2019, as amended (the "Regulations", which impose the relevant sanctions). An extensive and wide-ranging array of sanctions have been introduced by the Regulations, but the type most relevant to English court proceedings is the targeted freezing of assets.
In essence, the asset freezes restrict access to funds and economic resources of persons (whether individuals or entities) designated pursuant to the Regulations. On their designation, such persons are added to the Consolidated List of Financial Sanctions Targets maintained by the Office of Financial Sanctions Implementation ("OFSI"). Those on the list are known as "Designated Persons" and are primary targets of the freezes. However, importantly, the asset freeze restrictions also extend to entities owned or controlled, directly or indirectly, by a Designated Person. The test for "owned or controlled" is whether the Designated Person:
- holds, directly or indirectly, more than 50% of the other entity's shares;
- holds, directly or indirectly, more than 50% of the other entity's voting rights;
- has the right, directly or directly, to appoint/remove a majority of the other entity's board; or
- can reasonably be expected, having regard to all the circumstances, in most cases or in significant respects, by whatever means and whether directly or indirectly, to be able to achieve the result that the affairs of the other entity conducted in accordance with their wishes.
Further provisions relevant to the interpretation of these tests are set out in a Schedule to the Regulations, and there is some further clarification in OFSI's guidance.
References in this post to restrictions applying to Designated Persons should be taken also to apply to entities owned or controlled (within the meaning of the Regulations) by Designated Persons.
There are two key limbs to the asset freeze: (a) the Designated Person's funds and economic resources are 'frozen' (that is, there can be no use of or dealing with them of any kind), and (b) no funds or economic resources may be made available to, or for the benefit of, the Designated Person.
It is also worth noting that the asset freeze restrictions are subject to certain listed exceptions, and to the possibility that acts which would otherwise breach the restrictions may be licensed by OFSI. The grounds on which specific licences may be granted are set out in the Regulations.
A general description of the financial sanctions regime adopted in the UK (including a summary of exceptions and licensing grounds) is available in OFSI's General Guidance.
Potential difficulties arising from asset freeze restrictions
The asset freeze restrictions are very wide and, among other things, prevent a Designated Person from accessing funds, without a licence, to make payments related to court proceedings, including legal fees, court fees and amounts payable under court orders. The difficulties arising out of each of these restrictions are explored further below.
This list of practical difficulties is not, however, exhaustive. As the cases against Russian sanctioned parties continue to unfold, it is to be expected that the parties and the courts will have to deal with an increasing number of procedural issues arising out of the sanctions regime. Claimants should therefore consider the sanctions position and take into account the relevant risks when considering any proceedings against Designated Persons in the English courts.
Legal representation
First of all, it is important to note that the UK sanctions do not prohibit Designated Persons from being legally represented. Law firms can therefore accept instructions from, and provide legal advice to, sanctioned persons. However, because of the asset freeze, those acting for Designated Persons in the UK will not be able to accept payment for legal services unless licensed to do so.
The receipt of reasonable legal fees may be authorised by OFSI and for these purposes the Designated Person and/or the law firm may apply for a licence. However, until a licence is obtained, the restriction may cause delays in legal proceedings where a Designated Person's lawyers cannot be paid and therefore seek to come off the court record as the Designated Person's legal representatives. In a recent decision by the British Virgin Islands Commercial Court, VTB Bank v Taruta [2022] ECSCJ No 85, subsequently cited in AO Alfa-Bank v Kipford Ventures Ltd, the court refused to allow a Designated Person's lawyers to come off the record, at least until they had applied for a licence and the application had been determined. It remains to be seen whether the English courts will take a similar approach, or will be more willing to grant an application to come off the record in such circumstances.
OFSI indicated at a recent webinar that they are considering whether a General Licence might be issued (or some similar mechanism employed) to enable reasonable legal fees to be paid without individual licence applications being necessary. This would reduce delays, facilitate access to justice, and would be very welcome. Pending any such solution, however, licence applications will continue to be required and (unless urgency can be established) may take months to resolve. (In respect of a small number of significant designations, notably certain UK, Guernsey and EU subsidiaries of designated Russian banks, General Licences have been issued which permit, inter alia, the use of frozen funds to pay reasonable legal fees and expenses.)
Where a Designated Person's lawyers do come off the court record, what will the impact on the proceedings be? The general direction of case law in recent years has been such as to suggest that a party's lack of representation is not a reason for judicial sympathy towards that party's failure to comply with applicable rules and deadlines. This is, for example, encapsulated by the statement from the Supreme Court in Barton v Wright Hassall LLP [2018] UKSC 12 that a lack of representation "would not usually warrant applying a lower standard of compliance with the rules or court orders, unless the relevant rules were particularly inaccessible or obscure".
However, the recent High Court decision in Navigator Equities Ltd v Deripaska [2022] EWHC 1637 (Comm) considered specifically a situation where the defendant sought to adjourn a trial when his counsel team resigned a short time before trial due to their inability to get paid as a result of the UK sanctions. In this case, the court concluded that there should be an adjournment so that the defendant's new legal team (which had agreed in principle to act and for whom a licence application had already been made) could be instructed and prepare a defence.
In Deripaska, the court emphasised the need for a fair trial and that an adjournment should generally be granted regardless of inconvenience where a fair trial would not otherwise be possible. In assessing whether the adjournment was required for a fair trial, the court considered various factors which included: (i) the complexity of the case; (ii) the severity of the potential consequences of the case's outcome (which were, in this case involving a contempt application, particularly severe); (iii) the length of the consequential delay; and (iv) the fact that Mr Deripaska had found alternative legal representation who had applied for an OFSI licence.
In another recent decision, Maroil Trading Inc v Cally Shipholdings Inc [2022] EWHC 1201 (Comm), the court has adopted a similar approach and vacated a nine-week trial against the subsidiary of a sanctioned Russian shipping company, Sovcomflot. Similarly to Deripaska, the defendants' solicitors applied to come off the record because the sanctions made it unlawful for them to receive payment of their outstanding fees. The defendants applied for a licence, but it was expected that it would take at least four to six weeks to obtain it. The court held that, in the circumstances, "there could be no realistic prospect of the defendants being able to participate in a fair trial" in accordance with the existing timetable, and so vacated the trial.
Both cases show that, although a lot would depend on the circumstances of each case, the courts are prepared to make some concessions for Designated Persons who struggle to be legally represented due to the effect of the asset freeze restrictions, where this would be necessary for a fair trial. Proceedings against Designated Persons may in this way be delayed. It is, however, likely that the courts will be less sympathetic to Designated Persons if their procedural applications based on the sanctions would cause, in the words of the court in Deripaska case, "a complete derailment" of the process.
Court fees and payments into court
The payment of court fees or payment of funds into court (including payments for security for costs) by a Designated Person, is also restricted by the asset freeze and is generally not possible without a licence. This is because such a payment would involve a 'dealing' in the Designated Person's frozen funds.
OFSI's guidance envisages that both court fees and payments into court can be licenced under the "reasonable legal fees" licensing ground. Whilst there is nothing suggesting that a Designated Person cannot themselves apply for the required licence, it is clear from OFSI's guidance that it is the Designated Person's lawyers who are seen as the most appropriate applicant. One would therefore expect the lawyers to apply both for payment of their fees and payment of necessary disbursements – but, as noted above, a licence may take some time to be granted, and this may therefore have an impact on the procedural timeframe.
One question which might then be asked is whether someone other than the Designated Person could fund the payment of the court fees. For example, could the Designated Person's lawyers pay the fees up-front and, after a licence is granted, invoice these to the Designated Person as a disbursement? In this scenario, the initial payment to the Court would not involve a use of the Designated Person's frozen funds. There is a concern, however, that it could amount to a making available of funds for the benefit of the Designated Person (thereby contravening the second limb of the asset freeze).
Regulation 13 of the Regulations prohibits the making available of funds to any person for the benefit of a designated person, and provides that funds are made available in this way "only if [the designated person] thereby obtains, or is able to obtain, a significant financial benefit" (emphasis added). "Financial benefit" is defined as including the discharge (or partial discharge) of a financial obligation for which the designated person is wholly or partly responsible. The risk therefore is that the payment of the court fee – if significant – could involve a prohibited discharge by the lawyer (or any other paying party) of the Designated Person's financial obligation. This appears to be the way in which OFSI has analysed the position, as their Guidance suggests that "[c]ourt fees which will be invoiced to a designated person client as a disbursement can be paid without a licence only if they are not 'significant'. Whether a court fee is 'significant' is to be considered on the facts."
There is no further guidance from OFSI on what fees will be considered "significant".
Enforcement of court judgments
Another major difficulty that parties may face in proceeding against Designated Persons is the ability to enforce money judgments. Subject to licensing, the UK asset freeze would restrict enforcement against the assets of the Designated Persons in the UK and would prevent a UK person from receiving the assets of a Designated Person.
Schedule 5 to the Regulations sets out the grounds on which OFSI may grant specific licences. These include the possibility of obtaining a licence to enable the use of a Designated Person's frozen assets to satisfy a "pre-existing judicial decision" (that is, a judicial, administrative or arbitral decision or lien, granted prior to the person's designation, where the frozen assets are the subject of the decision or lien). However, this ground will not apply, and there is no equivalent licensing ground, in circumstances where a judicial decision is obtained after the date of designation. In other words, if proceedings are on foot against a person who becomes designated before judgment is obtained, it seems it would not be possible to utilise this licensing ground to obtain a licence to enforce the judgment against the assets of the defendant in the UK / in favour of the UK person. An alternative licensing group would therefore need to be established. (Curiously, the parallel EU provisions, on which the UK post-Brexit sanctions were based, do permit licences to be granted to enable frozen funds to be used to satisfy pre or post designation judgments; see for example Article 5(1)(a) of Regulation (EU) No 269/2014.)
There is, however, nothing in the UK sanctions regime precluding parties who are not required to comply with UK sanctions (ie non-UK persons in respect of activity involving no UK nexus) from enforcing an English court judgment against a Designated Person's assets outside the UK. Judgment creditors should however be mindful of the sanctions introduced by other jurisdictions, including the EU and the US, which may have similar restrictions on enforcement and, even if they are non-UK companies, of the position of their officers and employees – who, if they are British citizens, would be required to comply with UK sanctions. (The full definition is found in SAMLA. Note also that broadly equivalent sanctions apply in the British Overseas Territories (with certain modifications), pursuant to the Russia (Sanctions) (Overseas Territories) Order 2020.)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
