The decision considers the concept of "prior obligations" in sanctions regulations, the relevance of EU sanctions in interpreting UK sanctions, and the scope of the "reasonable belief" defence under s.44 SAMLA
The High Court has dismissed an application to set aside a statutory demand brought by a tenant who believed it was unlawful to pay rent to their landlord, who was a designated person under the Russia (Sanctions) (EU Exit) Regulations 2019 (UK Regulations), finding that the tenant's rent payments fell within the exception under regulation 58(5): Chanana v Khan [2025] EWHC 1472.
While regulations 12 and 13 prohibit the making available of funds to a designated person or for the benefit of a designated person, the court found that the rent payment fell within the exemption to this general prohibition, because the tenant's obligation arose before the landlord's designation, as it was created by the lease.
The decision will be of broader interest to financial services firms navigating payment issues relating to sanctioned entities. It clarifies that, under regulation 58(5), an obligation under a contract entered into before designation remains a pre-designation obligation, even if the payment dates fall after the person becomes designated. As a result, payments made in discharge of such obligations are not prohibited and do not require a licence from the Office of Financial Sanctions Implementation (OFSI), provided the funds are credited to a frozen account held or controlled by the designated person at a UK credit or financial institution.
The decision also highlights the scope of the "reasonable belief" defence under s.44 of the Sanctions and Money Laundering Act 2018 (SAMLA). Following obiter comments in Celestial Aviation Services Ltd v Unicredit Bank GmbH, London Branch [2024] EWCA Civ 628 (see our blog post), the court confirmed that s.44 SAMLA provides protection for acts or omissions done in the reasonable belief that they are in compliance with sanctions regulations, which ensures that a person is not pressurised into doing something that risks breaching sanctions by a fear of being exposed to civil proceedings – it does not protect against pre-existing liabilities. In the court's judgment, while s.44 SAMLA could provide protection against insolvency proceedings based on a failure to pay a debt, it did not automatically extend to the statutory demand process (which do not amount to civil proceedings). Nonetheless, to mitigate the risk of adverse consequences from a reasonable (but mistaken) belief about the effect of sanctions, the court exercised its discretion to allow the debtor an additional 21 days to make the required payment to a frozen account in the name of the landlord before a bankruptcy petition could be presented (thereby providing protection in accordance with s.44 SAMLA).
We consider the decision in more detail below.
Background
In 2021, a landlord and tenant entered into a fixed term tenancy agreement with monthly rent payments for a London property. In 2022, the landlord was designated under the UK Regulations. The tenant believed (on the advice of his solicitors) that it was unlawful to pay rent to the landlord and defaulted on his monthly payments. The landlord issued a statutory demand for unpaid rent and interest totalling over £850,000 from October 2022 to April 2024.
The tenant applied to the court to set aside the application, arguing that: (i) he was prohibited from making payments to the landlord due to her designation under the UK Regulations; (ii) even if not prohibited, he reasonably believed he was prohibited and under s.44 SAMLA was excused from payment, therefore the demand should be set aside, because he could not be liable to any civil proceedings related to his failure to pay; and (iii) part of the demanded sum was held by his solicitors, subject to an undertaking to pay the landlord's solicitors upon receiving a permission from OFSI or a suitable court order, thus securing his payment obligation. By the time of the hearing, OFSI had confirmed in correspondence that it would not issue a licence as it did not consider the payment would otherwise be in breach of the UK Regulations.
Decision
The court dismissed the tenant's application, but ordered that no bankruptcy petition should be presented for at least 21 days (enabling the tenant to make payment and avoid bankruptcy, thereby providing protection in accordance with s.44 SAMLA).
The key issues which will be of interest to financial institutions are set out below.
Prohibition and exception under the UK Regulations
As its starting point, the court considered whether there were any prohibitions and exemptions under the UK Regulations.
The court acknowledged that regulations 12 and 13 prohibit the making available of funds to a designated person or for the benefit of a designated person. However, there are exceptions to these prohibitions: (i) where OFSI has granted a licence; or (ii) in certain defined circumstances, set out in the UK Regulations.
As to the latter, the court noted that regulation 58(5) contained an automatic exception potentially relevant for the present proceedings, which states:
"The prohibitions in regulations 12 and 13 are not contravened by the transfer of funds to a relevant institution for crediting to an account held or controlled (directly or indirectly) by a designated person, where those funds are transferred in discharge (or partial discharge) of an obligation which arose before the date on which the person became a designated person."
The key question for the court was therefore whether the rent payment due under the lease – made before the landlord's designation – constituted a discharge of a pre-designation obligation, given that the sums only fell due for payment after the designation.
There was no prior authority on this point. The court acknowledged that in Thomas & Others v PJSC National Bank Trust [2025] EWHC 75 the regulation 58(5) exemption was held to apply to the payment of a dividend in bankruptcy to a Russian bank. However, in that case both the original payment obligations and the bankruptcy order pre-dated the earliest possible date of designation – ie it was clear that there was a "prior obligation". Thomas was not therefore of any assistance in respect of the present issue. The court was also not persuaded that there was a similarity between the nature of the obligation arising on the making of a bankruptcy order, and the nature of the payment obligation arising on entry into a lease.
The court found that the tenant's rent payment fell within the exception under regulation 58(5), due to the following reasons:
- There were no good or compelling reasons for it to not construe regulation 58(5) consistently with its predecessor, Article 7(2)(b) of the EU Regulation 269/2014 (EU Regulation). The court acknowledged there was a difference in the language of the UK and EU exemptions. Specifically, the UK Regulations refer to the discharge of an obligation which arose before designation, whereas the EU Regulation refers to "payments due under contracts, agreements or obligations that were concluded or arose before the date" of designation. However, the court referred to the Court of Appeal's decision in NBT v Mints [2023] EWCA Civ 1132 (see our blog post), which confirmed that the UK Regulations were intended to continue the EU sanctions regime in relation to Russia in place before Brexit without any substantive change. In the court's view both exemptions were essentially intended to allow for payments in discharge of pre-designation obligations.
- The tenant's obligation arose before the landlord's designation, as it was created by the lease. The court interpreted regulation 58(5) to mean that the payment obligation either arose when the contract was made, even if prospective or contingent at that time, or that it was the date of the contractual source of the obligation that was material.
- This conclusion aligned, in the court's view, with the OFSI Guidance (Financial Sanctions General Guidance) at paragraph 6.1, which states: "Asset freezing legislation permits without a licence...a person to transfer funds to a relevant institution for crediting a frozen account where those funds are transferred in discharge (or partial discharge) of obligations that were concluded or arose before the date the person became a designated person". The court highlighted that this refers to obligations that were concluded or arose before designation and which could be broadly construed to encompass "contracts".
The implications for banks of the decision on the exception include:
- For a UK bank receiving payments from a non-sanctioned party to an account held by the bank for a UK designated person, the position remains that the payment can be credited to the frozen account. This is because a separate exception in regulation 58(4) permits a bank to "credit [...] a frozen account where it receives funds transferred to that institution for crediting to that account". The conclusions in this case would principally impact whether the payer (if subject to UK sanctions) should be viewed as having breached sanctions, rather than the position of the bank (save in relation to breach reporting).
- For UK banks which have a pre-sanctions proprietary obligation to a UK designated person, the case would in principle be relevant to whether that obligation could be satisfied by payment into a frozen account (potentially at a third party UK institution). It is however important to note that the regulation 58(5) exception is an exception from the "making available" prohibition and not the "dealing" prohibition, so any "funds" already held by the bank for the designated person must remain frozen.
- Perhaps of more practical import, the judgment may also be relevant to the interpretation of the "prior obligations" licensing ground in Schedule 5 paragraph 8 of the UK Regulations. This provision permits a licence to be issued to enable the use of a designated person's frozen funds or economic resources to satisfy an obligation of that person which arose prior to the date of their designation (and providing no payments are made to another designated person). In other words, by contrast to this case which considers a payment to a designated person, a licence could enable the discharge of a pre-sanctions debt by a designated person. It is generally helpful for licensing grounds to be interpreted as broadly as possible, and it appears that there would be scope for the court's reasoning to be "read across".
- More generally, the court's analysis of the relationship between the EU and UK position is of particular interest. On one view, the choice of different words to those used in the predecessor EU legislation might have been thought to be a deliberate legislative choice – suggesting a narrower UK scope for the exception as compared to its EU equivalent. As noted above, however, the court followed the approach in Mints: "the differences are to be explained as putting the same thing differently". The court also stated that Mints was not confined to the particular features of the UK Regulations in issue in that case, because its conclusion was broad and essentially unqualified. This will therefore be of relevance to the interpretation of other UK sanctions provisions where there is a predecessor EU provision.
Reasonable belief and s.44 SAMLA
Next, the court considered whether the tenant had a "reasonable belief" defence under s. 44 SAMLA.
Drawing upon Celestial, the court highlighted that s.44 SAMLA: (i) is concerned with protecting against a liability which is created as a result of something done or not done in the reasonable belief that it is in compliance with a UK sanctions regulation; and (ii) aims to ensure that a person is not pressurised into doing something that risks breaching UK sanctions by a fear of being exposed to civil proceedings.
In the court's judgment, s. 44 SAMLA could provide protection against insolvency proceedings based on a failure to pay a debt. However, the tenant's reasonable belief that he was acting in accordance with the UK Regulations did not automatically mean that the demand should be set aside. The service of a statutory demand is not the start of civil proceedings (per the second limb of the s. 44 SAMLA test above). It is a prelude, allowing the creditor to establish the inability of the debtor to pay the debt (and subsequently present a bankruptcy petition if the debt is not paid).
Additionally, the court highlighted that under the relevant insolvency rules (rules 10.5(5)(d) and (8) of the Insolvency (England and Wales) Rules 2016):
- If the court was to dismiss the application to set aside, the court would be obliged to make an order authorising the presentation of a bankruptcy petition either as soon as reasonably practicable or on a specified date.
- Were it not for that power, a refusal to set aside the statutory demand would immediately expose a debtor to proceedings in which the debtor's inability to pay the debt was established by the failure to meet the demand.
- The debtor ought to be protected by the provisions of s.44 SAMLA where they have been deprived of a period to pay the sum demanded by virtue of justified non-payment.
Turning to the facts of the present case, the court found that it was arguable that the tenant's failure to pay was due to a reasonable belief that payment would breach sanctions. This belief was supported by the fact that the tenant had apparently received legal advice on the differences between the language of regulation 58 and the EU Regulation (albeit this was not disclosed). In relation to the objective reasonableness of the belief, the fact that the language of regulation 58(5) was different from that of the EU Regulation was enough to comprise reasonable grounds.
The court's approach of considering whether there were "at least some grounds which were not unreasonable" is helpful. The High Court in the Celestial case had set what appeared to be a very high bar to establishing a reasonable belief before this was overturned in the Court of Appeal. Both the Court of Appeal in Celestial and the High Court in Chanana adopt a more pragmatic reading of reasonableness, in the context of the uncertainties created by the sanctions legislation.
The protection under s.44 SAMLA against the adverse consequences of that failure could be provided by ordering that no bankruptcy petition be presented for 21 days (the period which would otherwise have been available for payment). This would enable the tenant to make payment and avoid bankruptcy.
Security for debt
Finally, the court found that the tenant's arrangements with his solicitors did not create any security, as they were unilateral and not agreed upon by the landlord. Further, they had no proprietary consequences and were not intended to have any, pending the specified contingencies (which is unsurprising, given the sanctions position). As to those contingencies, there was no prospect of a licence being provided as OFSI had confirmed that they did not provide licences unless they considered that the act would otherwise be a breach, which was not the case here.
Accordingly, the court dismissed the tenant's application. However, the court ordered that no bankruptcy petition should be presented for at least 21 days.
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.
