In Short
The Situation: As businesses continue to grapple with realising the value of business and assets which are potentially impacted by sanctions related to Russia's war in Ukraine, an English company recently utilised an insolvency process to seek court approval for a proposed divestment.
The Result: The English Court was prepared to give directions which would isolate the administrators from civil proceedings in respect of consummating the sale at a potential undervalue. However, the Court declined to make an order which protected the administrators from potential criminal liability for sanctions infringements.
Looking Ahead:Investors and insolvency officeholders and stakeholders alike should be aware that while realising value from assets which have become entangled with sanctions regimes is possible in the right circumstances, the only way to mitigate the risk associated with such transactions is through early and full engagement with the relevant regulators.
Re Petropavlovsk Plc [2022] EWHC 2097 (Ch) concerned Petropavlovsk Plc (in administration) (the "Company"), an English company which owned a series of gold mines in Russia. The imposition of economic sanctions following Russia's invasion of Ukraine in February 2022 made it increasingly difficult for the Company to meet its debt obligations, including as a result of a ban by the United Kingdom, the United States, Japan and Canada on the import of gold from Russia.
The Company's directors appointed administrators to deal with its assets. The administrators applied to the Court on an urgent basis seeking liberty to proceed with a sale of the Company's business and assets to UMMC-INVEST ("UMMC"), a substantial creditor of the Company.
Prior to the administrators' appointment, the Company's business and assets had been valued at between US$458–$621 million (the "Valuation"). However, largely as a result of the continuing effect of sanctions on the Company, the value of its assets was continuing to fall at the time of the application.
Neither the Company itself nor any of its directors were "designated persons" for the purposes of the applicable sanctions legislation, but concerns arose due to the Company's historic connections with sanctioned entities, as well as from the Company's principal business (gold mining) being subject to extensive international trade restrictions.
The UMMC Bid
UMMC is a Russian entity but was not itself a designated person or controlled by one. However, part of the UMMC offer included a credit bid against a US$200 million debt which it had acquired from Gazprombank (an entity caught by the sanctions regime). The proposed price was equivalent to US$619 million, effectively at a level that would provide a return to the Company's creditors, but none to its shareholders.
The administrators received a number of objections to the UMMC bid from the Company's shareholders, in part based on alleged connections between UMMC and Russian organized crime.
In advance of the administrators' appointment, the Company had contacted the UK Office of Financial Sanctions Implementation ("OFSI") to seek consent for the proposed sale, setting out the Company's view that the sale did not infringe any applicable sanctions but inviting the OFSI to make contact if it disagreed. The OFSI declined to opine on whether a licence was needed, deferring to the administrators' judgment on the matter and further noting that "the High Court is not the competent authority" to determine such matters.
The Court's Directions
The Court was prepared to approve the sale to UMMC. The decision was driven in large part because the administrators genuinely believed that proceeding with the sale was in the best interests of the Company. The proposed price was at the top end of the range put forward in an independent valuation, there was no obvious alternative option, and waiting to see if a better proposal came along risked enforcement action and insolvency proceedings being taken in Russia by creditors.
In considering whether the administrators had the necessary legal powers to proceed with the sale, the Court was also required to consider whether the proposed transaction was likely to infringe relevant sanctions legislation. The OFSI was not represented at the hearing and did not provide submissions to the Court. The administrators asked the Court to endorse their assessment that there was a low risk that the transaction would breach sanctions rules.
While on the facts the Court concluded that there was "no real doubt" the transaction was compliant with relevant laws, and so was willing to sanction the exercise of the administrators' powers, it also made it clear that it was unwilling to make an affirmative declaration that the transaction would not breach the relevant sanctions legislation. The Court concurred with the OFSI's view that "the Court should be reluctant to determine such points of criminal legislation unless it is necessary to do so, particularly in the absence of OFSI".
Accordingly, while the Court's direction would protect the administrators from being sued based on the actual steps for which directions are sought, it does not insulate the administrators from: (i) liability for mistakes made in the lead-up to the sale; (ii) liability for distributions and onward dealing with the sale proceeds; or, importantly (iii) criminal prosecution if the sale is found to have breached the sanctions (or other applicable) regimes.
Outlook
While the administrators secured the Court's approval for the exercise of their powers of sale, they did not secure protection against potential criminal liability. This presents a challenge for a stakeholder looking to dispose of or otherwise realise an asset with any proximity to a sanctions regime. A key implication of the judgment appears to be that the only way to eliminate this risk is to secure the permission (via a licence or otherwise) of relevant regulators well in advance of any proposed transaction.
However, in this case, securing a licence from the OFSI—even on an urgent basis—had the potential to jeopardise the sale and thus jeopardise the interests of the Company's creditors. It is clear that the courts will be extremely reluctant to determine points of criminal legislation unless it is necessary to do so, particularly in the absence of submissions from the OFSI. Early engagement with regulators therefore remains the only way to ensure protection from potential criminal sanctions.
Three Key Takeaways
- Where an asset has become distressed or encumbered as a result of applicable sanctions regimes, investors and insolvency officeholders should not automatically consider the value of those assets as "lost"; in the right circumstances, administration in England & Wales can act as a viable means of containing litigation risk and overcoming resistance to a proposed transaction.
- However, even with the protection of directions from the High Court, transacting parties remain exposed to criminal liability where there is a possibility (however slim) that the transaction in question infringes an applicable sanctions regime.
- In order to mitigate this risk, where there is any proximity to a sanctions regime, transacting parties should engage with the relevant bodies as early as possible with a view to securing a licence to proceed if appropriate.
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.
