The judgment of Nicholas Thompsell, sitting as a Deputy High Court Judge, in Hellard & Ors v OJSC Rossiysky Kredit Bank & Ors [2024] EWHC 1783 (Ch) deals with three questions raised by an application of the trustees in bankruptcy of Anatoly Leonidovich Motylev for directions under s 303(2) Insolvency Act 1986:
(1) Should the trustees treat certain Russian bank creditors as being caught by the sanctions imposed under the Russia (Sanctions) (EU Exit) Regulations 2019?
(2) If those creditors were caught by sanctions, was it lawful for the trustees to accept votes from them for the purposes of any creditors’ decision procedure and/or to allow them to take part in and vote at meetings of the creditors’ committee?
(3) Were the trustees, in undertaking their duties, providing financial services in breach of Regulation 18A of the 2019 Regulations?
The Russian bank creditors (the first to fourth respondents) did not appear. The Office for Financial Sanctions Implementation, the government body responsible for implementing and enforcing UK sanctions, although joined as fifth respondent, did not appear either, although the judge had regard to correspondence from it and its published guidance.
Under the 2019 Regulations and the Policing and Crime Act 2017 a person commits an offence if he/she does something that amounts to dealing with or directly or indirectly making available to a designated person “funds” or “economic benefits” owned, held or controlled by a designated person. Funds or economic benefits are treated as owned, held or controlled if they are owned, held or controlled by a person who is owned or controlled directly or indirectly within the meaning of reg 7. Reg 7 provides for two ways in which a person (not being an individual) can be said to be owned or controlled:
Reg 7(1) provides that a person who is not an individual (“C”) is “owned or controlled directly or indirectly” by another person (“P”) if either or both of two conditions is met:
The first (reg 7(2)) is that P (a) holds directly or indirectly more than 50% of the shares in C, (b) holds directly or indirectly more than 50% of the voting rights in C, or (c) holds the rights directly or indirectly to appoint or remove a majority of the board of directors of C.
The second (reg 7(4)) is that it is reasonable, having regard to all the circumstances, to expect that P would (if P chose to) be able, in most cases or in significant respects, by whatever means and whether directly or indirectly, to achieve the result that the affairs of C are conducted in accordance with P’s wishes.
Whilst the first condition is straightforward, the deputy judge found the second to be more complicated, as it requires the person applying it to have regard to all the circumstances and to make value judgments as to what it is “reasonable” to expect, and what is meant by “in most cases” and “in significant respects” (expressions used in the legislation); that, the judge held, required consideration, among other things, of the 2023 decision of the Court of Appeal in PJSC National Bank Trust and anor v Mints and ors and the decision of the Commercial Court in Litasco SA v Der Mond Oil & Gas Africa SA.
Having considered those, other authorities and government department guidance from the OFSI, and undertaken a detailed analysis of the evidence available, the deputy judge concluded that, in the case before him, there was insufficient evidence of ownership or control by a designated person, or that would lead to a reasonable suspicion thereof, thus disposing of the first question before him.
On the second issue he found difficulty in seeing why the legislature should have wished to prohibit the exercise of creditor voting rights in bankruptcy by designated persons:
“Unlike in the case of shareholder voting rights, such creditor voting cannot permit the designated person to access the underlying asset or its value: they remain locked within the bankruptcy until the Trustee decides to make a dividend or distribution. Moreover (and, again, unlike in the case of shareholder rights) such voting rights are to be exercised within the context of a statutory scheme under the supervision of an officer of the Court and – ultimately – the court itself.”
He also agreed with a submission on behalf of the trustees that prohibiting the exercise of creditor voting rights by creditors who were designated persons would be wrong as a matter of policy: the presence of a single sanctioned creditor would prevent the proper operation of statutory machinery designed to operate for the collective benefit of all creditors and in the public interest. He said,
“Where (as here) sanctioned creditors make up a majority of the creditor pool, there would be a serious risk of the bankruptcy developing contrary to the views of the majority creditor.”
He concluded that voting rights were neither funds nor economic benefits within the meaning of the Regulation, and accepting such votes did not involve dealing with funds or economic benefits.
On the third issue he held that the trustees, in undertaking their duties as trustees in bankruptcy, were not breaching the restrictions on carrying out financial services under the 2019 Regulations.
The deputy judge was careful to address the limits of the court’s jurisdiction under s 303(2) Insolvency Act 1986. He accepted that this was not a case where the trustees in bankruptcy were seeking to “offload commercial decisions to the court;” this was a case where the court’s guidance was genuinely needed (cf Re Longmeade Ltd). Nor did the power to be exercised in this case fall foul of the restriction identified in HMRC v Ariel (that the court could not usurp its power by modifying the general law). The application before the court in this case involved the court being asked to declare what the law (applied to the facts put before it) was, not to modify the law.
The deputy judge directed the trustees not to treat the Russian bank creditors as designated persons pending any change of circumstances, any notice or requirement from the OFSI, or any new guidance from the court (including as a result of any appeal to the Supreme Court in PJSC v Mints).