Re Sova Capital Ltd  EWHC 452 (Ch) sale of assets, sanctions
03 / 03 / 2023
Miles J’s judgment in Re Sova Capital Ltd  EWHC 452 (Ch) will, like that of Jonathan Hilliard QC in Re Petropavlovsk Plc,be welcomed as a further example of the courts acting to assist insolvency practitioners selling assets in unusual circumstances.
Sova Capital Ltd was an FCA authorised and regulated broker. Before it went into special administration it had provided investment brokerage services to institutional and corporate clients, mostly trading in the Russian market. The joint special administrators sought a direction under para 63 of Sch B1 Insolvency Act 1986 (applied to the special administration regime by reg 15(4)(a) of the Investment Bank Special Administration Regulations 2011) that they be at liberty to enter into two transactions for the sale of the assets and liabilities of Sova to LCC Holding Company Dominanta. Dominanta was one of the largest unsecured creditors of Sova with an admitted claim of some £233 million. The joint special administrators had agreed this deal because it was the best way of realising Sova’s Russian securities which were effectively trapped as a result of Sova’s inability to trade on the Moscow Stock Exchange. As part of the deal Dominanta’s claim against Sova would be waived together with any claim to a dividend. That proposed course of action was opposed by Boris Zilbermints, a creditor of Sova for some £19.9 million, who was part of a consortium which also wanted to acquire the same Russian securities. His objections were on the grounds that the proposed deal infringed fundamental principles of insolvency law and public policy and on the basis of value.
When the administration order was made, Leech J had indicated that in the event that any sanctions-related issue arose in the administration, the administrators could and should return to court for directions. Completion of the transactions potentially gave rise to such issues.
The first questions for the court were whether the joint special administrators had surrendered their discretion to the court and whether it was appropriate in principle for them to seek the court’s approval of the transactions. The judge drew on Robert Walker J’s judgment set out by Hart J in The Public Trustee v Cooper on the position (which was also considered and applied in the Petropavlovsk case) which framed the issues as being:
“whether the proposed course of action is a proper exercise of the trustees’ powers where there is no real doubt as to the nature of the trustees’ powers and the trustees have decided how they want to exercise them but, because the decision is particularly momentous, the trustees wish to obtain the blessing of the court for the action on which they have resolved and which is within their powers.”
He referred to David Richards J’s approval in Re MF Global UK Ltd (No 5) of a passage from Lewin on Trusts:
“The court’s function where there is no surrender of discretion is a limited one. It is concerned to see that the proposed exercise of the trustees’ powers is lawful and within the power and that it does not infringe the trustees’ duty to act as ordinary, reasonable and prudent trustees might act, ignoring irrelevant, improper or irrational factors; but it requires only to be satisfied that the trustees can properly form the view that the proposed transaction is for the benefit of beneficiaries or the trust estate and that they have in fact formed that view. In other words, once it appears that the proposed exercise is within the terms of the power, the court is concerned with limits of rationality and honesty; it does not withhold approval merely because it would not itself have exercised the power in the way proposed. The court, however, acts with caution, because the result of giving approval is that the beneficiaries will be unable thereafter to complain that the exercise is a breach of trust or even to set it aside as flawed; they are unlikely to have the same advantages of cross-examination or disclosure of the trustees’ deliberations as they would have in such proceedings. If the court is left in doubt on the evidence as to the propriety of the trustees’ proposal it will withhold its approval (though doing so will not be the same thing as prohibiting the exercise proposed). Hence it seems that, as is true when they surrender their discretion, they must put before the court all relevant considerations supported by evidence. In our view that will include a disclosure of their reasons, though otherwise they are not obliged to make such disclosure, since the reasons will necessarily be material to the court’s assessment of the proposed exercise.”
He also noted that David Richards J had said:
“In commercial matters, administrators are generally expected to exercise their own judgment rather than to rely on the approval or endorsement of then court to their proposed course of action: see In re T&D Industries plc […] While the compromise of claims raising difficult legal issues may not be on all fours with a purely business decision, administrators commonly exercise the powers of compromise without recourse to the court and in general apply to the court for directions only if there are particular reasons for doing so: see In re Lehman Brothers International Europe.”
As to the case before him, Miles J found that the administrators had already decided to exercise their discretion in a specific way by entering the transaction. “They have not thrown the decision onto the court on the footing that they cannot decide how to act. They are sure that the Transaction is the right course (but have structured it as dependent on obtaining approval). The[y] have decided that they have the power to commit Sova to enter into the [agreements] and in the circumstances, the Transaction is the appropriate way of discharging their duties and functions.”
He thought that was a proper course for them to take, deciding the issue in their favour.
He moved next to the question whether the administrators’ decision to commit Sova to the transaction was within their statutory powers and/or whether it complied with the principles of insolvency law.
Again he came down on the side of the administrators, rejecting submission made on behalf of Mr Zilbermints. He made the following (among other) points:
(a) The administrators’ power to dispose of company property was broad enough to cover a transaction whereby a creditor waived its claim against the company.
(b) In exercising such power an administrator is required to act reasonably to obtain the best price in the circumstances. “It is only if the administrator genuinely and rationally believes proper value is being obtained that the power is exercisable.”
(c) The pari passu principle did not necessarily apply to a sale by an office-holder (Guy v Churchill), which was not the same thing as a distribution. “The principle is concerned with equality of distribution and does not apply to sales of assets. Of course if a distribution is dressed up as a sale and in reality is a distribution the rule would apply. But…I do not think there is any basis for saying that the Transaction is a disguised distribution.”
(d) It was necessary to distinguish Dominanta’s position as creditor from its position as buyer: it was to receive the assets as a buyer and would (to the agreed extent) cease to be a creditor, but “It will not be receiving anything qua creditor (for such part of its claim as is waived) and will therefore not receive a distribution.”
(e) The value of the assets to Dominanta was less important than their value to Sova. The administrators “are and can only be interested in the realisable value of the Russian Securities by Sova. Of course the fact that a Russian bidder may stand to make a profit is a factor the JSAs have to take into account when seeking to negotiate a sale and when assessing the commercial appeal of any given bid. There are starkly asymmetrical values for non-Russian and Russian owners of Russian securities. But these arise from the various legal restrictions (Western and Russian) and not from any action or choice of the JSAs. They are a feature of the world in which the JSAs are having to operate. I agree with the JSAs that it is simply unreal to suggest that Sova would be able to realise anything like the Nominal Value of the Russian Securities.”
For these and other reasons he held that the transaction did not infringe the statutory scheme. There could be no real doubt about the powers of the administrators to enter the transaction.
The final question was whether that decision was rational and honest.
The position of the joint administrators was that they were in a difficult predicament and that various restrictions constrained their ability to obtain anything like the nominal value of the assets they were selling. They had sought quotes from parties other than Dominanta, which were unfavourable, and had negotiated with Dominanta to obtain the best terms they could. They had sought offers from the other creditors, who included key Russian market participants. They accepted that Mr Zilbermints’s offer was broadly comparable in value to that of the Dominanta transaction, the outcome being marginally better in some possible ways and marginally worse in others, but his offer was, in their view, subject to execution and other risks. They relied on the support of the non-conflicted voting creditors for the rationality of their decision to transact with Dominanta and pointed to the advantage of transacting in a way which settled “a greater part of the company’s affairs than any alternative.”
The judge concluded that their decision to enter into the transaction was an honest one that they genuinely considered to be in the interests of Sova’s creditors. He also concluded that there was no realistic risk that the transactions would infringe UK, US or EU sanctions. He therefore made an order permitting the joint special administrators to enter into the transaction.
If the outcome of this application was similar to that in Re Petropavlovsk and follows broadly similar reasoning (notably as to the test applicable to a trustee set out in Public Trustee v Cooper), there are important differences between the two cases, not least because the case before Miles J involved opposition. As a result the judgment is longer, more complex and deals with a wider range of issues, many involving important basic insolvency law principles. Having been fully argued it necessarily carries greater weight.