On 6 April 2022, the English High Court made an administrative order in respect of the UK arm (VTB Capital) of Russia’s second largest bank, VTB Bank. VTB Capital is a designated entity under the UK sanctions regime, which has led to extensive asset freezes since the onset of the Ukraine invasion. Despite this, VTB Capital was one of the first sanctioned entities to be granted a general licence for its winding down by the UK Office for Financial Sanctions Implementation (UK OFSI). The general licence has not however made it easier for the Russian-owned bank to find funding to facilitate the wind-down of its business. Although the bank is balance sheet solvent, the skeleton argument made by VTB Capital at the High Court highlighted that it was unable to pay its employees, suppliers, and other creditors, thus making VTB Capital’s directors’ plea for an administration ‘urgent’.
Usually, under the UK insolvency regime, banks like VTB Capital would be subject to a ‘special administration’, as special interests related to consumers or financial regulators have to be borne in mind in addition to those of the company’s creditors. However, as Mr. Justice Fancourt noted in the High Court, VTB Capital as in the ‘unusual’ position that it was already undergoing the wind-down of its affairs by the time Western nations started imposing more extensive and stringent sanctions on Russian-owned entities after 24 February 2022. It has been reported that since the annexation of Crimea in 2014, VTB Capital anticipated there would be sanctions and began reducing its London operations. After boasting that it had over 500 London employees in 2014, its staff has now been reduced to only 120 in 2022. This example stands in contrast to the UK administrations of Russian banks Sova Capital and Sberbank, both of which are in administration under the special administration regime and had to begin their insolvency proceedings as a result of being hard hit by financial sanctions, rather than having prior plans to wind down.
According to its skeleton argument, VTB Capital had already been in discussions with the Prudential Regulation Authority, the Bank of England, and the Financial Conduct Authority regarding its plans. As a result, despite being balance sheet solvent, the English High Court has allowed for this unusual case of ordinary administration for the bank. The decision is subject to the bank being granted a further licence from the U.S. Office of Foreign Assets Control, the U.S. equivalent of the UK OFSI. Once the bank’s administrators have been granted this licence, they will be free to open a bank account to continue the payments required for the relevant wind-down of VTB Capital.
Authored by Howard Phillip Morris. Trainee Solicitor, Sakshi Rai, contributed to the drafting of this alert.