As Russia’s invasion of Ukraine continues, governments around the world are coordinating and responding with increasingly severe sanctions and export controls on Russian entities, institutions, and individuals. Insolvency practitioners first wonder whether sanctioned entities, or entities connected to sanctioned individuals, can enter into an insolvency procedure and, if so, how does the insolvency practitioner accept an appointment and get paid? Demystifying these grey areas necessitates an overview of the UK sanctions regime and the carve-outs allowing sanctioned entities to continue with financial dealings in distressed circumstances.
General Overview of the UK Sanctions Regime
It is the Sanctions and Anti-Money Laundering Act 2018 (the “Sanctions Act”) that enables regulations for specific sanctions targets to be made, and provides criminal penalties for any breach. Under the Sanctions Act, the Russia (Sanctions) (EU Exit) Regulations 2019 (the “Sanctions Regulations”) were made to enable the Secretary of State to designate persons as subject to restrictions under the Sanctions Act. The Sanctions Regulations were further amended in 2022 in light of the current Ukraine war to widen the ambit of sectors and entities that can become designated under the Sanctions Regulations.
The restrictions that can be imposed under these sanctions are wide-ranging, however the most notable for the commercial sector are the financial sanctions. This includes a blanket prohibition for dealing with any funds or assets of a sanctioned entity.
Carve-Outs Under the Sanctions Regime
Under the Sanctions Regulations, the UK Office for Financial Sanctions Implementation (UK OFSI) has the power to grant licences for specific purposes, or general licences, that enable sanctioned entities to continue an activity without breaching the sanction imposed on them. Licence applications are submitted by applicants on a form whch is sent to the UK OFSI. The sanctioned entities must identify the legal basis for why they need to continue a financial activity despite the prohibition for dealing. The UK OFSI has granted some licences, most notably for Chelsea Football Club, which has been allowed to continue playing its games but subject to restrictive conditions in contrast to the general perception of free-spending EFL Premier League clubs. In the realm of insolvency proceedings, a general licence was granted for the wind-down of Russian-owned VTB Capital illustrating how to pursue an insolvency proceeding for a sanctioned entity.
Entering into Insolvency Proceedings as a Sanctioned Entity
Given the novelty of the situation, there are few precedents to provide a roadmap as to how sanctioned entities are to be dealt with in an insolvency proceeding. English Courts have extensive powers to appoint a ‘receiver’ in cases where it appears ‘just and convenient’ to do so. However, it is unlikely that this is an unlimited right of the Court. The need for a legal basis to ground the general licence carve-out under the Sanctions Regulations supports an argument that a licence is necessary to appoint a receiver.
Sanctioned Russian bank Sberbank CIB has gone into special administration, whereas VTB Capital has gone into a regular administration as it was farther down the road towards closing its business. The administrations of these sanctioned banks illustrates that financial sanctions will not in and of themselves stop insolvency processes from going ahead.
Please see our comprehensive Sanctions Resource Center, with particular highlights on the firm’s highly regarded National Security team, led by Sanctions expert John Smith, former director of the U.S. Office of Foreign Assets Control, the U.S. sanctions entity, and our webinar on the new Russia sanctions, which further dissects the details.
Authored by Howard Phillip Morris. Trainee Solicitor, Sakshi Rai, contributed to the drafting of this alert.