The war in Ukraine continues and the economic effect of sanctions against businesses that are connected to the Russian government are now being felt in earnest. Unsurprisingly, sanctions are becoming an increasingly hot topic for insolvency practitioners.
Recent months have seen the Courts hand down some important decisions, which provide helpful guidance on situations where the sanctions regime interfaces with insolvency processes. We have summarised three of the most significant in this article.
Re Petropavlovsk Plc (in administration)  EWHC 2097 (Ch)
Petropavlovsk Plc (“Petropavlovsk”) was the English holding company of a Russian gold mining group. Petropavlovsk became insolvent shortly after the implementation of the UK sanctions regime, which severely curtailed its ability to trade. Refinancing attempts were unsuccessful and the administrators determined that it was in the interests of stakeholders to sell Petropavlovsk's assets. The proposed buyer was a Russian company, but one that was not, one the face of it, subject to UK sanctions.
The administrators of Petropavlovsk sought an order for permission to proceed with the proposed sale. The Court considered whether (a) the proposed sale was lawful and proper, (b) the administrators were free from any conflict of interest, and (c) the administrators were acting rationally and in the genuine belief that the proposed sale was for the benefit of Petropavlovsk and its creditors.
The Court declined to make a declaration that the proposed sale would not breach the UK sanctions regime, as it had not heard any arguments on the interpretation of the sanctions regime from the Office of Financial Sanctions Implementation (“OFSI”) (i.e. the body that is responsible for the enforcement of the regime). Rather, the Court held that it was for the administrators to form their own view on the application of the sanctions regulations. However, the Court also held that administrators were entitled to ask the Court whether they would be acting appropriately by entering into the proposed sale.
Whilst certain stakeholders of Petropavlovsk were potentially subject to sanctions, the Court found that the risk of the sale breaching the UK sanctions regime was not so high as to make it inappropriate for the administrators to proceed, as there was no obvious alternative and the sale was likely to fall through if the offer was not accepted quickly.
Importantly, the Court suggested that, in most cases, it would be desirable for the administrators to apply to OFSI for a licence permitting them to act in a way that otherwise might be a breach of UK sanctions. However, in this case, the Court held that the time-critical nature of the sale and the length of time it can take to obtain a licence meant that it was not appropriate for the Court to refuse the permission to proceed.
Re Nostrum Oil and Gas Plc  EWHC 2249 (Ch) – 26 August 2022
Nostrum Oil & Gas plc (“Nostrum”) is the English parent company of an oil and gas group (the “Group”) operating in Kazakhstan. The Group’s sole source of revenue was an oil and gas field in Kazakhstan. Due to depleted reservoirs, the Group became over-leveraged and needed restructuring.
Nostrum sought an order sanctioning a scheme of arrangement (the “Scheme”) regarding Nostrum and some of its creditors. However, as some of the creditors were the subject of sanctions in the UK, EU, the US and Guernsey, the Court found that it was necessary to consider their position in relation to said sanctions, when making an order.
Importantly, and in line with the objective of the sanctions regime in each country, the Scheme expressly prevented the distribution of consideration to any sanctioned creditors for as long as they remained subject to sanctions. The Court was satisfied that this did not put the sanctioned creditors at any greater disadvantage than they already faced under the relevant sanctions regulations.
The Court also placed weight on the fact that, even if the sanctioned creditors had been permitted to vote on the Scheme, and had all voted against it, the required statutory majorities would still have been obtained. Furthermore, even though they were not able to vote on the Scheme, the sanctioned creditors had signed up to a lock-up agreement prior to them being sanctioned – it was held that this strongly indicated that the sanctioned creditors would not have objected to the Scheme, in any event.
Accordingly, the Court held that the Scheme dealt with the sanctioned creditors in a fair and proper manner and granted the order.
Re CargoLogicAir Ltd  EWHC 3316 (Ch)
CargoLogicAir Limited (“CargoLogicAir”) was the UK’s only main deck freight airline. CargoLogicAir’s ultimate beneficial owner was an individual who was subject to UK sanctions. As a result, CargoLogicAir was subject to full asset freezing sanctions and was unable to pay its debts as they fell due. Importantly, the sanctions regime also prevented CargoLogicAir from removing ownership and control from the sanctioned individual.
The Court determined that the only way for CargoLogicAir’s business to be freed from sanctions was for CargoLogicAir’s ownership to be re-structured or its business sold as a going concern. OFSI had already refused an application for this, i.e. whilst CargoLogicAir remained under the sanctioned individual’s control. However, the Court considered it likely that administrators would be able to obtain the relevant OFSI licences needed to run CargoLogicAir.
The Court decided that experienced insolvency practitioners could take control of CargoLogicAir and ensure an orderly wind down of the business, while respecting the sanctions and not making any distribution to the Company’s shareholders directly or otherwise.
It was also held that it would be sensible for the administrators to make use of the Insolvency Services Account, given that commercial banks might refuse to provide banking services to CargoLogicAir and the sanctions were affecting CargoLogicAir’s operational bank account.
Finally, the question remained as to whether the Court should seal the order immediately on the basis that OFSI was very likely to grant the licence to the administrators – e.g. CargoLogicAir had already received a Basic Needs Licence from OFSI. The Court took the view that the administrators needed immediate control and sealed its order accordingly.
Given that a breach of the UK sanctions regime is a strict liability criminal offence, sanctions are clearly an issue that insolvency practitioners need to be aware of. If there is any doubt as to whether the sanctions regime might be engaged, and time is of the essence, the best option will generally be to apply to the Court for an order that confirms the legality of any steps that might otherwise amount to a breach.
As it is likely that businesses connected to the Russian government will remain sanctioned for the foreseeable future, we expect to see further sanctions-related decisions handed down in the months ahead.