Sova Capital Ltd (“Sova”) was an FCA authorised and regulated broker. Before it went into Special Administration, Sova provided investment brokerage services to institutional and corporate clients, mostly trading in the Russian market.

Special Administration supports companies that provide a statutory or public service, or that hold client money. Companies regulated by the FCA, may be placed into Special Administration if they fail. There is often wider public interest in these organisations when they fail, so the objectives of the Special Administrator appointed, and the powers bestowed on them, are different from those in a standard company administration.

The joint special administrators (the “JSAs”) made two applications under paragraph 63 of Schedule B1 to the Insolvency Act 1986 for permission of the Court to enter into two transactions (the “Transactions”) concerning the sale of the assets and liabilities of Sova to LCC Holding Company Dominanta (“Dominanta”).

Dominanta was one of the largest unsecured creditors of Sova with an admitted claim of approximately £233 million. Broadly, the proposed Transactions would result in Dominanta acquiring from Sova a portfolio of Russian securities (the “Russian Securities”) in return for Dominanta waiving all or a portion of its claims against Sova (i.e. an "unsecured credit bid").

The applications were opposed by Boris Zilbermints, who was a creditor of Sova with an estimated claim of £19.9 million. Mr Zilbermints was also part of a consortium that wanted to acquire the same Russian Securities.

The reason for these applications was that, due to Russian Restrictions, Sova had become unable to trade on the Moscow Stock Exchange (“MOEX”) and, as such, the majority of its assets were unrealisable. The only viable option for the JSAs was an over-the-counter sale of Sova’s Russian Securities.

Sale to a Western buyer would be challenging, as the buyer would need to be willing to be subject to the same MOEX restrictions. For sale to a Russian buyer, approval is required from the relevant Russian authority. Further, Sova needed to find a buyer who was not subject to Western Sanctions.

Dominanta is ultimately beneficially majority owned by a dual Russian and Cypriot national, who was also the ultimate beneficial owner of Sova. Dominanta is not owned or controlled by persons subject to UK, EU, or US sanctions. Further, unlike Mr Zilbermints, Dominanta had the required approvals from the Russian authorities to enter into the Transaction.

Issues that the Court had to decide

Have the JSAs surrendered their discretion to the court and is it otherwise appropriate in principle for the JSAs to seek the court’s approval of the Transaction?

The Court found that entry into an agreement that was conditional on the court’s consent did not mean that the JSAs had surrendered their discretion. It was appropriate for the JSAs to seek approval as the applications disposed of a substantial part of Sova’s estate and the legal mechanism of the Transaction (the transfer of the securities in return for the waiver of Dominanta’s claim) raised novel issues, which had not previously been decided by the English courts. Further, the Transaction also raised the potential application of sanctions laws.

Is the JSAs’ decision to commit Sova to the Transactions within their statutory powers and/or does it comply with the principles of insolvency law?

The Court decided that the JSAs’ power to sell or otherwise dispose of the company’s property is broad enough to cover a transaction whereby a creditor waives its claim against the company. In exercising such power, the JSAs were required to act reasonably to obtain the best price in the circumstances.

The Court considered the pari passu principle and concluded that the Transaction was a sale of assets in return for the waiver of claims, instead of a distribution. Therefore, the pari passu principle does not apply here.

The Court noted that there are starkly asymmetrical values for non-Russian and Russian owners of Russian securities, due to the various legal restrictions in place. In this case, the higher value of the assets to Dominanta was less important than their lower value to Sova. The JSAs were right only to be interested in the realisable value of the assets.

Is the JSAs’ decision to enter the Transaction rational and honest?

The Court found that the decision of the JSAs to enter the Transaction was an honest and rational one. The JSAs sought to make the best of challenging circumstances and had sought offers from other creditors, which were unfavourable in comparison. The JSAs negotiated with Dominanta to obtain the best terms possible and the relevant Russian authorities had already approved the Transaction. Finally, the landslide indicative vote of the creditors supported the JSAs’ position.

Is there a real risk that the Transaction breaches applicable sanctions laws?

The Court decided that there was no real risk that the Transaction would infringe UK Russian sanctions:

1. The Russian Securities were owned, held, or controlled by Sova which was neither a Designated Person nor controlled by one.
2. Neither Dominanta nor the person who controls Dominanta are Designated Persons.
3. None of the other relevant parties are Designated Persons, nor are they controlled by Designated Persons.
4. The Russian Securities that were issued by a sectorally sanctioned entity were issued prior to 1 Aug 2014 and none of the Russian Securities were issued after 1 March 2022.
5. The Russian Securities were admitted to trading on a regulated market prior to 19 July 2022 and were not issued for a prohibited purpose.

To the extent material, the Court also decided that the Transaction would not infringe US or EU sanctions.

Comment

The approval of the Transaction represents the first unsecured credit bid to be approved by an English Court. 

It suggests that the Courts are taking a practical approach to sanctions-related administrations and are assisting insolvency practitioners where they are dealing with assets otherwise trapped by Russian restrictions and sanctions.  

The Court also acknowledged that, in the face of a challenging set of constraints, the JSAs had sought to find a way of realising value for the creditors, who might otherwise have had to wait indefinitely.

Abi Kromer, a solicitor in the Dispute Resolution team, kindly assisted with the preparation of this note.