Sanctions in bankruptcy proceedings: UK High Court provides clarification

Quick read

The High Court has considered whether trustees in bankruptcy are in breach of sanctions by allowing sanctioned Russian creditors to participate in UK insolvency proceedings.

Background

A Russian national, resident in London is subject to bankruptcy proceedings both in Russia and the UK. The bankrupt's creditors include four Russian banks in liquidation in Russia. The UK trustees in bankruptcy applied to the court for directions concerning three main questions:

Should the Russian bank creditors be treated as being sanctioned under the Russia (Sanctions) (EU Exit) Regulations 2019 (the 2019 Regulations)?
If yes, should the Russian bank creditors be able to participate and vote where there is any creditors' decision procedure and/or meetings of the creditors' committee?
Are the trustees, in undertaking their duties, providing financial services to sanctioned persons in breach of Regulation 18A of the 2019 Regulations?

Decision

The court held that there was insufficient evidence that the creditors were owned or controlled by designated persons or that there was a reasonable suspicion thereof.
The court declared that the voting rights of creditors who are designated persons did not constitute 'funds' or 'economic benefits' so as to be caught by the 2019 Regulations.
The trustees, in undertaking their statutory functions, were not providing financial services in breach of the 2019 Regulations.

Key takeaways

The judgment provides reassurance to officeholders that they will not be in breach of sanctions in allowing sanctioned creditors to participate and vote in creditors' decision procedures and/or creditors' committee meetings (except on a vote to approve a distribution, if that was the necessary step to cause a designated person or a person owned or controlled by a designated person, to obtain the funds).

The judgment also clarifies the meaning of ownership and control by a designated person.