Kevin Hellard v OJSC Rossiysky Kredit Bank ((in Liquidation))

Hearing date 11 June 2024

Approved JUDGMENT

INTRODUCTION

The applicants in this matter (the “ Trustees”) are the trustees in bankruptcy of Mr Anatoly Leonidovich Motylev (whom I shall refer to as “ Mr Motylev” or the “ Bankrupt”). They have applied to the court for assistance by way of directions under s.303(2) Insolvency Act 1986 (“ IA 1986”) and/or declarations, concerning three apparently simple questions:

i) First, should they treat the First to Fourth Respondents (the “ Russian Bank Creditors”) as being caught by the sanctions that have been imposed under the Russia (Sanctions) (EU Exit) Regulations 2019 (the “ 2019 Regulations”)?

ii) Secondly, if the Russian Bank Creditors should be treated as being caught by sanctions, is it lawful for the Trustees to accept votes from those creditors for the purposes of any creditors' decision procedure and/or to allow those creditors to take part in and vote at meetings of the creditors' committee?

iii) Thirdly, are the Trustees providing financial services in breach of Regulation 18A of the 2019 Regulations?

The Trustees require the court's assistance on these points as there has been some doubt as to how to apply the 2019 Regulations in the particular circumstances in which they find themselves, and as a result they find themselves between a rock and a hard place. If they wrongfully treat the Russian Bank Creditors as not being subject to sanctions, and it turns out that they are, the Trustees could be exposed to criminal and substantial civil liability. Conversely, if they wrongfully treat the Russian Bank Creditors as being subject to sanctions and accordingly refuse to allow them to participate in the normal way in the Bankrupt's insolvency, and it turns out that they are not subject to sanctions, and there was no basis for a reasonable belief that they were, they could find themselves civilly liable to the Russian Bank Creditors.

Whilst the three questions for consideration may be simply put, in relation to the first two of these at least, the answers are not simple at all. They require consideration of the 2019 Regulations, the broader UK sanctions regime, and of recent case law interpreting this.

The Trustees are asking for the court's guidance, to be provided in a manner that will provide the Trustees with protection if they follow that guidance) in relation to the status of the Russian Bank Creditors under the 2019 Regulations.

BACKGROUND

Mr Motylev is a Russian national who has been resident in London since July 2015. So far as the Trustees are aware, no sanctions issues arise in relation to him.

The Russian Bank Creditors are banks formerly controlled by the Bankrupt, which collapsed shortly before his departure from Russia. The Bankrupt has been charged in his absence by the criminal authorities in Russia with various crimes involving alleged fraud and financial mismanagement relating to the Russian Bank Creditors.

Mr Motylev was initially declared bankrupt in Russia on 19 February 2018. In September 2020, his Russian Financial Manager (which I am told is broadly analogous to a trustee in bankruptcy in the United Kingdom) obtained recognition of this bankruptcy in the United Kingdom and a freezing order and other interim relief in support.

Shortly thereafter, the Financial Manager presented an English bankruptcy petition relying on the debts admitted in the Russian bankruptcy proceedings. Ultimately, Mr Motylev was declared bankrupt in England by a bankruptcy order dated 2 November 2020 and trustees in bankruptcy were appointed. A block transfer order of 23 December 2022 established the Trustees as his current trustees in bankruptcy.

The period of Mr Motylev's English bankruptcy (the “ Bankruptcy”) will be longer than is usual. By order of ICC Judge Mullen dated 8 March 2023, the Bankrupt's discharge from bankruptcy was suspended for three years from the date of that order, on the ground that he had failed to satisfy his obligations as a bankrupt.

As matters stand, proofs of debt totalling £741million have been received in the Bankruptcy, although these have not yet been adjudicated. The Russian Bank Creditors comprise a 52.88% majority of the total. As regards almost all the other creditors, the Trustees have evinced some concerns as to connections to the Bankrupt and/or validity of claims.

The Trustees and the Russian Financial Manager have very sensibly entered into a Cooperation Agreement dated 22 September 2021 to govern the interaction of the two procedures and (in very broad terms) provides for the (English) Bankruptcy to take primacy in most respects.

A creditors' committee has been established for the purposes of the Bankruptcy. The Russian Bank Creditors comprise four of the five members of that committee. To date, that creditors' committee has passed four resolutions, of which three remain in force: two successive resolutions fixing the Trustees' basis of remuneration (with some remuneration having been already drawn under the first such resolution) and another dispensing with six-monthly reports to the committee.

REPRESENTATION AT THE HEARING

The Trustees have joined as respondents the parties who (other than the Trustees themselves) are most likely to be affected by the outcome of the application, namely the Russian Bank Creditors, and the Office for Financial Sanctions Implementation (“ OFSI”), which is joined as the Fifth Respondent. OFSI is the United Kingdom governmental body charged with the implementation and enforcement of the sanctions legislation.

Whilst at this hearing the Trustees have been ably represented by Mr Thomas Munby KC, neither the Russian Bank Creditors nor OFSI have chosen to appear or to be represented at this hearing. They had ample opportunity to do so had they wished this.

OFSI has provided some guidance in correspondence as to certain aspects of its approach, including in the form of a letter dated 24 May 2024 from the Government Legal Department. OFSI has also provided some of OFSI's published guidance. However, OFSI has declined to express any opinion on the questions raised by the Trustees. From the correspondence, OFSI appears to be neutral on the questions of fact and law raised by the application. It has indicated that it does not intend to participate citing “ constraints on resources and our need to prevent unnecessary costs to public funds”.

OFSI also requested to the Trustees that it should be removed as a party. The Trustees did not consider this appropriate as it would appear potentially to undermine the protective effect of the application. I agree.

The Russian Bank Creditors have stated in correspondence that that they did not consider themselves to be sanctioned but have not provided any detailed reasoning to counter the concerns raised by the Trustees.

One point that I needed to consider was whether the hearing should proceed at all in the absence of any of the Respondents. This is a matter within the court's discretion under its general powers of management in CPR rule 3.1, and specifically under CPR rule 23.11.

In the current case, given that the absence of each of the Respondents was deliberate, I considered that I should proceed to consider the application. It is clear that both the Russian Bank Creditors and OFSI have been engaged with the application, even if OFSI to date has not expressed any view in relation to the central questions raised by the application.

I will consider further, however, whether it is appropriate to make a declaration that would be binding on OFSI.

THE SANCTIONS LEGISLATION

(a) Overview

As was explained by the Court of Appeal in PJSC National Bank Trust and another v Mints and others [2023] EWCA Civ 1132 (“ Mints”) at [4]–[11], the current United Kingdom sanctions regime derives from the scheme of sanctions introduced by the United Nations from 1999 onwards in the context of the so-called “war on terror”. The United Kingdom originally implemented sanctions by orders made under the United Nations Act 1946, and subsequently through European Union regulations, commencing with Council Regulation (EC) No. 881/2002.

Prior to Brexit, sanctions responsive to the Russian invasion of Crimea in 2014 were contained in EU Council Regulation 269/2014, Sanctions were implemented in the UK by the Ukraine (European Union Financial Sanctions) (No 2) Regulations 2014.

Following Brexit, the UK's sanctions regime derives its authority from the Sanctions and Anti-Money Laundering Act 2018 (“ SAMLA”). The 2019 Regulations were made under SAMLA, originally with the simple intention of continuing the prior EU regime. However, the scale on which the 2019 Regulations have been used has been greatly increased since the Russian invasion of mainland Ukraine in 2022.

Under s.8 SAMLA, regulations may be made to comply with a United Nations obligation. These may include prohibitions or requirements imposed on or otherwise relating to “designated persons”. S.9 SAMLA defines designated persons including by reference to powers...