Petropavlovsk Plc ((in Administration))

Hearing date: 29 July 2022

Jonathan HilliardQC sitting as a Deputy Judge of the High Court:

Introduction

By Application Notice dated 27 July 2022, Allister Jonathan Manson, Trevor Binyon and Joanne Rolls (together “the Administrators”), the joint administrators of Petrapavlovsk plc ( “the Company”), seek a direction pursuant to paragraph 63 of Schedule B1 to the Insolvency Act 1986 (the “1986 Act”) providing them with liberty to proceed with the sale of the Company's business to UMMC-INVEST ( “UMMC”) (the “Proposed Transaction”).

As I explained in a short judgment handed down on Monday 1 August 2022, reported as [2022] EWHC 2074 (Ch), my decision is to grant the application and make the order appended to that judgment. I stated in that judgment that I would set out the reasons for this in a further written judgment. This is the further written judgment.

The Company is an English holding company that owns a group of gold mining and exploration companies operating in eastern Russia (the “Group”). The Administrators are partners of Opus Restructuring LLP ( “Opus”) and were appointed by order of HHJ Jarman QC sitting as a Judge of the High Court dated 18 July 2022.

The Group's ability to operate its business was substantially impaired by the international sanctions and other restrictions applied in response to the Russian Federation's invasion of Ukraine earlier this year. In the absence of being able to obtain refinancing, the Company was rendered unable to pay its debts as they fell due.

Mr Arden QC, appearing with Mr Sturman QC and Mr Wigley, put forward the following principal reasons for the Administrators choosing to seek a Court direction:

(1) The Proposed Transaction involves the sale of a substantial undertaking, is complex and effectively disposes of almost all of the Company's assets.

(2) While the envisaged sale proceeds of US$619m are expected to be sufficient to pay off creditors and are towards the top end of Kroll's valuation of the Company's operating assets at between US$458m and US$621m, they leave nothing for shareholders and the sale price is substantially below the Company's book value of US$1,619m.

(3) The Proposed Transaction appears to be opposed by a number of the Company's shareholders, including the Company's largest shareholder, ‘Uzhuralzoloto Group of Companies’ JSC ( “UGC”), which at 30 June 2022 reportedly held approximately 29.18% of the Company's share capital, and Prosperity Capital Management (RF) Limited ( “Prosperity”). The Company understands that UGC is controlled by Konstantin Strukov, a successful Russian businessman.

(4) While the Administrators' settled view, with the benefit of advice from specialist leading counsel, Mr Sturman QC, is that proceeding with the Proposed Transaction would not give rise to a breach of any sanctions, they appreciate that there is nevertheless a risk in that regard. While it does not represent their view, the Administrators are concerned that given the sanctions regime, it may be said that the Proposed Transaction is not something that they should proceed with. They are acutely conscious of their position as officers of the Court and of the fact, that pursuant to the principle derived from ex p. James the Court will not permit its officers to act in a way that would be clearly improper or dishonourable. Therefore, they wish to invite the Court to give appropriate directions.

In my judgment, the Administrators were amply justified in bringing the matter before the Court in these circumstances.

The application was brought on an extremely urgent basis. The Administrators consider that the Company's business is in a very serious and deteriorating state. At the time of the hearing before me, the deadline for acceptance of the offer from UMMC was 12pm on Friday 29 July. Further, it is feared that if the sale does not go through quickly, UMMC could proceed with enforcement action and insolvency proceedings against the Company's subsidiaries in Russia. Therefore, I heard the matter for a little over half a day on 29 July, and handed down a short judgment giving my decision on Monday 1 August, the Administrators having indicated through Counsel that they did not push for a decision on 29 July and hoped that UMMC would be willing to accept a response the following week. Mr Arden QC and Mr Wigley dealt with the insolvency law and commercial elements of the application, and Mr Sturman QC with the application of the sanctions regime and related restrictions.

I make two points clear at the outset.

The first relates to the Office of Financial Sanctions Implementation ( “OFSI”), which is the authority responsible for implementing the UK's financial sanctions on behalf of HM Treasury. I am not seeking to determine the correct construction of the relevant UK sanctions legislation- the Russia (Sanction) (EU Exit) Regulations 2019 as amended ( “the Regulations”)- in a manner that binds OFSI. OFSI is not before me. As explained below, while I need to consider the Administrators' submissions on the application of the Regulations to determine whether to grant the Administrators the liberty they seek, I do not need to grant declarations as to the meaning of the Regulations in order to do so.

Secondly, the order granted is, as the application was, limited to proceeding with the Proposed Transaction itself. Neither the Company nor any of its directors are designated persons for the purposes of the Regulations, so they are free to receive payment so long as the payment is not made by a designated person. UMMC is a Russian entity but is not a designated person or controlled by one. Nevertheless, Mr Arden's skeleton made clear that the Administrators recognise that sanctions may be relevant to the Company's ability to make any distribution of those incoming sale proceeds to creditors and shareholders, because the identity of such stakeholders is not clear and it is therefore possible that the class may include designated persons.

The Administrators intend that repayment of creditors will include cancellation of the US$500m notes guaranteed by the Company which are due on 14 November 2022 (the “2022 Notes”). The Administrators envisage that such cancellation may require them to return to Court to approve a scheme of arrangement in that regard. More generally, they also envisage that they may apply for a licence from OFSI if the Administrators consider there to be a risk that any creditors are designated persons. They would also intend to apply for a licence from the authorities of the relevant EU member state if the Administrators were to be advised that this was required to deal with EU-based intermediaries in relation to the 2022 Notes. A licence allows an act that would otherwise breach prohibitions imposed by financial sanctions.

Background

In order to explain the issues that arise on the present application, it is necessary first to set out the key elements of the factual background. The backdrop is set out in some detail in the witness statements of Mr Manson, who has filed witness statements in support of the original administration application and now the present application, and two witness statements of Charlotte Philipps, an independent non-executive director of the Company, in support of the administration application. I draw on those statements in the account below.

The Company is the parent of the Group and has seven employees, all of whom are based in London. Its operating subsidiaries are based near its assets in Russia, and it sells almost all of its gold domestically in Russia. The Group consists of 38 entities, 24 of which are incorporated and based in Russia. Of the remaining 14, one is dormant and the others are based in the UK, Jersey, Cyprus and the Cayman Islands. The Group has three main gold exploration and production entities in Russia: JSC Pokrovskiy Mine, LLC Malomysrkiy Rudnik and LLC Albynskiy Rudink. The rest of the Group's Russian entities support these mines by providing exploration, research, engineering, construction, maintenance, transportation and other ancillary services.

The Group's last annual report made up to 31 December 2020 states that the Group has assets of US$ 1,1731m and liabilities of US$1,059m, giving net assets of US$672m, and that the Company had assets of US$1,540m and liabilities of US$1,640m, giving net liabilities of US$100m.

The Company has the following preferential and unsecured creditors, and no secured creditors:

(1) The main preferential creditor is HRMC, which is owed VAT estimated to be between £10,618,223 and £14,854,913.

(2) The Company has the following unsecured debts:

(a) The Company is the borrower under a term loan facility of US$200m (the “Term Loan”). The original lender was Gazprombank, also known as Bank GPB JSC ( “GPB”). GPB became a sanctioned person – known as a “designated person”- for the purposes for the Regulations on 24 March 2022. On 18 April 2022, GPB gave notice to accelerate the Term Loan as a result of failure by the Company to meet an interest payment. The reason for the failure was that the Company was unwilling to make the payment in light of the financial sanctions by HM Government against GPB. On 19 April 2022, GPB gave notice that it had assigned its rights under the facility agreement to UMMC pursuant to an assignment agreement. UMMC is not an entity subject to sanctions and has confirmed that it paid full value for the...