Sova Capital
| Jurisdiction | England & Wales |
| Judge | Mr Justice Miles |
| Judgment Date | 02 March 2023 |
| Neutral Citation | [2023] EWHC 452 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CR-2022-000596 |
On the application of:
[2023] EWHC 452 (Ch)
Mr Justice Miles
Case No: CR-2022-000596
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY & COMPANIES COURT LIST (ChD)
IN THE MATTER OF SOVA CAPITAL LIMITED (COMPANY NUMBER 04621383) (IN SPECIAL ADMINISTRATION)
AND IN THE MATTER OF THE INVESTMENT BANK SPECIAL
ADMINISTRATION REGULATIONS 2011
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL
Mark Phillips KC, William Willson and Dr Riz Mokal (instructed by Hogan Lovells International LLP and Shoosmiths LLP) for the Applicants
Stephen Robins KC and Charlotte Cooke (instructed by DMH Stallard LLP) for Mr Boris Zilbermints, an interested party
William Buck and Nicholas Wright (instructed by Quillon Law LLP) for LLC Holding Company Dominanta, an interested party
Hearing dates: 20 & 21 February 2023
APPROVED JUDGMENT
This judgment was handed down remotely at 10.30am on 2 March 2023 by circulation to the parties or their representatives by email and by release to the National Archives.
Introduction
The joint special administrators ( the JSAs) of Sova Capital Limited ( Sova) apply, by two closely interrelated applications, for a direction that they be at liberty to enter into two transactions concerning the assets and liabilities of Sova.
Sova is in special administration. It is an FCA authorised and regulated broker. Before the administration it provided investment brokerage services to institutional and corporate clients, mostly trading in the Russian market.
The applications are made under paragraph 63 of Schedule B1 to the Insolvency Act 1986 ( Schedule B1 and the 1986 Act). These are applicable in Sova's special administration by Regulation 15(4)(a) of the Investment Bank Special Administration Regulations 2011 ( the IBSARs).
The JSAs seek the permission of the Court to perform, and to procure Sova to perform, two transactions with LCC Holding Company Dominanta ( Dominanta).
These are referred to in the evidence as the Dominanta Transaction and the Further Dominanta Transaction (together, the Transaction). Dominanta is one of the largest unsecured creditors of Sova with an admitted claim of c.£233m.
In very broad terms the Transaction would result in Dominanta acquiring from Sova a portfolio of Russian securities in return for Dominanta waiving all or a portion of its claims against Sova. The JSAs say that they have agreed this deal because it is the best way of realising Sova's Russian securities which are effectively trapped.
The applications are opposed by Boris Zilbermints ( BZ), who is a creditor of Sova with an estimated claim of £19.9 million. BZ is also part of a consortium which wishes to acquire the same Russian securities. The consideration offered by the consortium is a combination of £125m of cash and the waiver of BZ's claims against Sova of c.£20m.
At the first hearing of the applications, which was on 13 January 2023, I adjourned the applications and gave directions for an expedited hearing. This included a timetable for the service of further evidence and consolidated skeleton arguments. I also considered that the adjournment would give a chance for the competing bids to be fully assessed and for any further competitive tension to be exploited.
The evidence is extensive. The applications are supported by ten witness statements of Mr Soden, one of the JSAs. The exhibits include three memoranda prepared by the JSAs' UK and US solicitors concerning the possible application of UK, US and EU sanctions. BZ has served two statements. Mr Trakhtenberg has served a statement for Dominanta.
I have carefully considered this evidence. I have also been assisted by the very full written submissions and oral submissions of the parties. Much of the factual background is not controversial and I have drawn on the parties' written submissions in preparing this judgment.
Background to the applications
In broad outline the background to the applications (as explained by Mr Soden in his statements) may be summarised as follows.
A large part of Sova's estate consists of financial assets which are held in depositaries in Russia. Many of these Russian securities trade on the Moscow Stock Exchange ( MOEX) and are either: securities issued by entities incorporated in and under the laws of Russia; securities issued by entities within corporate groups with material operations in Russia; or securities issued by the Russian government (together Russian Securities). As explained below Sova cannot trade on MOEX.
Russia invaded Ukraine on 24 February 2022.
This created turmoil in the markets on which the Russian Securities are traded. Assets issued by Russian entities and traded on Russian markets fell in value, counterparties holding them by way of collateral issued margin calls, and MOEX and related market infrastructure closed. This severely impaired Sova's liquidity and it was unable to leverage or finance its Russian Securities. This rendered Sova cashflow insolvent.
On 3 March 2022, on the application of its directors, Sova was placed in special administration by order of Leech J.
The UK, the EU and the US introduced sanctions in response to the invasion ( Western Sanctions). The Russian government imposed countermeasures ( Russian Restrictions). As a result of the Western Sanctions and the Russian Restrictions (together the Sanctions Regimes), the JSAs and Sova are unable to realise the Russian Securities by normal means for the benefit of Sova's estate.
Russian Securities amount to about 87% by value of the total securities Sova owns (valued as at 11 November 2022). These are illiquid or otherwise unrealisable other than for a much reduced price.
Adding more detail, MOEX ceased trading in late February 2022. It has not reopened to securities trading for foreign residents in countries designated under the Russian Restrictions as ‘hostile’ (which include the UK, the US and the EU member states). So the JSAs cannot trade on MOEX and cannot sell the Russian Securities on-exchange on a line-by-line basis. The only option is an over-the-counter sale. Such an over-the-counter ( OTC) sale could be either to a Russian buyer (or potentially to a non-Russian buyer from a non-hostile jurisdiction) or to a non-Russian buyer from a ‘hostile’ jurisdiction.
As for a sale to a Russian buyer (or a non-Russian buyer from a non-hostile jurisdiction), under the Russian Restrictions, as Sova is incorporated in a hostile jurisdiction, any transaction it enters with a Russian buyer in relation to the Russian Securities is subject to approvals ( Government Commission Consent) from the relevant Russian authority, the Government Commission for Control of Foreign Investment in the Russian Federation ( the Government Commission).
Additionally Sova would need to find a buyer who is not subject to Western Sanctions. A material target population of buyers for the Russian Securities would have been Russian financial institutions. However, many Russian financial institutions are subject to Western Sanctions.
The Russian Restrictions also make it difficult for Sova to repatriate cash from Russia to the UK. Generally, this would require the approval of the Central Bank of Russia ( the CBR), and there is a lack of clarity in relation to this process and the operation of the different Russian laws which creates potential uncertainty when entering cash transactions with such buyers.
On this last point, BZ has submitted evidence of Russian law and practice which concludes that Government Commission Consent to a transaction would satisfy the requirements concerning approvals of the transfers of cash. The JSAs' position is that there is a risk that further CBR approval would be needed. There was no cross-examination of witnesses and the court is not in a position to resolve this difference of view.
A sale to a buyer in a ‘hostile’ jurisdiction (such as a Western buyer) would be extremely challenging. Though theoretically allowed under Russian law, there would have to be a buyer willing to invest in Russian assets at a time when most such parties are exiting Russian markets. The buyer would also have to be willing to hold the assets for an extended period since it would not be able to trade on MOEX and would be subject to the same restrictions on selling as Sova faces.
The JSAs say that these unusual conditions make it extremely hard for them to realise the value of the Russian Securities through a normal marketing process.
It is against this background that they seek the court's approval for the JSAs to perform and procure Sova to perform the Dominanta Transaction and the Further Dominanta Transaction.
The Dominanta Transaction relates to 71 of some of the highest value Russian Securities held by Sova ( the First Target Russian Securities); the Further Dominanta Transaction relates to a further 18 such securities ( the Second Target Russian Securities; together the Target Russian Securities).
The terms of the Dominanta Transaction are set out in a portfolio transfer agreement dated 2 December 2022, as amended on 30 December 2022 and 10 February 2023 ( PTA1). The terms of the Further Dominanta Transaction are set out in a portfolio transfer agreement dated 30 December 2022, as amended on 13 February 2023 ( PTA2).
The parties to each of these PTAs are Sova and the JSAs on the one hand and Dominanta, a Russian entity, on the other.
Dominanta is one of Sova's largest unsecured creditors by virtue of having taken assignments of certain claims against Sova. Dominanta is ultimately beneficially majority-owned by Mr Roman Avdeev...
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