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Summary
Administrators were appointed over a company subject to sanctions as a result of the Russian invasion of Ukraine where the effect of the sanctions was to make the company cash flow insolvent.
Facts
The Company was an airline transporting cargo internationally. To operate its business, the Company was in possession of multiple licences which it required to fly the various routes (the “Flight Licences”). The Company also owned two aircraft.
The Company’s ultimate majority owner was a Russian national who became subject to sanctions. As a result, the Company was unable to carry on its business and the owner was unable to sell his shares.
As a consequence of the sanctions, the financing of the aircraft was withdrawn and the aircraft were repossessed. The Company’s bank also stopped operating its accounts and the Flight Licences were at risk of being withdrawn.
In these circumstances the Company was unable to operate its business. It was also insolvent on the basis that it could not pay its debts as they fell due (due to the inability to access its bank accounts). The Company was however balance sheet solvent.
The sole director of the Company applied to appoint administrators (given the Company’s insolvency). The proposed administrators requested approval from the court to allow them to make payments and operate an Insolvency Services Account despite the sanctions that applied. They had also applied to HM Treasury’s Office of Sanctions Implementation (OFSI) for licenses to deal with the company’s assets (“OFSI Licence“)
Issues
The court considered the following issues.
First, whether administrators should be appointed over a company subject to sanctions.
Second, could the administrators make use of the Insolvency Service Account, given the likelihood of commercial banks being unwilling to providing banking services to a sanctioned company?
Third, if appointed, when should the order be sealed and the administrators given control of the company? Should it be at the time of the order, or once the OFSI Licence was granted?
Decision
1. Appointment of administrators
In order to approve the appointment of the administrators the court needed to be satisfied it was reasonably likely that one of the purposes of administration would be achieved. The judge found that it was sufficiently likely and cited the fact that it was possible that the administrators could sell the business as a going concern as they could potentially retain the Flight Licences. Furthermore, the administrators were more likely than the directors to obtain the OFSI Licence allowing them to operate the Insolvency Services Account. Even if they could not sell the business as a going concern, the ability to operate the Insolvency Services Account would allow them to deal with the money. This would make it reasonably likely to obtain the second objective (recovering and distributing assets).
The court also relied on its discretion in appointing administrators and noted that administrators, as officers of the Court, were more likely to ensure that the Company complied with the sanctions placed on it and this was a reason in its own right to appoint them.
2. Insolvency Service Account
The judge approved a draft order allowing an account to be operated on the basis that the wording provided to him had been approved by the Insolvency Service itself. The judge agreed that approving this order was the sensible thing to do, as the account would remain under the control of the Insolvency Service, and was a necessary option for the administrators should they have difficulty in securing a commercial bank account.
3. Timing for sealing the order
On the facts, the order should be sealed immediately. The judge considered divergent authorities on the timing of the sealing of the order however determined that the order should be sealed immediately without the need to await the grant of an OFSI licence. This was because in this case only one additional licence was required and it was from the UK authorities. Further, a Basic Needs Licence had already been obtained by the company. Ultimately, the judge viewed that it was important that the administrators take immediate control of the company.
Takeaway
This case serves as a reminder of the court’s discretion in relation to the appointment of administrators, and therefore the fact specific nature of such an application. As such, it demonstrates the benefit of directing the court to other benefits associated with the appointment of administrators beyond the strict legal test when making an application as they may well be considered relevant. The specific circumstances will of course be highly relevant here.
The case also demonstrates the pragmatic approach the court will take in relation to companies subject to sanctions and ensuring their assets are realised for the benefit of creditors, which includes the permitted use of the Insolvency Services Account in circumstances where they may be no other option.
Should you wish to discuss any of the issues raised in this article, please contact Sacha Pickering.
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