Author: Dr. Angelika Hellweger
19 August 2022
3 min read
An English holding company that owns gold mining and exploration entities operating in eastern Russia filed for administration.
The company, Petropavlovsk PLC filed following sanctions imposed on its sole gold buyer and major lender, Gazprombank in the London High Court.
Although neither Petropavlovsk nor any of its subsidiaries were actually sanctioned, it was unable to service its debt as a result of the sanctions despite trying to restructure the business and refinance its debts.
Petropavlovsk was placed in a difficult position in that no Western banks that were approached were willing to provide significant financing since the Group's assets were located in Russia. Similarly, no Russian bank was willing to refinance a non-resident entity that was located in the UK.
In addition, on 26 June 2022, the UK, US, Japan, and Canada announced a ban on new imports of Russian gold which made it even more difficult for the Group to export its gold or achieve a better price than they could in the Russian market.
Subsequently, Petropavlovsk urgently appointed three administrators to file an application with the High Court to allow them the liberty to enter into a sale and purchase agreement with UMMC, a Russian company.
The urgent application was filed based on an independent valuation of the company’s assets in order to avoid the collapse of the business and on the basis that only one prospective buyer, namely UMMC, was willing and able to buy the company.
However, one of the directors and majority shareholders of UMMC was sanctioned by the EU in July and resigned from his position as a director.
The administrators brought the proposed transaction to OFSI’s attention although the administrators thought that no licence was required. However, should OFSI have been of a different view, the administrators would have wished to discuss it in time.
On 1 August 2022, the English High Court (Chancery Division) granted the administrators of Petropavlovsk PLC permission to enter into a sale and purchase agreement (SPA) with UMMC.
On 5 August 2022 the High Court summarised as follows:
It was established that the test to decide whether an administrator’s decision is accepted is one that is applicable to a trustee. Therefore, the trustee is under a strict duty to act in accordance with the limit and powers conferred on it.
In this situation, the court had to consider whether the trustee had taken into account all relevant considerations and reached a rational conclusion and whether the trustee’s proposed exercise of discretion was not vitiated by conflict.
Since the value of the company was continually deteriorating mainly as a result of the current geopolitical situation and no other alternative proposal was available, it was concluded by the court that the case should be processed urgently and that the transaction was in the best interests of the company’s creditors.
It should be noted that the administrators took their obligations under the sanctions violation seriously and sought independent advice to resolve the matter.
Since Petropavlovsk, its subsidiaries and its directors do not fall under the UK’s Russia sanctions regime, they are free to receive payment.
Although UMMC is a Russian entity, but not a designated person or controlled by one, and the fact that one of the directors had to step down as he became a designated person under the EU sanction regime as well as two other minority shareholders, did not change this view.
After having evaluated the facts of the case, they cannot control the company directly or indirectly and do not own the company, therefore, there was no sanctions violation.
Further to this, the SPA contains a warranty that means that due to the specific characteristics of the transaction, no funds or economic resources will be made available directly or indirectly to any sanctioned person.
The proposed transaction also does not violate the UK sanctions regime which prohibits the export of luxury goods (“gold”) to Russia.
The purpose of the ban on luxury goods is to stop luxury items from being moved to Russia.
The Proposed Transaction, however, simply transfers the shares from a UK company to a Russian one rather than moving the gold into Russia. Therefore, it cannot constitute the export of luxury goods to Russia since the gold bars are made in Russia and not transferred into the country.
The decision to grant liberty to the administrators to enter into the SPA does not bind OFSI on the correct construction of sanctions legislation, particularly since OFSI was not represented and it was not necessary in order to give the administrators the relief they sought.
In other circumstances, an application for an OFSI licence would have been desirable, however, due to the urgency of the case and the expected lead time, meant that the court should not withhold relief until a licence was applied for / resolved.
Angelika is a specialist in international, high-level economic crime investigations and large-scale commercial disputes. She has widely-recognised expertise in representing corporates and conglomerates in Europe, the Middle East, Africa and United States.