A recent judgment in Kevin Hellard & Ors v OJSC Rossiysky Kredit Bank (in liquidation) & Ors [2024] EWHC 1783 (Ch) the High Court considers the ‘ownership and control’ test in Bankruptcy, involving trustee powers and Russian Bank creditors. This is in the context of the applicability of the UK sanctions regime against Russia.
Whether a company is owned or controlled by a designated person is key to discerning whether certain sanctions bite, and now we have a steer from the courts for that analysis.
Brief Background Facts
Anatoly Leonidovich Motylev is a bankrupt, and the applicants in the matter were his trustees in bankruptcy (the Trustees).
Mr Motylev used to control a number of banks, referred to in the judgment as the ‘Russian Bank Creditors.’
The Trustees applied to court to ask three questions; one of which was:
Should they treat the Russian Bank Creditors as being caught by the sanctions imposed under the Russia (Sanctions) (EU Exit) Regulations 2019 (the 2019 Regulations)?
The court acknowledged that the Trustees faced a difficult dilemma. If they incorrectly categorised the Russian Bank Creditors as being subject to sanctions, and thereby prevent their usual participation in the bankruptcy, they could face civil liability. Conversely, if they mistakenly determine that these creditors are not subject to sanctions when they actually are, they could be held criminally liable.
Designated Persons
To answer the question, it is first necessary to consider the meaning of “designated persons” under the 2019 Regulations.
The 2019 Regulations implement a scheme of sanctions whereby individuals and institutions are designated to become the subject of sanctions (and thereby become "designated persons").
Designated persons have their assets frozen, and it can be a criminal offence to deal with the assets of a designated person. Regulation 11 introduces the “asset freeze” over funds and economic resources of designated persons, including persons “owned or controlled” by designated persons.
Who Owns or Controls the Assets?
The provisions of the 2019 Regulations are extended so that it may be a criminal offence to deal with assets which are owned, held or controlled by a person who is owned or controlled directly or indirectly (within the meaning of Regulation 7) by the designated person.
In short, Regulation 7 has created two ways in which a person (who is not an individual) can be said to be "owned or controlled".
- The ‘owning or controlling’ person holds directly or indirectly more than 50% of the shares, or more than 50% of the voting rights, or holds the rights directly or indirectly to appoint or remove a majority of the board of directors. (Reg 7(2))
- There is a reasonable expectation that the owning or controlling person would (if they chose to) be able to achieve the result that the affairs of the company (or person who is not an individual) are conducted in accordance with the owning or controlling person’s wishes. (Reg 7(4))
The exact wording of Regulation 7 is included at the end of this article for reference.
Recent Cases on ‘Control’
This judgment discusses the UK sanctions test for ownership and control, and the conflating judgments in recent cases.
In PJSC National Bank Trust and another v Mints and others [2023] EWCA Civ 1132 (‘Mints’), the Court of Appeal said that the controlling person “calls the shots, or can call the shots”.
The problem with that interpretation is that control could be said to extend to control via political office, as President Putin or Governor Nabuillina (governor of the Centra Bank of Russia) could exercise influence in significant respects.
Following that judgment, the Office for Financial Sanctions Implementation (OFSI) published a statement reassuring the market that the UK government did not presume that all private entities incorporated in Russia were owned and controlled by the designated officials.
Permission to appeal from the decision of the Court of Appeal in Mints was granted by the Supreme Court on 24 January 2024 and it will be interesting to see what transpires.
The other significant case is Litasco SA v Der Mond Oil & Gas Africa SA [2023] EWHC 2866 (Comm) (‘Litasco’).
In Litasco, it was said that control should be looked at in the context of control that would result in direct or indirect control of the property (amounting to funds or economic benefits) in question.
It was a much narrower interpretation of Regulation 7(4). The judge was “prepared to assume that it is strongly arguable that President Putin has the means of placing all of Litasco and/or its assets under his de facto control, should he decide to do so," but he did not consider that President Putin was in control of the claimant Swiss subsidiary.
The judge in Litasco thought that the better interpretation of Regulation 7(4) is that it is concerned with an existing influence of a designated person over a relevant affair of the company, not a state of affairs which a designated person is in a position to bring about.
Does the State have Control of the Assets?
In Hellard, the question was whether President Putin or Governor Nabiullina would be able to exercise control over the Russian Bank Creditors via their liquidators so as to affect their dealings with these assets.
There was no evidence of de jure control or of present actual de facto control or of any possible future de jure control. The court considered what circumstances would need to occur to bring about any possible future de facto control by President Putin or Governor Nabiullina.
It was decided that until Governor Nabiullina or President Putin take steps to control the liquidators in the carrying out of their duties, it is going too far to say that either of them they could, if they wished, do this. It would ignore the fact that other people would need to cooperate with this, and it would also ignore the difficulties and political and reputational costs to them in bringing this about.
The Decision
The court decided that it had not seen any evidence that the Russian Bank Creditors are in fact owned or controlled by a designated person. Whether or not they are so owned or controlled is a question of fact and the court was not in a position to make any ruling on that point.
The Trustees were told that they should deal with the Russian Bank Creditors on the understanding that they are not designated persons and are not owned or controlled by any designated person and on the basis that they have no knowledge and no grounds for reasonable suspicion that this is not the case.
The Trustees were asked to undertake enhanced monitoring of the position of the Russian Bank Creditors. They have to check that there is no change in the public records on which they have relied.
Four Types of Control
During the course of the judgment, the Mr Nicholas Thompsell, sitting as a Deputy Judge of the High Court, broke the concept of "control" down into four types:
- de jure control: this exists where there is an absolute legal right to exercise control embedded, for example in the constitution of a company or a body;
- actual present de facto control: this exists where the putative controller is manifestly "calling the shots" with no legal right to do so;
- potential future de jure control: the creation of this category is the main reason why the words "(if P chose to)" are included in Regulation 7(4). This would exist where, although the designated person enjoyed no current legal right of ownership or control, the designated person had the legal means to obtain ownership or control. The most obvious example of this, would be where the designated person had an option or a forward contract to acquire a majority shareholding in a company; and
- potential future de facto control. This would exist where although there was no evidence that the putative controller was currently exercising de facto control, there is some good reason to believe that the putative controller could, if he or she wished, exercise control in some manner. For reasons I will expand on below, whilst this category must exist theoretically, I believe its existence in practice will be very rare.
Analysis
This judgment, and the new categories of control will help to give clarity on when sanctions apply to companies, particularly in working out whether a company is owned or controlled by a designated person. This judgment also offers further guidance when advising on the nuances of sanctions. It provides a clearer framework when assessing ownership and control.
Reference:
Regulation 7
- A person who is not an individual (“C”) is “owned or controlled directly or indirectly” by another person (“P”) if either of the following two conditions is met (or both are met):
- The first condition is that P (a) holds directly or indirectly more than 50% of the shares in C, (b) holds directly or indirectly more than 50% of the voting rights in C, or (c) holds the rights directly or indirectly to appoint or remove a majority of the board of directors of C.
- Schedule 1 contains provisions applying for the purpose of interpreting paragraph (2).
- The second condition is that it is reasonable, having regard to all the circumstances, to expect that P would (if P chose to) be able, in most cases or in significant respects, by whatever means and whether directly or indirectly, to achieve the result that the affairs of C are conducted in accordance with P’s wishes.
