Emma RadmoreThe Administrative Court has rejected a challenge of a general licence OFSI issued to allow the distribution of assets from VTB Capital plc’s estate while its assets were frozen.
PJSC VTB Bank (VTBB), the Claimant, has been subject to UK sanctions since February 2022, and the sanctions extended indirectly via an asset freeze to its UK subsidiary VTB Capital plc (VTBUK). The effect of the sanctions was to make VTBUK insolvent and it went into administration in late 2022. When it applied for the administration order, OFSI amended the General Licence it had previously issued to permit VTBUK to make payments for its basic needs, routine holding and maintenance charges and legal fees, so that any person would be able to make, receive or process any payments or take any other action in connection with any insolvency proceedings relating to VTBUK, but that no funds or economic responses could be made available to or for the benefit of any person designated under the Russian sanctions regime, except for VTBUK.
When the hearing for the administration order application took place in April 2022, the judge made an “in principle” decision on the basis that the appointment would be in keeping with its stated statutory objective, but since it was pointless unless an OFAC licence equivalent to the OFSI one was granted, the appointment order would not be sealed until there was evidence of both licences being in place. Once the OFAC licence was granted in November 2022, the application went back to the Insolvency Court, which granted the application and appointed the Joint Administrators.
The court heard that over the next 18 months the JAs worked on progressing the administration consensually, and so consulted closely with VTBB as the majority shareholder and principal creditor of VTBUK. There had been discussion about a scheme of arrangement which envisaged some limited participation of VTBB (which was of course still sanctioned), so it would get some of the assets, albeit on a “frozen” basis and deferred until the non-sanctioned creditors had been paid. VTBB seemed willing to accept this and, in May 2024 OFSI amended the General Licence further to enable the Joint Administrators to administer the scheme. However, the day before the scheme meeting, VTBB, having previously raised no objections, announced that it would vote against the scheme – which as a result would not be approved. This led to detailed discussions between the JAs and OFSI as to the best way forwards, and OFSI amended the General Licence with the effect that VTBB would not be able to make a double recovery, step ahead of other creditors or profit from statutory interest in the administration.
VTBB voted against the latest version of the scheme, but no longer had a blocking veto, so the scheme was passed. When the JAs then went to the Insolvency Court to get the distribution approved, VTBB again said it would both oppose the application and challenge the amended licence. So the Insolvency Court decision was put on hold.
The Administrative Court considered VTBB’s challenge, which was based on several grounds including procedural unfairness, irrationality and what was considered to be the main substantive challenge that OFSI acted in exercise of its licensing powers for an improper purpose. The Court dismissed the claim in its entirety, saying that the purpose of the licence amendment was consistent with the statutory purpose of the sanctions and that the decision was fair, rational and lawful. It said that OFSI allowed the administration so that unsanctioned creditors could so far as possible be protected from the consequences of the insolvency and that it was never part of the intention that any sanctioned creditor should be relieved of any of the effects of the process other than to help the unsanctioned creditors. Hence OFSI’s original willingness to remove sanctions barriers to the scheme that was being proposed, which entailed decriminalisation of some residual funds flows, subject to protections. Because VTBB then at a late stage and without notice withdrew from the scheme it gave rise to concerns that VTBB was looking to achieve a flow of resource out of the administration towards itself, at the expense of the unsanctioned creditors. As a result, OFSI placed on the licence (on request) conditions to give effect to the original policy intent.