High Court clarifies how sanctions interact with administration orders in England and Wales

In Re KRF Services (UK) Ltd [2024], the High Court made an administration order in relation to an company whose core business was adversely impacted by the Russia (Sanctions) (EU Exit) Regulations 2019 and set out useful guidance on the interaction between insolvency and the sanctions regime.

Asset freeze

KRF had provided management services for the benefit of the family of Dr Viatcheslav Kantor, a Russian businessman, which included managing the family home, the development of a further property and management of an art collection.

On 6 April 2022, the secretary of state designated that Dr Kantor be subject to an asset freeze pursuant to the sanctions regulations. Although KRF was not sanctioned itself, the practical effect of the asset freeze on Dr Kantor was that KRF was unable to carry on its business, leading to KRF and its sole director (and later a third-party creditor) seeking an administration order in respect of KRF.

Upon hearing the application, some six months after it was issued due to payment issues arising in light of the sanctions regulations, Andrew Twigger KC (sitting as a High Court judge) granted the administration order.

Sanctions regulations and insolvency legislation

Regulations 11 to 15 and 19 of the sanctions regime effectively prohibit any person from dealing with funds or economic resources owned, held or controlled by a designated person, or otherwise making funds or economic resources available to (or for the benefit) of a designated person, save where they have obtained a licence from the UK Office of Financial Sanctions Implementation (OFSI).

Separately, in order to place KRF into administration, the judge needed to be satisfied that, first, KRF was, or was likely to become, unable to pay its debts as set out in the Insolvency Act 1986, and, secondly, it was reasonably likely that the statutory purpose of the administration would be achieved. In KRF's case, the statutory purpose of the administration was to achieve a better result for its creditors than would be likely if KRF were wound up (without first being in administration).

Although content that KRF was unable to pay its debts as they fell due, the judge was mindful that, in order to achieve the purpose of the administration, the steps which needed to be taken by the (then proposed) administrators could only lawfully be achieved following the granting of an OFSI licence. These steps included collecting in KRF's cash reserves, and making distributions to KRF's creditors, which would likely involve dealing with funds owned, held or controlled by a designated person.

The insolvency ground

The Russia sanctions regulations have, since 5 December 2024, been amended to include the ability for administrators (among others) to obtain a licence from OFSI to "enable anything to be done in connection with […] any insolvency or restructuring proceedings relating to an insolvent person" provided that any payments made directly or indirectly to a designated person (among others) are credited to a frozen account. The insolvency ground applies, among other things, to administration.  

Although the insolvency ground was not in force at the time of the KRF hearing (albeit it would be within three weeks), the insolvency ground provided the judge with "further confidence for the view that OFSI is likely to grant a licence" to the administrators to enable them to take the steps needed to pursue the statutory purpose of KRF's administration.

Timing of an administration order

The judge concluded that the making of an administration order did not, in principle, breach regulations 11 to 15 and 19. He noted, in particular, that restricting the ability to apply for an administration order would have required unambiguous legislation and that the right to access the court would be hollow if the court could not make the order it had otherwise determined should be made. The judge then turned his attention to when the administration appointment should take effect.

Case law on the interaction between the sanctions regulations and insolvency legislation has been relatively sparce, but the judge considered:

• Re Sberbank CIB (UK) Ltd [2022], where an immediate special administration order was made, albeit pursuant to the Investment Bank Special Administration Regulations 2011.
• Re VTB Capital Plc [2022], where the judge directed that the administration order should not be made until licences from both OFSI and the equivalent US body (OFAC) were in place. An OFAC licence was not relevant in KRF's case.
• Re CargoLogicAir Ltd [2022], where a limited licence from OFSI was in place. Although a further licence was required by the administrators, the judge considered the administrators should be appointed immediately, therefore an immediate administration order was made.

Where there was no sufficient OFSI licence in place at the time of the hearing to enable proposed administrators to take the necessary steps to achieve the statutory purpose of the administration, the judge considered that would be taken into account as part of the court's discretion on whether to grant an administration order immediately, or at some future date. In the instant case, the judge considered that it was appropriate to make an immediate administration order, on the basis that:

• OFSI was more likely to grant a licence (and to do so more quickly) if the administrators had actually been appointed, particular in light of the (now in force) insolvency ground;
• KRF had been given notice by Companies House regarding strike-off action which presented a risk of a disorderly dissolution of KRF adverse to the interests of creditors; and
• there was a "high" and "increasing" risk of enforcement action from KRF's creditors.

Proposed administrators may be required to give undertakings

Notwithstanding the judge's willingness to make an immediate administration order, undertakings were obtained from the proposed administrators to provide additional comfort that there would be no breach of the sanctions regulations between their appointment and the grant of the requisite OFSI licence.

The undertakings obtained included that the administrators (once appointed) would pursue the licence in an expeditious manner and not deal with the funds or economic resources of KRF before obtaining the licence. If the OFSI licence had not been granted within three months, the administrators undertook to seek directions from the court.

Osborne Clarke comment

Although this was an unopposed application, this judgment provides useful commentary on the interaction between the making of an administration order and sanctions regulations. This will provide welcome clarification to ensure that officeholders can pursue the statutory purpose of the administration in a way that is compliant with the sanctions regulations and shows a commonsense approach to this technical area of law.

Considerations on timing and undertakings may also be relevant in the context of other restructuring procedures, as the insolvency ground for an OFSI licence covers moratoriums, company voluntary arrangements, receiverships, liquidations, schemes of arrangements and restructuring plans.