UK High Court Hands Down Decision In Sova Capital

• Published date: 05 April 2023
• Subject Matter: Corporate/Commercial Law, International Law, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Export Controls & Trade & Investment Sanctions, Securities
• Law Firm: Katten Muchin Rosenman LLP
• Author: Prav Reddy, Sonya Van de Graaff, Mark Johnson, Dominique Hodgson and Dodie James

Key Points

• This application was brought in the wake of sanctions imposed by the United Kingdom, United States and European Union in response to the Russian invasion of Ukraine and involved a complex assessment of potential breaches.
• Although common and enshrined in statute in the United States "credit bid" transactions are not legislated for in the United Kingdom, and this case represented the first unsecured credit bid to be approved by an English court.
• The pari passu principle (by which all unsecured creditors must share equally any available assets) was raised in opposition to the application brought by a third party. The UK High Court held that the principle was not engaged on the facts as the proposed transaction was considered to be a sale rather than a distribution to creditors.

Background

The judgment of the UK High Court in Re Sova Capital Ltd. [2023] EWHC 452 (Ch) was handed down on 2 March. The full judgment can be found here.

Prior to entering special administration on 3 March 2022, Sova Capital Limited (Sova) was a Financial Conduct Authority authorised investment broker providing services to institutional and corporate clients primarily trading in the Russian markets. The sanctions imposed by the United States, United Kingdom and EU member states following the Russian invasion of Ukraine on 24 February 2022, combined with Russian countermeasures (such as prohibiting "hostile" residents from trading on the Moscow Stock Exchange), rendered Sova cash-flow insolvent and "effectively trapped" its Russian securities (which amounted to 87 percent of the value of Sova's assets).

The joint special administrators (the JSAs) applied to the Court for directions to enter into two transactions (together the Transaction) with LLC Holding Company Dominanta (Dominanta), one of Sova's largest unsecured creditors. The Transaction would involve Dominanta waiving its claim against Sova (circa '233 million) in return for a portfolio of Russian securities. The JSAs' application was opposed by a competing unsecured creditor, who wished to purchase the securities in return for '125 million in cash and a waiver of its '19.9 million claim. Dominanta was not subject to sanctions and, unlike the competing creditor, had obtained the requisite consent from the Russian government on 11 January.

The Dividend Bid Model

A transaction in which a creditor uses its debt as consideration to "bid" to buy an asset, although recognised under US bankruptcy legislation, is not...