Key takeaways
EU sanctions blocked bond payments
The court ruled payments under the bonds were illegal in France and Italy.
Ownership and control interpreted broadly
Sanctions apply even through trusts or indirect links to designated individuals.
Sanctions laws apply to all financial tools
No matter how basic, compliance is required.
LLC Eurochem North-West-2 & another -v- Societe Generale S.A & others [2025] EWHC 1938 (Comm)
The Commercial Court has found that on-demand bonds governed by English law were invalid in their places of performance (Italy and France) due to EU sanctions. Therefore, as a matter of English law, they were unenforceable. Alternatively, they would have been unenforceable as a matter of public policy.
This is a very important decision for those dealing with international sanctions because the Court has provided a very detailed analysis of the way in which EU sanctions and domestic sanctions authorities operate in such circumstances. It also includes a detailed analysis of the concepts of ‘ownership’ and ‘control’ for the purposes of sanctions’ application, including in the context of a trust arrangement, which is not uncommon where there is a connection to a sanctioned individual.
This is additionally a very useful decision for those dealing with performance bonds and similar trade finance instruments in the context of sanctions.
The background facts
The relevant parties
The dispute arose out of six on-demand bonds (Bonds) issued in 2021 and 2022 by Société Générale (SocGen) and ING Bank (ING) - together, the Banks - in favour of EuroChem North-West-2 (EuroChem NW2), a Russian entity.
The Bonds were issued pursuant to contracts between Eurochem NW2 and Tecnimont S.P.A (Tecnimont), an Italian engineering company and its Russian affiliate LLMC MT Russia (MT Russia), for the construction of a fertilizer plant in Kingisepp, Russia. The Bonds were intended to guarantee Eurochem NW2’s obligations under those contracts.
SocGen is a French-incorporated bank with a branch in Milan. ING is a Netherlands-incorporated bank, also with a branch in Milan.
The Bonds
The Bonds, which were governed by English law, had a combined value exceeding EUR 280 million. The Bonds were in materially similar terms, however the SocGen Bonds all provided that there were no applicable rules, whereas the ING Bonds provided for the application of the URDG Rules. Article 20(c) of the URDG 758/2010 provides as follows:
“(c) Payment is to be made at the branch or office of the guarantor or counter-guarantor that issued the guarantee or counter-guarantee or such other place as may be indicated in that guarantee or counter-guarantee (“place for payment”).”
Sanctions
Following Russia’s invasion of Ukraine in February 2022, the EU designated Mr. Andrey Melnichenko, the founder of EuroChem Group, and subsequently his wife, Mrs. Aleksandra Melnichenko, as sanctioned individuals. The EU sanctions include, in particular, designation by being listed under Annex I to Council Regulation (EU) No. 269/2014 (Regulation 269).
Article 2 of Regulation 269 is a key provision for the purposes of this dispute and has two limbs:
Article 2(1) provides: “All funds and economic resources belonging to, owned, held or controlled by” anyone listed in Annex I “shall be frozen.”
Article 2(2) provides: “No funds or economic resources shall be made available, directly or indirectly, to or for the benefit of” anyone listed in Annex I.
Termination of the contracts
In May 2022, both Tecnimont and MT Russia informed Eurochem NW2 that they were terminating their services under the contracts due to sanctions. Eurochem NW2 rejected this stance and itself terminated the contracts on the basis of the contractors’ default.
The dispute under the contracts was referred to arbitration and the outcome remains pending.
Demand on the Bonds
In August 2022, EuroChem NW2 made demands under the Bonds. It requested that payment be made to its account with Gazprombank in Moscow, via the correspondent bank in Luxembourg.
The Banks refused to honour the demands, contending that to do so would be illegal and would breach EU sanctions.
Assignment
In December 2022, EuroChem NW2 assigned the proceeds of the Bonds to EuroChem AG (together EuroChem), a Swiss entity. Notice of the assignment was given to the Banks in January 2025 and EuroChem AG requested that payment be made to its Euro bank account in Russia.
As a matter of English law, the assignment of the proceeds of a bond are distinguishable from an assignment of the bond itself. In the case of an assignment of the proceeds, there is no contractual relationship between the assignee and the issuer of the bond whose relationship remains solely with the assignor. Any demand under the bond must be made by or on behalf of the assignor. The sole effect of the assignment is that the proceeds are paid to the assignee, not the assignor.
An assignment of the proceeds also differs from a novation because the assignee acquires its rights subject to any claims and defences that would have been available against the assignor.
The dispute
When no payment under the Bonds was forthcoming, EuroChem issued proceedings against the Banks, claiming that valid demands were made under the Bonds which the Banks were obliged to pay.
The Banks argued that one or both of Article 2(1) and Article 2(2) of Regulation 269 applied. Therefore, they alleged that payment under the Bonds would be illegal under any relevant EU country’s laws. Furthermore, they contended that this foreign illegality rendered the Bonds unenforceable as a matter of English law.
The Commercial Court decision
The issue of control
The Court was primarily required to determine whether either EuroChem NW2 or EuroChem AG was owned or controlled by Mr or Mrs Melnichenko, for the purposes of Regulation 269.
As both Mr and Mrs Melnichenko were listed in Annex I to Regulation 269, the Court had to determine whether the Bonds were frozen under Article 2(1), because they must be considered funds or economic resources that belonged to, or were owned, held or controlled by Mr or Mrs Melnichenko; and whether payment under the Bonds was prohibited under Article 2(2), because it would make funds or economic resources available to Mr or Mrs Melnichenko.
The Court reviewed the provisions of Regulation 268 and additionally consulted numerous relevant materials published by the EU, including:
EU Council’s Best Practice document giving EU Members giving guidance relevant to the meaning of “owned” and “held or controlled” in Article 2(1) of Regulation 269 and discussing the significance of a finding of ownership or control, in the context of Article 2(2);
Two Opinions (June 2020 and June 2021) from the EU Commission on Regulation 269;
EU Commission Guidance (November 2023) on the implementation of firewalls in cases of EU entities owned or controlled by a designated person;
Consolidated FAQ Document (March 2025) in response to frequently asked questions regarding the relevant regulations;
Syria FAQ Document (November 2017) which shed light on Regulation 269; and
Various CJEU decisions relevant to the interpretation of Regulation 269, including decisions specifically relevant to the EuroChem Group and the Melnichenkos.
Construction of Regulation 269
The Court found that the Bonds fell within the definition of “funds” in Regulation 269 because Article 1(g)(v) expressly included “performance bonds or other financial instruments.” Further or alternatively, they must come within the definition of “economic resources,” which had to be given a broad interpretation. As the definition of “funds” included “performance bonds,” the definition of “freezing of funds” was intended to apply to performance bonds.
The real issue under Article 2(1), therefore, was whether the Bonds fell within the phrase “belonging to, owned, held or controlled by.”
As to Article 2(2), the Court highlighted the significance of prohibiting “indirect” as well as direct transactions because otherwise it would be easy to circumvent, and would defeat the purpose of, the regulations.
Specifically:
If an entity – typically, a company – was owned or controlled by a designated person, there was a risk that any funds or economic resources that were available to that entity would thereby become available to the designated person that owned or controlled it.
There was a presumption that if a designated person controlled an entity, that control would extend to all the entity’s assets.
Firewalls were relevant because they could enable an entity that would otherwise be affected by Article 2(1) or 2(2) to continue to trade, by: (i) removing the designated person from day-to-day operations; and (ii) ringfencing its assets so as to prevent its funds or economic resources from being made available to a designated person.
Effective firewalls would negate the presumption that would otherwise follow from the entity being controlled by the designated person.
Ownership and control
The Court rejected the argument that “ownership” in this context was limited to direct, legal ownership. Such a restricted approach to “ownership” would effectively neuter Article 269 entirely and so would frustrate its purpose. In interpreting Article 2(1), the Court noted that its provisions are not limited to “ownership” and “control”. They also include “belonging to” and “holding”, which are intended to broaden the scope of the provision beyond formal ownership. These verbs must encompass a relationship that falls short of ownership but still reflects effective control.
With this in mind, the Court considered detailed evidence regarding the ownership structure of the EuroChem Group both before and after sanctions were imposed and analysed a restructuring of the Group.
In summary:
EuroChem NW2 is wholly owned by MCC EuroChem JSC (Russia), which is owned by EuroChem Group AG (Switzerland).
EuroChem AG is owned by AIM Capital Limited (Cyprus), which is ultimately held through a discretionary trust, Firstline Trust.
In March 2022, Mr Melnichenko resigned as discretionary beneficiary of the Firstline Trust. Mrs Melnichenko became the sole discretionary beneficiary and appointed Mr Fokin as the trust’s protector.
Among other arguments put forward by the Melnichenkos was that a beneficiary of a discretionary trust had no proprietary interest in the assets. Such a beneficiary could only oblige the trustees to administer the trust according to its terms.
The Court acknowledged that the beneficiaries in such a case would not have a proprietary interest, but it was incorrect in such circumstances to focus on the black-letter law rather than considering the purpose of Regulation 269. The Court decided that the beneficiary under a discretionary trust was the owner of the trust assets, alternatively the person to whom the assets belonged for the purposes of Article 2.
In any event, the Court also found on the evidence that Mr Fokin was effectively an individual who would do as Mr Melnichenko wished. Therefore, in reality, Mr Melnichenko retained effective control at all times. In the Court’s view, this was a case where the trust was not really a discretionary trust under the terms of the trust deed. Those terms gave Mr Melnichenko the ability to secure the appointment of Mr Fokin to do his bidding. The restructuring was deemed to be both ineffective and superficial for the purposes of removing Mr Melnichenko’s control.
The Court concluded that Mr Melnichenko was to be regarded as the owner of the trusts in question for the purposes of Articles 2(1) and 2(2) of Regulation 269.
It was noted that EuroChem AG had implemented certain firewall measures. As stated above, this is relevant because if a company is controlled by a designated person, there is a presumption that the control extends to all the company’s assets. However, effective firewall measures can negate this presumption, as they can prevent an entity from being treated as controlled by a designated person by (i) excluding the designated person from day-to-day management; and (ii) ensuring that the entity’s assets are ringfenced so that no funds or economic resources are made available to that person.
The Court found that due to EuroChem AG’s firewall measures, neither of the Melnichenkos retained control over the Group as a whole. In particular, an audit, combined with EuroChem AG’s policies and commitments, prevented Mr Melnichenko from having control over EuroChem AG and its EU subsidiaries.
However, the Court concluded that these firewall measures did not have any effect on EuroChem’s Russian entities, such as MCC EuroChem or EuroChem NW2, or on any group companies in countries where sanctions are not applicable (e.g. the UAE).
The Court, therefore, found that Mr Melnichenko retained and still had control over MCC EuroChem, the head Russian holding company, and (therefore) over the companies below it in the group ownership structure.
NCAs
National Competent Authorities (NCAs) are appointed by EU Member States to enforce the provisions of Regulation 269 at a domestic level. They are competent to determine issues of control and ownership for these purposes.
Therefore, the decision of an NCA (i) that specific assets, or the assets of a specific entity, are frozen, or (ii) that a specific entity is owned or controlled by a designated person, is determinative, at least for the purposes of the domestic law of the relevant Member State. NCAs may also recognise a firewall and grant authorisation to release frozen assets.
Evidence regarding the stance taken by various NCAs was submitted. Principally, the Court relied on evidence that the French and Italian NCAs had determined that the Bonds were frozen under Article 2(1).
Findings on ownership and control
Based on its own findings, as well as the NCA decisions referred to above, the Court concluded that EuroChem NW2 was owned, held or controlled by Mr Melnichenko. There was a presumption that any funds transferred to EuroChem NW2 would be passed on to Mr Melnichenko.
The Bonds were, therefore, subject to asset-freezing pursuant to Article 2(1). The Banks were therefore prevented from paying pursuant to EuroChem’s demands or even agreeing to do so.
The significance of Article 2(1) for the assignment was that there were no, and could be no, proceeds of the Bonds and so there was nothing for the assignment to bite on.
Claims in connection with the contracts
In view of the autonomous nature of on-demand bonds, an argument was made that the claims under the Bonds were not claims in connection with the underlying contracts. The Court acknowledged that the entitlement to bring claims under the Bonds depended solely on valid demands having been made.
However, such an approach did not take sufficient account of the purpose of Regulation 269. In this context, the words “in connection with” did not require any form of legal dependence. Rather, the question was one of factual connection. It was undeniable that the Bonds were connected to the contracts as they were only issued because the contracts required it.
Illegality
Payment would be illegal in France and in Italy, because (as matters presently stood) the NCA in each country had determined that the Bonds were frozen under Article 2(1) of Regulation 269. Payment would require the Banks to deal with the Bonds as if they were not frozen. This would be illegal, under the law of France and under the law of Italy.
Under English law, a contract will be invalid if it is deemed invalid in the place in which it is to be performed. In the case of the ING Bond that incorporated the URDG, payment was to be made at ING’s branch in Milan, which was where the Bond was issued and was also where the demand had to be made. In the case of the SocGen Bonds, there was no expressly stipulated place for payment. However, they all provided expressly that demands had to be made at SocGen’s headquarters in Paris.
On the authorities, the Court decided that the place of demand was also the obvious place of payment. Therefore, as a matter of English law, the place for payment under the Bonds was in France as regarded the SocGen Bonds and in Italy as regarded the ING Bond. Payment was clearly central to the Banks’ performance of their obligations under the Bonds, and it followed that performance by them would therefore be illegal in the relevant jurisdictions. Alternatively, they would be unenforceable as a matter of public policy.
The Court also noted that the Banks had in fact applied for licences but so far to no avail.
The Court concluded that EuroChem’s claims failed.
Comment
It is significant that the Court highlighted the importance of applying a broad interpretation to the concepts of control and proprietary interest in this context so that the purposes of the sanctions regulations should not be defeated. Ultimately, the Court prioritised substance over form in assessing ownership and control for these purposes.
It is also noteworthy that the Court decided the principle of autonomy with regard to on-demand bonds and similar instruments did not take adequate account of the purposes of Regulation 269. This is an important point for those dealing in trade finance instruments.
