Court considers whether UK sanctions would be breached by distribution of dividends in bankruptcy

Thomas & others in their capacities as joint trustees in bankruptcy of Nikolay Fetisov and Ilya Yurov -v- PJSC National Bank Trust [2025] EWHC 75 (Ch)

The Court has granted English trustees in bankruptcy permission to make distributions in two bankruptcies to a Russian bank by making a payment to the bank’s solicitors’ client account. 

On the evidence and facts before the Court, there would be no breach of UK financial sanctions in making the payments. Even if there were, a regulatory exemption applied because the circumstances that gave rise to the obligation to make these payments arose well before the sanctions came into force.

The background facts

PJSC National Bank Trust (PJSC) is a Russian bank that collapsed in 2014 and is now in run-off. It is regulated and majority-owned by the Central Bank of Russia (CBR).

Mr Fetisov and Mr Yurov (the Bankrupts) were among the defendants in English Court proceedings brought by PJSC, pursuant to which the defendants were ordered in 2020 to pay very significant amounts to PJSC in various currencies. The aggregate liabilities were in the region of US$900 million.

Messrs Fetsove and Yurov subsequently petitioned for their own bankruptcies in the English Court and bankruptcy orders were made against them. Trustees in bankruptcy were appointed and sought court orders permitting them, pursuant to s.303 Insolvency Act 1986, to make distributions in the two bankruptcies to PJSC by making payments to their solicitors’ client account. 

PJSC was by far the largest creditor in both bankruptcies and would receive a very substantial proportion of any distributions. The trustees had realised assets in both bankruptcies and had sufficient funds to make a first distribution to the Bankrupts’ creditors.

PJSC is not a specifically designated entity pursuant to UK financial sanctions in place in relation to certain Russian entities and individuals, although it became a designated entity pursuant to US sanctions in November 2024. 
Nonetheless, the trustees were concerned that PJSC might be treated as being subject to sanctions by the UK authorities because the Governor of the CBR and President Putin are sanctioned individuals, and President Putin is arguably able to control the Russian economy by virtue of his political office. 

Consequently, the concern was that a payment of dividends to PJSC might arguably be found to be a breach of the sanctions regime and lead to criminal liability on the trustees’ part.

The relevant Regulations

The trustees highlighted certain provisions of the Russia (Sanctions) (EU Exit) Regulations 2019 (the Regulations) as being potentially engaged by the payment of dividends in an insolvency process. Specifically:

• Regulation 12, which concerns making funds available to a designated person;

• Regulation 13, which concerns making funds available for the benefit of a designated person; and

• Regulations 14 and 15, which contain similar prohibitions against making economic resources available to a designated person.

The prohibitions extend to making funds available directly or indirectly to a designated person, which includes making them available to a person who is directly or indirectly owned or controlled by a designated person.

Regulation 7 clarifies what it means to be owned or controlled directly or indirectly by a designated person. In essence:

• The designated person holds directly or indirectly more than 50% of the shares in the relevant entity, the voting rights in the entity, or the right to appoint or remove a majority of the board of directors of the entity (Regulation 7.2); or

• it is reasonable, having regard to all the circumstances, to expect that the designated person would (if it 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 the entity are conducted in accordance with the designated person’s wishes (Regulation 7.4).

The offences in question can lead to criminal liability if intent is proven but may also attract significant financial penalties on a strict liability basis. The financial penalty can be up to £1 million or 50% of the estimated value of the economic resources in question, whichever is higher.

However, these Regulations will not apply where a licence has been obtained from the UK Office for Sanctions Implementation (OFSI). 

Furthermore, Regulation 58 sets out a number of exceptions to the prohibitions in Regulations 12 and 13. These exceptions include: 

• Paragraph (4) which provides an exception for a relevant institution crediting a frozen account when it receives funds transferred to that institution for crediting to that account; and 

• Paragraph (5) which provides an exception where a relevant institution credits an account held by a designated person where ”those funds are transferred in discharge (or partial discharge) of an obligation which arose before the date on which the person became a designated person”.

The control issue

There are a number of relevant authorities on whether a designated person can control an entity within the meaning of Regulation 7 where the entity is not a personal asset of the designated person, but the designated person is able to exert influence over it by virtue of the political office that they hold at the relevant time.
In 2023, the Court of Appeal in PJSC National Bank Trust -v- Boris Mints held that Regulation 7(4) had a clear and wide meaning and was not ambiguous. There was nothing to justify a carve-out where the ability to exert influence arose from political office.

Following Mints, in November 2023, OFSI and the Foreign and Commonwealth Development Office issued a joint guidance on the application of the “ownership and control” test under UK financial sanctions regulations as follows:

"…Specifically, for the purposes of regulation 7(4) of the [Regulations], the UK government does not consider President Putin exercises indirect or de facto control over all entities in the Russian economy merely by virtue of his occupation of the Russian Presidency. A person should be considered to exercise control over certain private entities where this can be supported by sufficient evidence on a case-by-case basis."

Subsequently in 2023, in Litasco SA -v- Der Mond Oil and Gas Africa SA & another, the Court focused on the existing influence of a designated person as opposed to a state of affairs which the designated person was in a position to bring about. Therefore, the Court did not consider that Mr Putin’s position as the head of a “command economy” meant he controlled every company operating within Russia. The Court’s view was that the designated person had to “call the shots”, not be a person who merely could call the shots. 

In 2024, in Hellard -v- OJSC Rossiysky Kredit Bank (& others), the Court sought to reconcile the decisions in Litasco and the Mints appeal. It identified four categories of control:

1. De jure control: this would clearly satisfy the test and could be determined by looking at the constitutional documents for the entity in question.

2. Actual present de facto control: this was where the putative controller was manifestly “calling the shots” while having no legal right to do so; again, this would satisfy the test.

3. Potential future de jure control: this would be control arising, say, under a forward contract of some sort which would give the putative controller a legal right to assume control. Whether such control existed would involve looking at the documents which were the source of the legal right.

4. Potential future de facto control. This would exist where although there was no evidence of current de facto control, there was a good reason to believe the controller could, if they wished, exercise control in some manner. Such cases would be rare.

The Court decision

The Court found this case was distinguishable on the facts from the scenario in the Mints litigation. 

Here, the following considerations were important:

1. PJSC was not a UK-designated entity. The recent US designation was broad brush and included another 50 Russian banks. PJSC was not designated due to a reassessment of the control issue.

2. OFSI had confirmed that it did not consider PJSC to be directly or indirectly owned or controlled by the CBR Governor or President Putin.

3. PJSC’s solicitors had confirmed their view, based on the information available to them, that there was no such control. 

4. There was no evidence of potential de facto control by President Putin in this case.

5. There was no reasonable expectation, in all the circumstances, that either of the designated individuals here would be able to exercise meaningful control over the affairs of PJSC.

The Court stated that if it were wrong on the control issue and a designated person did in fact control PJSC within the meaning of the Regulations, a distribution of dividends to PJSC would indeed be a breach of Regulation 12, even if the funds were paid to their solicitors. The solicitors would be in breach because they would make the funds available to PJSC.

However, the exemption in Regulation 58(5) would then apply in this case because the facts which gave rise to the judgments against the Bankrupts, and the payment orders against them, arose well before Mr Putin became a designated entity. The exemption would apply, therefore, to the proposed payment to the solicitors’ account.

The Court, therefore, made the orders for a distribution of the dividends by the trustees in bankruptcy.

Comment

This is another useful decision from the English Court, giving guidance on how it will construe the scope and effect of sanctions regulations and how it will approach the issue of ownership and control.