London partners Prav Reddy and Sonya Van de Graaff, Insolvency and Restructuring, authored an article for Financial Regulation International on the England and Wales High Court's recent judgment regarding the application by Sova Capital Ltd to enter a "credit bid" transaction, which is not legislated for in the UK, representing "the first unsecured credit bid to be approved by an English court."
The joint special administrators applied to the court for directions to enter into two transactions with one of their largest unsecured creditors, Dominanta, in the wake of sanctions imposed by the US, UK and EU member states following Russia's invasion of Ukraine as well as Russian countermeasures that "rendered Sova cash flow insolvent and 'effectively trapped' its Russian securities." Prav and Sonya explained that these transactions would involve Dominanta waiving its £223 million claim against Sova in exchange for a portfolio of Russian securities.
However, the pari passu principle, "which requires that distribution among unsecured creditors of assets available in an insolvent estate should be equal," was raised in opposition by a competing unsecured creditor that wished to purchase those same Russian securities for £125 million in cash and a waiver of its own £19.9 million claim. The court ultimately held that this principle did not apply "as the proposed transaction was considered to be a sale rather than a distribution to creditors," and that there was no "realistic risk" the transactions would breach applicable sanctions laws.
Prav and Sonya noted that the decision "demonstrates that the courts are taking a pragmatic approach to complex sanctions-related administrations" and "identifies a novel solution for insolvency practitioners to maximize value for the benefit of creditors as an alternative to a sale to a third party."
"A Pragmatic Approach to Sanctions-Related Administrations" *Financial Regulation International, June 9, 2023
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Note: This article was first published as an advisory on March 27, 2023.
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