In the matter of Sova Capital Limited

The joint special administrators applied under paragraph 63 of Schedule B1 to the Insolvency Act 1986 (as applied by Regulation 15(4)(a) of the Investment Bank Special Administration Regulations 2011) for the court's approval to enter two linked portfolio transfer transactions with Dominanta by which Sova would transfer a portfolio of Russian securities in return for Dominanta waiving admitted claims. The court treated the proposed transactions as sales or disposals of company property rather than distributions and held the administrators had the power to enter such sales provided they acted honestly and rationally and sought to obtain proper value in the circumstances.

The judge analysed (i) whether the administrators had surrendered their discretion to the court, (ii) whether the transactions offended the pari passu principle or the statutory insolvency scheme, (iii) whether the administrators' decision was rational and honest, and (iv) whether there was any realistic risk of breaching applicable sanctions laws. The court found the administrators had not surrendered their discretion, the transactions were within their statutory powers and not a forbidden distribution, the administrators' decision was honest and rational in the constrained sanctions environment, and there was no realistic risk of breach of UK, US or EU sanctions on the evidence. The court therefore granted permission for the JSAs to complete the transactions, subject to conditions precedent already agreed (notably Government Commission Consent having been obtained).

The applicants, the joint special administrators of Sova Capital Limited (an FCA-authorised broker in special administration), sought directions under paragraph 63 of Schedule B1 to the Insolvency Act 1986 (as applied by the Investment Bank Special Administration Regulations 2011) to permit two linked portfolio transfer transactions (the Dominanta Transaction and the Further Dominanta Transaction) whereby Sova would transfer a package of predominantly Russian securities to Dominanta in return for a waiver of Dominanta's admitted claim (the Dominanta Adjudicated Claim). Dominanta was a major unsecured creditor and a Russian purchaser; a competing bid was advanced by an interested creditor, Mr Boris Zilbermints, together with TPM, offering a hybrid of cash and claim waiver.

• Background: Following Russia’s invasion of Ukraine and the subsequent Western sanctions and Russian countermeasures, Sova’s ability to realise Russian securities on MOEX or by normal routes was severely constrained. The JSAs considered the securities effectively trapped and negotiated with Dominanta, a large unsecured creditor and Russian buyer, to transfer a portfolio in return for waiver of its claim. The JSAs calculated a cash equivalent value (CEV) model for comparing the competing offers and carried out creditor voting and legal due diligence (including on sanctions).
• Relief sought: directions permitting the JSAs to perform and procure Sova to perform the two portfolio transfer agreements (PTA1 and PTA2).
• Issues identified: (i) whether the JSAs had surrendered discretion to the court or whether it was appropriate to seek directions; (ii) whether the transactions were within statutory powers and consistent with the pari passu principle and other insolvency rules (notably Rules equivalent to Rule 151(1) and the pari passu principle); (iii) whether the decision was rational and honest and consistent with the duty to obtain proper value; and (iv) whether the transactions risked breaching UK, US or EU sanctions.
• Court’s reasoning and findings: The court accepted the JSAs had exercised their discretion in negotiating and entering the conditional PTAs and had not surrendered their discretion merely by making court approval a condition. The sale/disposal power in Schedule 1 of the Insolvency Act 1986 covered transfers in exchange for waiver of claims; characterisation must focus on legal substance not purely economic description. The pari passu principle governs distributions but does not prohibit sales of assets to creditors where the transaction is genuinely a sale for proper consideration and the administrators act to obtain best value reasonably obtainable in the circumstances. The JSAs’ approach—using the CEV/Dividend Bid Model, obtaining creditor indications, and assessing deliverability and sanctions risk—was an honest and rational exercise of their commercial judgment in a highly unusual sanctions-constrained market. Detailed legal advice and due diligence led the court to conclude there was no realistic risk of breaching UK, US or EU sanctions on the evidence presented. The court therefore permitted the JSAs to complete the Transaction.

The judgment also reviewed authorities on the court’s supervisory role in approving ‘momentous’ decisions, the limits of that role (MF Global, Nortel and related authorities), and the circumstances in which office-holders should apply for directions. It discussed the possible scope of immunity following court approval and emphasised that approval is not a sanctuary for office-holders but depends on the precise questions before the court.

The court allowed the applications and authorised the joint special administrators to enter and complete the Dominanta Transaction and the Further Dominanta Transaction. The judge held that the PTAs were properly characterised as sales or disposals within the administrators’ powers, did not constitute an unlawful distribution in breach of the pari passu principle, and that the administrators had acted honestly and rationally in the constrained sanctions environment. The court also concluded there was no realistic risk of breaching applicable UK, US or EU sanctions on the evidence provided.