In the matter of Sova Capital Limited

An insolvency office-holder may sell company property in return for a creditor’s waiver of claims. Such a transaction is not a distribution merely because the creditor may obtain greater economic value from the asset than other creditors receive through dividends. The pari passu principle therefore does not apply to a genuine sale, although the office-holder must act rationally and honestly and seek the best price reasonably obtainable in the circumstances.

The court’s approval is appropriate where the transaction raises genuine questions about statutory powers, insolvency principles, conflicts or sanctions. Approval does not transfer the commercial decision to the court. The court asks whether the transaction is lawful, within power, and one which reasonable and honest office-holders could properly approve.

The joint special administrators of Sova Capital Limited sought directions permitting two related portfolio transfer transactions with LCC Holding Company Dominanta. Dominanta would acquire Russian securities in return for waiving its admitted unsecured claim against Sova.

The applications were opposed by Boris Zilbermints, who advanced a competing cash-and-claim-waiver offer and argued that the proposed transactions were outside the administrators’ powers, infringed the pari passu principle, breached the statutory scheme and might contravene sanctions legislation. The central issues were whether the administrators had surrendered their discretion, whether the transactions were lawful and rational, and whether there was a realistic risk of sanctions breaches.

1. Approval and surrender of discretion. The applications were proper because they raised novel questions concerning the administrators’ powers, the statutory insolvency scheme, possible conflicts and sanctions. The administrators had not surrendered their discretion. They had already decided to enter the transactions, subject to court approval, rather than leaving the decision to the court.
2. Power and pari passu. The power to sell or otherwise dispose of company property under paragraph 2 of Schedule 1 to the Insolvency Act 1986 was broad enough to include a transfer in return for a creditor’s waiver of claims. The transaction was legally a sale, not a distribution. The creditor received the securities as buyer and ceased to be a creditor to the extent of the waived claim. The pari passu principle concerned equality of distributions and did not apply to a genuine sale.
3. The transaction would remain impermissible if a purported sale were in reality a disguised distribution. The relevant constraint was instead that the administrators must act reasonably to obtain the best price available in the circumstances. The possibility that a Russian purchaser might profit from the securities reflected the asymmetrical value created by the sanctions and restrictions, rather than an unequal distribution by Sova.
4. Rationality and honesty. The administrators honestly believed that the transaction was in Sova’s creditors’ interests. Their decision was rational because it responded to severe restrictions on realisation, compared the competing offers, allowed for execution risks and uncertainty concerning Russian approvals, and took account of creditor support. The court did not substitute its own commercial judgment or determine whether better marketing or negotiations could have produced a better result.
5. Sanctions. There was no realistic risk that the transactions infringed UK sanctions. The court was also satisfied, so far as material, that they did not infringe US or EU sanctions. Ukrainian sanctions law had no bearing on the decision because there was no relevant governing-law, performance or other material nexus with Ukraine.
6. The administrators were permitted to enter into the transactions.