Kevin Hellard & Ors v OJSC Rossiysky Kredit Bank (in liquidation) & Ors

Under Regulation 7(4) of the Russia (Sanctions) (EU Exit) Regulations 2019, control requires a sufficient ability to ensure that the affairs of the relevant entity are conducted in accordance with the designated person’s wishes. Potential future de facto control is theoretically possible but will be rare. The phrase “if P chose to” does not extend to situations requiring the cooperation of others or exposing P to substantial penalties or adverse consequences.

Creditor voting rights arising under the statutory bankruptcy machinery are neither “funds” nor “economic resources”. Exercising or accepting those rights therefore does not ordinarily constitute dealing with frozen funds or economic resources. Trustees in bankruptcy performing their statutory functions do not thereby provide financial services for the purposes of Regulation 18A.

The applicants were trustees in bankruptcy of Anatoly Leonidovich Motylev. Four respondent banks, formerly controlled by the bankrupt, held the majority of admitted proofs in the English bankruptcy and occupied most seats on the creditors’ committee. The trustees sought directions under section 303(2) of the Insolvency Act 1986 and declarations concerning the application of UK sanctions.

The central issues were whether the banks were owned or controlled by designated Russian public officials under Regulation 7(4) of the Russia (Sanctions) (EU Exit) Regulations 2019; whether their creditor votes could lawfully be exercised and counted; and whether the trustees’ statutory activities constituted prohibited financial services under Regulation 18A.

1. The court could not make a definitive factual finding whether the Russian Bank Creditors were owned or controlled by President Putin or Governor Nabiullina. On the evidence available, however, the trustees had no knowledge and no reasonable cause to suspect that the creditors’ claims, judgment debts or distributions were held or controlled by a designated person.

2. Regulation 7(4) recognises four forms of control: de jure control, actual present de facto control, potential future de jure control and potential future de facto control. The last category is theoretically possible but rare. The words “if P chose to” require that the designated person’s choice and action would itself be sufficient to bring control about. They do not cover a situation requiring cooperation by other persons or involving penalties, political costs or other consequences likely to deter the designated person.

3. The court reconciled PJSC National Bank Trust and another v Mints and others [2023] EWCA Civ 1132 with Litasco SA v Der Mond Oil & Gas Africa SA [2023] EWHC 2866 (Comm). The control inquiry must be directed to the relevant property and affairs in issue. The observations in Mints concerning political control were obiter and arose from an evidential concession.

4. Even assuming that the Russian Bank Creditors were caught by Regulation 7(4), creditor voting rights under the bankruptcy regime arise from statute and are not rights inherent in the underlying debts. They are neither “funds” nor “economic resources” within SAMLA. Exercising or accepting such votes is not dealing with frozen funds or economic resources, save that a vote approving a distribution could engage the Regulations if it caused funds to become available to a designated person.

5. The trustees’ statutory functions were not financial services for the purposes of Regulation 18A. Their functions were performed for the purposes of the bankruptcy and under court supervision, rather than for the purpose of foreign exchange reserve and asset management or as services supplied to particular creditors.

6. The court declined declaratory relief on the factual question of ownership or control, because it was fact-sensitive and touched on criminal liability. It did grant a declaration on the legal character of creditor voting rights, following the exceptional approach recognised in Bowman v Fels [2005] EWCA Civ 226. Directions were given under section 303(2) requiring the trustees, pending changed circumstances, to proceed on the stated basis and to undertake proportionate enhanced monitoring.

First-instance application for directions and declaratory relief in the English bankruptcy. No appellate history was stated.