Summary
The English courts continue to develop precedents on the interpretation of UK sanctions legislation. In the recent case of Vneshprombank v. Bedzhamov [2024] EWHC 1048 (Ch), the English High Court ruled that, as a matter of construction, the asset freeze restrictions under Regulation 11 of the UK Russia (Sanctions) (EU Exit) Regulations 2019 are only engaged if, as a matter of fact, the funds or economic resources in question are owned, held or controlled by a designated person. They are not engaged if a UK person merely had “reasonable cause to suspect” that they were owned, held or controlled by a designated person.
Brief facts
- A1 is the litigation funder of Vneshprombank (VPB), which has issued a claim against Mr Bedzhamov (B) pleaded in the amount of US$1.34 billion.
- A1, part of the Alfa Group, was founded by Mr Fridman, Mr Khan and Mr Kuzmichev (the Founders). Up until March 2022, the Founders were the major shareholders, holding 95% together. It was B’s case that these shareholdings formed a “joint arrangement” and therefore (contrary to the default position under UK sanctions law) were to be aggregated.
- On 15 March 2022, the Founders were each designated by the UK government. Shortly afterwards, the Founders purported to have sold their majority shareholding in the Alfa Group to other individuals involved in the governance of the Alfa Group, such that Alfa Group was unaffected by the restrictions in place against the Founders.
- This judgment related to an application issued by B seeking a declaration from the High Court as to whether there was reasonable cause to suspect that A1 was owned, held or controlled by a designated person or persons, and if there was, an order that the litigation could not proceed since A1, as the litigation funder of VPB, would financially benefit from any judgment obtained by VPB.
Relevant law
The relevant legislation is contained in Regulations 7 and 11 of the UK Russia (Sanctions) (EU Exit) Regulations 2019 (the Regulations).
Regulation 7: “owned or controlled directly or indirectly”
1. “A person who is not an individual (“C”) is “owned or controlled directly or indirectly” by another person (“P”) if either of the following two conditions is met (or both are met)
2. The first condition is that P -
a. Holds directly or indirectly more than 50% of the shares,
b. Holds directly or indirectly more than 50% of the voting rights, or
c. Holds the right directly or indirectly to appoint or remove a majority of the board of directors
...
4. the second condition is that it is reasonable, having regard to all the circumstances, to expect that P would (if P chose to) be able, in most cases or in significant respects, by whatever means and whether directly or indirectly, to achieve the result that affairs of C are conducted in accordance with P’s wishes”.
Regulation 11: Asset-freeze in relation to designated persons
1. “A person (“P”) must not deal with funds or economic resources owned, held or controlled by a designated person if P knows, or has reasonable cause to suspect, that P is dealing with such funds or economic resources
...
3. A person who contravenes the prohibition in paragraph (1) commits an offence.”
The issues
1. Issue of construction: Is Regulation 11 engaged if there is “reasonable cause to suspect” that an entity is owned, held or controlled by a sanctioned person or entity? Or is “reasonable cause to suspect” not relevant until or unless proven that there is, as a matter of fact, such ownership and/or control?
2. Issue of fact: Is there in fact reasonable cause to suspect that A1 remains controlled by the sanctioned former owners?
Issue of construction
- B proposed Regulation 11 is engaged if “reasonable cause” exists – even if relevant funds or economic resources are not in fact owned, held or controlled by a designated person (DP). B further asserted that to conclude otherwise would create a trap, as a person who has reasonable cause to suspect (but not definitive evidence to prove) that a party is controlled by a DP would not have a basis to refuse to deal with the party; but could later be found to have committed a criminal offence if it were concluded that the party was in fact owned or controlled by a DP.
- B argued that this is supported by the legislative text, the primary purpose of the Regulations, OFSI guidance and a white paper on UK’s future legal framework for imposing and implementing sanctions.
- The High Court rejected B’s approach. It agreed with VPB that B’s construction of Regulation 11 would be a “monumental extension of criminal liability” since it would mean that a person P is prohibited from dealing with funds or economic resources owned, held or controlled by a person in respect of whom there was reasonable cause to suspect is, but who in fact is not, a DP; and that person P who did so would be liable for conviction on indictment (which is punishable with up to seven years’ imprisonment).
- The High Court, having outlined key principles from case law on statutory construction, stated that the focus is on the following words in Regulation 11: “A person (“P”) must not deal with funds or economic resources owned, held or controlled by a designated person [emphasis added]”.
- Accordingly, the High Court ruled that liability arises under Regulation 11 only if (i) there is ownership or control in fact; and (ii) there was knowledge or reasonable cause to suspect.
Issue of fact
- Despite ruling against B on the issue of construction, the High Court determined that there were good reasons to consider the second issue (albeit in isolation from the determination on the first issue).
- The High Court concluded as follows:
- Having considered the share proportions and company history, it had reasonable cause to suspect that there was a joint arrangement between the Founders up until the time of disposal of the Founders’ interests in or control over A1.
- The factual circumstances of disposal (including the alleged ownership change on undisclosed terms at around the same time) suggest that the disposal was not an arm’s length or genuine transaction but was designed to circumvent the impact of sanctions.
- The £714 paid for the entire share capital of A1 aligns with a non-arm’s length disposal. The balance sheet contained obvious and unexplained omissions.
- However, pursuant to the High Court’s finding on the issue of construction, what mattered was whether A1 was in fact owned, held or controlled by the Founders. The High Court was invited by B to consider this issue, but it rejected to do so. Crucial to this decision was that the point at which the question of control matters is the point at which payment has to be made. On that basis, B’s application was dismissed.
Conclusion
This recent judgment indicates that counterparties relying on the application of UK sanctions law to exit their contracts due to the risk of breaching the asset freeze rules will need to prove that there is, in fact, ownership or control by a designated person. Depending on the circumstances, this may be challenging to establish, increasing litigation risk.
Accordingly, it is ever more important that businesses have a robust sanctions clause in their contracts that provides for additional contractual triggers or recourse to properly safeguard their interests. We discussed the key elements of such a clause in a recent client alert.
Client Alert 2024-117
