Court of Appeal rules sanctions regulator cannot dictate how administrators distribute assets or make provision for a sanctioned creditor

The Court of Appeal of England and Wales has dismissed an appeal by PJSC VTB Bank challenging restrictions imposed by the Office of Financial Sanctions Implementation (OFSI), a part of HM Treasury, on distributions in the administration of its UK subsidiary, VTB Capital plc, but ruled that the sanctions regulator cannot use its licensing powers to override creditors' substantive rights under insolvency law. Sir Geoffrey Vos, Master of the Rolls, Lord Justice Bean and Lord Justice Zacaroli unanimously held that a sanctions licence merely permits conduct that would otherwise be prohibited and does not authorise administrators to disregard insolvency legislation. In a significant qualification to the regulator's position, the Court also found that the licence's purported restriction on making provision for VTB Bank's claims could have no legal effect because retaining assets against a disputed claim does not amount to making funds available to a sanctioned creditor.

VTB Bank, Russia's second-largest bank and majority-owned by the Russian government, was sanctioned in February 2022 following Russia's invasion of Ukraine. Its UK subsidiary entered administration in December 2022 after sanctions effectively prevented it from continuing operations. Although VTB Capital was considered balance-sheet solvent at the time, its administrators faced significant difficulties recovering approximately £180 million in assets located in Russia, together with substantial receivables owed by other VTB group companies.

VTB Bank itself submitted a proof of debt exceeding £205 million and commenced enforcement proceedings against its subsidiary's assets in Russia. The administrators were concerned that these proceedings, combined with the inability to recover intra-group receivables, could undermine recoveries for other creditors and delay distributions.

The administrators initially pursued a scheme of arrangement designed to facilitate distributions to unsanctioned creditors while addressing VTB Bank's claims through mechanisms including distributions in specie, adjustments for overseas recoveries and a trust holding distributions for sanctioned creditors. However, VTB Bank voted against the proposed scheme in September 2024, preventing it from obtaining the necessary creditor approval.

Seeking an alternative, the administrators approached OFSI, which amended VTB Capital’s general licence on 8 January 2025. The amendment required deductions from distributions or provisions benefiting VTB Bank to reflect the value of assets subject to the bank's enforcement proceedings and receivables owed by other VTB group companies. It also specified historical exchange rates for calculating the deductions and restricted statutory interest.

The amendment enabled the administrators to advance a revised scheme, which creditors approved in January 2025 despite VTB Bank's opposition. The bank's voting claim had been reduced on the basis of the licence amendment, depriving it of the ability to block the arrangement. However, the scheme has not yet been sanctioned, and a separate application seeking authority to make distributions on the proposed basis remains unresolved.

VTB Bank challenged the licence amendment, arguing that OFSI had improperly used sanctions powers to diminish its insolvency rights, effectively allowing other creditors to receive distributions without adequate provision being made for its claims. The High Court dismissed that challenge in December 2025.

The Court of Appeal agreed that the challenge should fail, but its reasoning imposed important limits on the effect of the licence. The judges held that sanctions do not extinguish a designated creditor's underlying entitlement to participate in an insolvency distribution, even though they prohibit that creditor from receiving payment while the sanctions remain in force.

Crucially, the Court rejected the proposition that making provision for a sanctioned creditor's claim constitutes making funds or economic resources available to that creditor. Under Rule 14.39 of the Insolvency (England and Wales) Rules 2016, administrators must retain sufficient assets to account for disputed or undetermined claims before distributing the estate to other creditors. Such a reserve does not confer a proprietary interest or immediate financial benefit on the creditor.

The Court therefore concluded that the wording of the OFSI amendment purporting to prohibit provision for VTB Bank's claims without first making the specified deductions could have no legal effect, other than potentially indicating the approach OFSI wished the administrators to adopt.

The judges also rejected HM Treasury's broader submission that a sanctions licence could permit administrators to distribute all available assets to unsanctioned creditors while leaving nothing for a sanctioned creditor. Although sanctions may cause severe and potentially permanent economic harm, the licensing regime cannot displace the requirements of insolvency law or compel an insolvency court to approve a distribution that would otherwise be unlawful.

Nevertheless, the appeal was dismissed because the licence itself did not require the administrators or the insolvency court to implement the proposed deductions. It merely identified transactions that OFSI would permit under the sanctions regime. The Court also rejected VTB Bank's arguments concerning improper purpose, irrationality, procedural fairness and interference with its right to a fair hearing.

The Court acknowledged that its interpretation meant the licence amendment had not achieved the comprehensive "sanctions solution" sought by the administrators. It nevertheless suggested that insolvency law might provide an alternative, including through the application of the hotchpot rule or by allocating Russian assets and intra-group receivables against VTB Bank's claims. The judges expressly declined to determine those issues because they had not been fully argued.

The decision leaves the administrators to seek directions from the insolvency court on how the competing creditor claims should be treated, potentially requiring a further amendment to OFSI's licence. More broadly, it establishes an important distinction for insolvency practitioners dealing with sanctioned creditors: sanctions licences can determine which transactions are permitted, but cannot themselves alter the statutory distribution rights of creditors or relieve administrators of their obligations under insolvency law.

Read the decision here.

Tim Owen KC of Matrix Chambers, William Day of 3 Verulam Buildings and Tim James-Matthews of Matrix Chambers (instructed by PCB Byrne) acted for VTB Bank.

Sir James Eadie KC of Blackstone Chambers, Thomas Munby KC of Maitland Chambers and Tom Rainsbury of 3 Verulam Buildings (instructed by the Government Legal Department) acted for HM Treasury.

Daniel Bayfield KC of South Square, Maya Lester KC of Brick Court Chambers, Malcolm Birdling KC of Brick Court Chambers and Alastair Richardson of Brick Court Chambers (instructed by Weil Gotshal & Manges) acted for VTB Capital.