Guidance on creditors subject to sanctions

In the Matter of Nostrum Oil & Gas Plc [2022] EWHC 2249 (Ch)What is the appropriate way to treat creditors subject to sanctions under a scheme?

Overview

Although schemes sanctioned by the Court earlier this year have involved entities subject to sanctions imposed as a result of the war in Ukraine, the issue of sanctions does not appear to have been expressly addressed prior to the High Court’s decision in the Nostrum Oil & Gas case. This decision provides guidance to IPs and lawyers on the treatment of creditors subject to sanctions imposed as a result of the war, and the necessary steps to be taken to obtain approval of a scheme involving such sanctioned creditors.

Background

Nostrum Oil & Gas Plc (“the Company”), the ultimate parent of a corporate group (“the Group”) which operates an oil and gas business in Kazakhstan, sought an order sanctioning the scheme of arrangement (“the Scheme”) between the Company and certain of its creditors (“the Scheme Creditors”) pursuant to Part 26 of the Companies Act 2006. The Scheme contemplates a financial restructuring (“the Restructuring”) of the Group and, more specifically, two series of unsecured notes (“the Existing Notes”), with aggregate principal amount of approximately US$1.125 billion. The Group stopped making interest payments under the Existing Notes in July 2020.

The Scheme Meeting was held on 22 August 2022, and 147 out of 148 Scheme Creditors who cast a vote voted in favour of the Scheme, representing a majority in number of 99.32% and by value of 99.98%. The turnout at the meeting was 85.11% by value. Certain Scheme Creditors which are the direct or indirect target of sanctions (imposed as a result of the war in Ukraine) in the UK, EU, the US and Guernsey which prohibit them from dealing with the Existing Notes (“the Sanctions Disqualified Persons”) were not permitted to vote at the Scheme Meeting. The Sanctions Disqualified Persons are estimated to hold approximately 7.1% by value of the Existing Notes.

Ensuring Compliance with International Sanctions Legislation

In determining whether to grant the order sanctioning the Scheme, Mr. Justice Mellor considered whether the Scheme is consistent with sanctions legislation in the US, the UK, the Netherlands and Guernsey, and whether the appropriate regulatory approvals had been sought. The sanctions legislation in the US is notorious as being particularly stringent, and a licence from the US sanctions authority, the Office for Foreign Assets Control (“OFAC”), was required before the Scheme Meeting could be held. An OFAC licence was granted on 25 July 2022, which permitted the voting form and formal notice of the Scheme Meeting to be circulated to Scheme Creditors (excluding the Sanctions Disqualified Persons) on 1 August 2022.

The Company also applied for licences to be granted by the sanctions authorities in the UK, the Netherlands and Guernsey (“the Additional Licences”). The Additional Licences were not required to hold the Scheme Meeting and are not a condition precedent to the effectiveness of the Scheme, but are required to implement the Restructuring in due course. Mr. Justice Mellor pointed out that the Company believes the Additional Licences will be granted, not least because the OFAC licence has already been granted.

Mr. Justice Mellor also concluded that there is a reasonable prospect that the Scheme will be recognised and given effect in other relevant jurisdictions so as not to be capable of being undermined by action by dissenting or other creditors. Mr. Justice Mellor relied on the overwhelming vote by Scheme Creditors in favour of the Scheme, as well as the expert evidence tendered by the Company that the Scheme is likely to be recognised and given effect in key foreign jurisdictions.

The Treatment of Sanctions Disqualified Persons

In determining whether the Scheme is fair, Mr. Justice Mellor considered, among other things, the treatment of Sanctions Disqualified Persons under the Scheme. The Scheme expressly prevents the distribution of consideration under the Scheme to any Sanctions Disqualified Persons until such time as they are no longer sanctioned. The Board of Directors of the Company received legal advice that, as a result, the Scheme is consistent with one of the important objectives of the sanctions legislation.

Mr. Justice Mellor also pointed out that the Scheme consideration will be held for the Sanctions Disqualified Persons on bare trust. If or when they cease to be Sanctions Disqualified Persons in the future, they will then have 60 days to claim the consideration from the trust. Mr. Justice Mellor accepted submissions to the effect that this structure is simply an instance of a broader concept that has been used in many noteholder schemes, as there have been many regulatory reasons why a noteholder may be unable to receive the scheme consideration. It is common for noteholder schemes to include some form of holding trust to deal with such situations.

Furthermore, Mr. Justice Mellor was satisfied that the holding trust structure does not place the Sanctions Disqualified Persons at any greater disadvantage than the constraints they already face under the sanctions legislation. Accordingly, Mr. Justice Mellor accepted that the holding trust structure is a fair and proper way to deal with the situation of the Sanctions Disqualified Persons.

In the result, Mr. Justice Mellor determined that the Scheme is fair, and ultimately sanctioned the Scheme.

Judge: Mr. Justice Mellor

Counsel: David Allison QC and Ryan Perkins of South Square (instructed by White & Case LLP) for the Company