KRF Services (UK) - Case Update

The High Court has provided clarity on when a resolution of a single director to put a company into administration will be validly passed in a case involving sanctions.

KRF Services (UK) was incorporated on 3 September 2018. Until recently, its business involved providing management services for the benefit of the family of Dr Viatcheslav Moshe Kantor, a Russian businessman currently residing in Tel Aviv. The Company managed, amongst other things: the family's home in London (including the payment of staff and contractors), a substantial development of property and an art collection.

All the shares of KRF are owned by KRB PTC Ltd, a company incorporated in the Isle of Man which acts as trustee of the KR Family Office Trust. Dr Kantor was the settlor of that trust and is one of its beneficiaries. On 6 April 2022 Dr Kantor was designated under the UK and EU sanctions regulations. KRF has not itself been designated in the UK or any other jurisdiction, but the imposition of sanctions on Dr Kantor has had the practical effect of preventing the company from carrying on its business.

As a result, KRF and its sole director Thomas Paillardon brought an application to appoint administrators. However, there was an issue about whether a resolution to make the administration application, passed by a board consisting of a single director, amounts to a valid decision by the company. The other directors of the company have resigned, and it has not been possible to find other individuals willing to act as directors because of the sanctions position.

This prompted an application by Keltbray, the largest creditor (excluding connected parties), for permission to appear and be represented at the hearing as a supporting creditor and also, in so far as necessary, to be joined as a further applicant to the administration application.

This raised various issues, including:

• whether the administration application was validly brought by the company or Mr Paillardon, and/or whether Keltbray should be joined as an additional applicant; and

• whether the Court should exercise its discretion to make an administration order, particularly in the light of the designation of Dr Kantor under the sanctions regulations.

In considering whether the administration application was validly brought, the Court had regard to the Model Articles, which the company has adopted in full. In particular, Article 7(1) provides that any decision of the director must be a majority decision or a decision taken unanimously. Article 7(2) qualifies the general rule in Article 7(1), providing that if a company has only one director, and no provision of the articles requires it to have more than one director, that director may take decisions on behalf of the company.

The Court also had regard to two authorities on the point: Re Fore Fitness Investments Holdings Ltd. [2022] EWHC 191 (Ch) and Re Active Wear Ltd. [2023] BCC 14. Fore Fitness concerned an unfair prejudice petition where the sole remaining director purported to resolve that the company should bring a counterclaim. The Articles were a mix of the Model Articles and bespoke articles, one of which provided that the quorum for board meetings was two directors. The Deputy Judge held that there had been no valid decision by the sole director because of the provision in the articles requiring there to be at least two directors to constitute a quorum.

By contrast, Active Wear concerned an out-of-court appointment of administrators by a sole director (who had always been the company’s sole director) and the court was asked to rule on the validity of that appointment. The Deputy Judge held that Article 7(2) applied, since no provision of the articles required the company to have more than one director. As a result, a standard form resolution executed by the director alone was valid and effective to appoint administrators.

Applying these principles to the case at hand, where the articles did not require more than one director, the Court ruled that the resolution passed by Mr Paillardon was a valid and effective decision of the company to apply for an administration order.

After finding that the company was unable to pay its debts and that the administration order was likely to achieve the purpose of the administration (achieving a better result for creditors as a whole than a winding up), the Court considered whether it should exercise its discretion to make an administration order, particularly in the light of the designation of Dr Kantor under the sanctions regulations.

The draft order contained a recital to the effect that the order did not breach regulations 11 to 15 and 19 of the The Russia (Sanctions) (EU Exit) Regulations 2019. Regulation 11 prohibits a person (P) from dealing 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. Regulations 12 to 15 prohibit a person from making funds or economic resources available (directly or indirectly) to a designated person, or making them available to any person for the benefit of a designated person. Regulation 19 is an anti-circumvention provision. It prohibits a person from intentionally participating in activities, knowing that the object or effect of them is (whether directly or indirectly) to circumvent the Regulations.

The Court ultimately found that the administration application and the order did not breach regulations 11 to 15 and 19. Among other things, the Court ruled that:

• The abrogation or curtailment of the statutory right to apply for and to be granted an administration order would require unambiguous wording in the Sanctions and Anti-Money Laundering Act 2018 (SAMLA) itself, rather than in the Sanctions Regulations. In the absence of any express prohibition in SAMLA on making an administration order, Parliament would not be taken to have intended such a prohibition unless that was a necessary implication from the express words.

• Although SAMLA had not been enacted at the time the R v R [2016] Fam 153 case was decided, there is nothing to suggest that it was intended to change the policy described by Ryder LJ that, "…it is no part of the sanctions regime to prevent judges in the EU from making regular orders in favour of persons who are entitled to seek the court's determination of an issue within the competence of that court." Accordingly, SAMLA cannot be interpreted as intending to prohibit the making of administration orders.

• The Court of Appeal’s decision in PJSC Bank v Mints [2024] KB 559, which is currently the leading case on the effect of the Sanctions Regulation on litigation (although permission has been granted for an appeal to the Supreme Court), leads inevitably to the conclusion that the making of an administration order cannot involve a breach of the Sanctions Regulations.

• The mere appointment of administrators, by itself, is not naturally described as "dealing with" any "funds", or "use" of them, so as to trigger regulation 11(4). Adapting Sir Julian Flaux C's expression in Mints, the words "dealing with" are not apt to describe the exercise by the court of its judicial function of appointing administrators, nor the acceptance by a licensed insolvency practitioner of an appointment. The funds will only be "dealt with" in the natural sense of that expression when the Joint Administrators actually take some step in relation to them, following their appointment. This implicitly assumes that it is not insolvency proceedings themselves which are intended to be prohibited by SAMLA, but that it is the payments made, and activities undertaken, by the appointed officeholders which potentially require a licence.

• It was appropriate to make an immediate administration order instead of waiting to find out if OFSI decides to grant a licence. There was evidence that OFSI may be more likely to grant a licence, or to do so more quickly, once administrators have been appointed.

The decision can be accessed HERE.

Professionals involved:

• Joshua Ray of CANDEY Ltd. for KRF and Mr Paillardon

• Rebecca Page of Maitland Chambers (instructed by BCL Solicitors) for Keltbray