Suspending an administration appointment for a sanctioned company?

Re Cargologicair Ltd [2022] EWHC 3316 (Ch)When should an administrator be appointed for a company affected by sanctions?

Overview

This case – an administration application for a company affected by sanctions – considers a legal issue on which there is divergence in the case law. Specifically, should an administrator be appointed immediately, or should the administrator be appointed in principle pending confirmation of licences to allow the administrator to take the appropriate actions in the administration? The Court ultimately ruled that it was important for the administrators to take immediate control of the company in this case, distinguishing it from another case where an appointment was effectively suspended whilst steps were taken to obtain the necessary licences.

Background

The sole director of CargoLogicAir Limited, an English registered company which operates as a cargo airline, applied to put the company into administration. The company has been affected by the sanctions imposed on its ultimate majority shareholder, and is itself subject to the full asset freezing sanctions imposed by the UK government.

In addition, Citibank, the company’s bankers, notified the company that they intended to close the company’s only bank account, despite the fact that the Office of Financial Sanctions Implementations (“OFSI”) had granted the company a Basic Needs Licence. In addition to the Basic Needs Licence, the proposed administrators had already applied to OFSI for a further licence to authorise them to deal with the company’s funds if appointed, to make payments, and to operate the Insolvency Services Account.

As a result of the company’s sanctioned status, it appeared highly unlikely that any other commercial bank would be willing to do business with it, at least whilst it was not in administration, meaning that the company would soon be unable to pay its debts as they fell due. Therefore, the director submitted that an administration order was the only way for the company to avoid a disorderly wind-down and to realise value for its creditors.

The Court’s Decision

There were two issues before the Court: (1) whether the requirements for making an administration order were met; and, if so, (2) whether the administrators should be appointed immediately, or whether they should be appointed in principle pending confirmation of licences to allow the administrator to take the appropriate actions in the administration?

Were the requirements for making an administration order met?

The Court found that the substantive conditions for making an administration order were met. Even though the company may have been balance sheet solvent as a result of its assets, it was abundantly clear that company was unable to pay its debts and was therefore cash flow insolvent.

The Court also found that the company was reasonably likely to achieve one of the three prescribed objectives of the administration. For a start, the proposed administrators would likely be able to run the company’s business. They had a Basic Needs Licence and had made a further licence application to OFSI which would enable the proposed administrators to deal with the company’s funds, transfer Citibank funds to the Insolvency Services Account, or another commercial bank, and make payments in discharge of their duties. It was reasonably likely that OFSI would grant the new licence within a reasonable time, as OFSI had granted similar licences to administrators of sanctioned companies in the past. The administrators would then be able to run the company with a view to rescuing it. That is something that liquidators could not do. The proposed administrators were therefore reasonably likely to be able to achieve one of their statutory objectives by selling the company’s business or parts of it to potential purchasers.

Even if OFSI did not grant a licence for an outright sale, the value in the company’s licences and assets could be realised through a sale in some other sanctions-compliant way, such as a hive down. Even if the proposed administrators were unable to pursue a sale, they were reasonably likely to be able to achieve objective (b) after recovering and distributing assets of the company.

Should the administrators be appointed immediately or in principle pending confirmation of the licence?

The Court pointed out that there is an apparent divergence in the authorities as to the timing of the appointment. In Re Sberbank CIB (UK) Ltd [2022] EWHC 1059 (Ch), the Court directed that the administrators be appointed immediately on the basis that OFSI was very likely to grant the licence to the administrators. By contrast, in Re VTB Capital plc [2022] EWHC 1106 (Ch), the Court directed that administrators would, in principle, be appointed, but the order was effectively suspended whilst steps were taken to obtain a necessary licence from the US office equivalent of OFSI.

The Court found that this case was distinguishable from VTB Capital in that, in this case, only a licence from OFSI will be required and the administrators already had in place the Basic Needs Licence. In addition, the bank account in question in the VTB Capital case was a correspondent bank account allied to a US dollar account in the United States, which was a significant difference between the two cases.

Ultimately, the Court ruled that it was important that the administrators take immediate control of the company, and the administration order was made.

Judge: Mr Justice Michael Green

Counsel: Adam Al-Attar and Rabin Kok, both of South Square (instructed by Chris Parker, Natalie Peacock and James Davison of DLA Piper), for the company and its director