The case is a useful illustration of the circumstances when administrators are able to apply to court for approval of a transaction to be entered into by administrators (in this case, joint special administrators). The case is one where the court has specifically approved a sale of assets to an unsecured creditor with the consideration being that creditor’s waiver of unsecured claims against the company in administration. The court concluded that this was a sale, rather than a distribution and therefore did not infringe (or engage) the pari passu principle.
Sova Capital is an FCA authorised and regulated broker incorporated in England and Wales. Approximately 87% of Sova Capital’s portfolio are Russian securities. Russia’s invasion of Ukraine created market turmoil that rendered Sova Capital cashflow insolvent and Sova Capital was placed into special administration in March 2022 under the Investment Bank Special Administration (England and Wales) Rules 2011.
Western sanctions and Russian countermeasures meant that the Sova Capital’s Joint Special Administrators (the “JSAs”) were heavily restricted in the means of realisation of such securities (e.g. only over the counter sale and not the Moscow Stock Exchange), and were limited in terms of buyers’ identities etc). Having invited bids from relevant market participants including traditional market counterparties, distressed debt funds and Sova Capital’s own creditor base, the administrators received two offers for certain of the Russian securities:
- Dominanta’s offer – Dominanta became a creditor of Sova Capital by taking assignment of claims from other Sova Capital creditors. Dominanta is a Russia-incorporated company, majority owned by Mr Roman Avdeev who is also the ultimate beneficial owner of Sova Capital and who is (at the time of the hearing) not subject to Western sanctions. It has an adjudicated claim of c. £233m. Dominanta offered to acquire a portfolio of Russian securities with a nominal value equal to 85% of its adjudicated claim. In effect that meant with its c. £233m adjudicated claim, Dominanta would look to acquire Russian securities of c. £274m in nominal value. In return, Dominanta would release its adjudicated unsecured claim in full (the Dominanta Transaction). The Dominata Transaction had received relevant consents from the Russian government to proceed.
- BZ’s offer – The other offer came from a consortium led by Boris Zilbermints (BZ), who was a creditor of Sova Capital with an estimated claim of just under £20m. The BZ consortium offered to acquire the same Russian securities for (i) £125m in cash, plus (ii) a waiver of BZ’s claim in the estate (the BZ Transaction). The BZ Transaction had not yet received relevant Russian government consents. In addition, there was a new criteria introduced by the Russian Ministry of Finance (the MinFin Criteria) in December 2022 which, if applicable, would impose a limit on and require the deferment of the consideration payable by the BZ consortium to Sova Capital as a foreign seller. There was uncertainty as to whether the new MinFin Criteria would, as a matter of Russian law, apply to the BZ Transaction but it was common ground that the MinFin Criteria were prospective and did not apply to existing consents granted, such as that obtained by Dominanta.
To compare the economics of the two offers, the administrators conducted a mathematical analysis to ascertain the cash equivalent value (CEV) of the waivers. They did so by:
- first ascertaining the final dividend payable to creditors assuming the Dominanta Transaction did not take place;
- then ascertain the final dividend payable to other creditors assuming the Dominanta Transaction happened; and
- calculate the cash amount that Dominanta would need to contribute to the estate to pay that final dividend payable, but on the assumption that Dominanta’s adjudicated claim remains.
Applying this analysis, the administrators determined that the CEV of the Dominanta Transaction to Sova Capital’s estate would fall between £117.3m to £144.9m.
The CEV of the BZ Transaction would be between £134.9m to £137.2m. The figures come in a range because the total claims in the estate and the net realisations were estimates. Both CEV were therefore relatively comparable.
The administrators nonetheless had serious concerns about the deliverability of the BZ Transaction due to the need for obtaining consent from the Russian government and the potential applicability of the MinFin Criteria. In an indicative vote by Sova Capital’s creditors (all being institutional and professional parties), 97% by value of non-conflicted creditors voted in favour of accepting Dominanta’s offer.
The administrators decided to proceed with the Dominata Transaction and entered into relevant transaction documents on the basis that the transaction was conditional upon the court’s approval but sought the Court’s permission to enter into it. BZ sought to contest the JSAs’ power to seek the court’s approval and argued that the Dominanta Transaction was outside the scope of their powers and contravened various insolvency law principles.
The Court’s ruling
The novel issue in the case was that there was a sharp asymmetry in the value of the Russian securities from the perspectives of (a) Sova Capital, on which the Russian countermeasures bite and (b) any Russian market participant (including Dominanta, not sanctioned by Russian countermeasures) and therefore able to later sell the securities on the Moscow Stock Exchange without the need for governmental consent at close to the nominal value of the securities.
BZ challenged the administrators’ decision to commit Sova Capital to the Dominanta Transaction on the argument that such a transaction would yield an effective 117% recovery in specie for Dominanta when other creditors including BZ would receive between 50% to 62% recoveries in cash. This, BZ argued, contravened the fundamental pari passu principle in insolvency law.
The Court rejected BZ’s argument on the ground that it confuses the distinction between Dominanta’s position as a creditor of Sova Capital and its position as a buyer of the Russian securities.
Sale – not distribution: the Dominanta Transaction was in substance a sale of Sova Capital’s property and the administrators have powers to dispose of property to a creditor in return for that creditor waiving its claim in the estate. The Dominanta Transaction could not be properly characterised as a distribution, and as a result the pari passu principle regarding distributions had no relevance.
Best price in the circumstances – from Sova’s perspective: the relevant constraint on the administrators in a sale is the duty to obtain the best price in the circumstances. In the world of sanctions in which the administrators have to operate, the Court accepted that the administrators could only be interested in the realisable value of the Russian securities from Sova Capital’s perspective (not from any subsequent on-sale). If it should turn out that Dominanta, as a Russian market participant, should do better economically than the other creditors, that was not because it received a larger distribution from the estate; it was a collateral consequence of the various legal restrictions which have strangled the administrators’ ability to obtain full value of its assets.
When can administrators apply to court to bless a decision: BZ also challenged the court application on the ground that the administrators had surrendered their discretion to the court. This gave the Court an opportunity to revisit and pull together the principles governing (i) when administrators can apply to the court for directions, (ii) the court’s role in considering these applications and (iii) the implication of the court’s approval on future challenges. Key points in the court’s observation include the following:
- Drawing on the case of The Public Trustee v Cooper, where the trustee or administrator has already decided how they want to exercise their discretion, but because the decision is ‘particularly momentous’ the trustee or administrator wishes to obtain the blessing of the Court, in such cases the trustee or administrator cannot be said to have surrendered their discretion.
- Administrators are required to make their own commercial decisions and the court cannot be asked to bless what is in truth a commercial decision. The court will not entertain an application for directions simply because the commercial decision is one that is difficult or large.
- Seeking the court’s approval may be appropriate when doubts have been expressed about the administrators’ powers or there are potential conflicts of interest or where there may be potential issues as to the legality of a proposed transaction.
- The court is not a sanctuary for officeholders and the court’s approval does not provide blanket or automatic immunity for the officeholder from subsequent challenges. The scope of any subsequent immunity depends on the specific nature of the questions before the court and the court’s answers. For instance, when the court approves a sale what is approved is the officeholder’s decision to sell at the time. There is no endorsement of any decision taken by the office-older previously not to sell the asset, which is not immune to a later challenge.
Applying these principles to the present facts, the Court was satisfied that this was an appropriate case for the administrators to seek the court’s approval.
The administrators had taken the commercial decision to enter into the Dominanta Transaction, and so had not surrendered their discretion to the court.
The court however noted that the scale of the Dominanta Transaction did not make it a ‘particularly momentous’ one which would, on its own, justify a directions application. It is commonplace for administrators to sell assets of the company in whole or in part, and these are commercial decisions for administrators to make, not the court. The present case arose in very unusual circumstances with a sharp asymmetry in the value to Sova Capital and Dominanta. The JSAs’ decision to enter the Dominanta Transaction had been heavily challenged by BZ. The potential application of sanction laws further complicated the matter. All these factors made it an appropriate case for seeking the court’s directions.
The case is a useful illustration of the circumstances when administrators are able to apply to court for a commercial decision to be blessed. It also makes clear however that the mere fact that the transaction at hand is a large one is not in itself a reason to seek the court’s blessing.
The court agreed with the categorisation of an unsecured credit bit as essentially a “sale” to a creditor, rather than a distribution, therefore the pari passu principle (which requires equal treatment of equal ranking creditors) did not apply (and so was not infringed).