Court suggests all Russian companies may be subject to sanctions

Summary

In a highly significant judgment by Sir Julian Flaux (the Chancellor of the High Court) the Court of Appeal has indicated (albeit obiter) that the "control" test in Russian sanctions legislation cannot be read restrictively to exclude political or corporate office. Therefore it was "sensible and realistic" to treat PJSC National Bank Trust ("NBT"), a subsidiary of the Russian Central Bank, as controlled by either Vladimir Putin and Ms Elena Nabiullina (the Governor of the Central Bank).

Going forward, it would therefore appear reasonable for UK persons to treat the Russian Central Bank and its subsidiaries as frozen. That has significant implications, for instance in relation to payment of taxes in Russia which is likely to now amount to an offence (absent a licence).

However, as expressly accepted by the Court, the implications are potentially far broader. Giving Regulation 7(4) its proper wide meaning may as a result mean all Russian economic entities may ultimately be considered controlled by Vladimir Putin and thus subject to asset freezing sanctions.

Inhouse counsel and compliance officers dealing with the sanctions regime now need to consider afresh the permissibility of any continued dealings with Russian entities, with a particular focus on state owned enterprises.

Background

In Mints v PJSC National Bank Trust [2023] EWCA Civ 1132 the Court of Appeal analysed a situation arising from litigation brought by two banks against individual defendants alleging conspiracy to defraud the banks of some US$850 million. The litigation commenced in June 2019 and was approaching trial when Russia invaded Ukraine and the Russia (Sanctions) (EU Exit) Regulations 2019 ("the Regulations") were introduced. The first claimant bank (NBT) was not made a designated person for the purposes of the sanctions regime, while the second claimant (PJSC Bank Okritie) was.

Much of what the court had to decide was primarily of interest to parties to litigation and their lawyers, dealing with what the court can do in relation to a person designated for sanctions purposes. It held that a judgment can be entered by the English court for a designated person following a trial at which it has been established that the designated person has a valid cause of action. The Court also upheld a decision that OFSI can license the payment by a designated person of an adverse costs order, an order for security for costs or a payment by a designated person of damages pursuant to a cross-undertaking in an injunction.

Ownership or control

However, it is the Court's assessment of the final issue of the appeal, which related to the interpretation of the concept of 'ownership or control' under the Regulations, which are of potentially wider significance.

Under Regulation 7(4), a person (C) will be owned or controlled by a designated person, and therefore subject to the effects of the asset freeze on that designated person if:

• "it is reasonable, having regard to all the circumstances, to expect that [the designated person] would (if the [the designated person] chose to) be able, in most cases or in significant respects, by whatever means and whether directly or indirectly, to achieve the result that affairs of C are conducted in accordance with the [the designated person's] wishes."

The final issue in the appeal was the question of whether NBT while not sanctioned itself, was subject to an asset freeze on the basis of control by at least two designated persons, namely Mr Putin and Ms Nabiullina.

Importantly, the question of whether NBT was subject to asset freezing sanctions, in the event, did not need to be decided. As the appeal had failed on the first two points, the Court did not need to decide the third. The Court's further remarks are therefore obiter and not necessarily binding, nevertheless these comments have potentially wide ramifications.

In summary:

• The Court took the view that the Respondents' narrower interpretation of the Regulation 7(4) test, partially endorsed by obiter remarks in the High Court, was an "impermissible rewriting" of the legislation.

• It therefore expressly rejected a narrow reading of Regulation 7(4) excluding "effective personal control" by "state officials or directors and managers", i.e. there is no carve out for either control by political or corporate office.

• Rather, the test has a "clear and wide meaning" which the Court, agreeing with the Appellants, summarises as requiring a designated person who is capable of "calling the shots."

• Based on the Claimants' concession that NBT would be controlled in that either Mr Putin or Ms Nabiullina could exercise influence over it in significant respects (if this was properly interpreted as including control by political office), the Court would have determined - if it had been required to do so - that NBT was subject to asset freezing sanctions.

• The Court appears to have endorsed this concession, describing it as "sensible and realistic."

Wide-ranging implications

This guidance appears to suggest it would be "sensible and realistic" to treat the Russian Central Bank and its subsidiaries as subject to a UK asset freeze. This alone has dramatic implications: it may now be unlawful for any UK person to make any tax payment in Russia, whether or not legitimately due.

However the implications are potentially far wider and the Court was fully alive to this. The Court agreed with a submission that "Mr Putin is at the apex of a command economy" and that in those circumstances and given the broad formulation of the Regulation 7(4) test, Mr Putin could be deemed to control everything in Russia. The Court expressly accepted that it "may well be the case" that the consequence of giving Regulation 7(4) its correct interpretation is "that every company in Russia was "controlled" by Mr Putin and hence subject to sanctions". However, if that was the case it was not for judges to put a gloss on the wording of the legislation.

Next Steps

The Court's commentary as to the above is obiter; it is therefore not binding on a subsequent court. Clearly it was not the intent of the Government that imposing an asset freeze on Mr Putin on 25 February 2022 would have the effect of imposing, essentially, comprehensive sanctions on Russia.

Nevertheless, this judgment constitutes the most authoritative guidance we have in the UK as to the appropriate interpretation of the ownership and control test. Companies would be well advised to heed it and, if they have been applying a narrower interpretation of Regulation 7(4), to reassess their position vis-à-vis Russian counterparties urgently - in particular, those connected to the Russian state.

It may be the case that steps are taken by OFSI or the Government to mitigate this impact, whether by the implementation of targeted general licences or amendments to the Regulations. But it seems unlikely that Parliament will immediately rush to amend the wording of the Regulations to avoid what the Chancellor described as the potential "absurd consequences" of all Russian companies being deemed to be ultimately capable of being controlled by Mr Putin.