Understandably, Insolvency Practitioners (IPs) have been added to the ‘relevant firms’ that are subject to the sanctions reporting requirements. We join banks, accountants (which many of us are, too), lawyers, estate agents and even crypto agents. So what are we now bound to do?
From 14 May, IPs will have to report to the Office of Financial Sanctions Implementation (OFSI) any reasonable cause to suspect that: a person is a ‘designated person’ under the UK’s Russia (Sanctions) (EU Exit) Regulations 2019 – i.e. a UK asset freezing target; that a person has breached the UK’s sanctions regimes, perhaps transacting with a designated person; and to provide the information supporting such knowledge. If a designated person reported is a client, IPs will also be required to report any frozen assets of that individual that they hold.
Reporting may not be necessary if an IP acquires such information while engaged in other business, possibly acting as a receiver, or when undertaking an independent business review. Nonetheless, the onus will be on the IP to seek advice on whether OFSI must be informed.
Sanctions related insolvencies are, arguably, the most complex – and frustrating – of all, since they can severely restrict a Court-appointed practitioner pursuing a timely and constructive process. This is in no small part because sanctions applied to companies for political reasons are rarely, if ever, applied on a case-by-case basis. They are a general economic weapon targeted against certain countries; as such, they impact citizens of those nations who are involved in legitimate businesses in other territories, and will inevitably face asset freezes and operating restrictions from a sanctioning government.
This indiscriminate approach can prove at best harmful, at worst terminal, for perfectly healthy and viable businesses connected (even tangentially) to citizens of sanctioned countries. Look no further than Buchler Phillips’ appointment in 2022 as Administrator to CargoLogicAir.
Operating as the only British all-cargo main deck freight airline, headquartered at London Heathrow Airport, CargoLogicAir was a unique and highly profitable British business which suffered as an unintended consequence of sanctions against Russia. The company, a significant local employer, was unable to trade effectively after its majority shareholder and former director was made the subject of UK government sanctions against businesses deemed Russian controlled following the Russian invasion of Ukraine in February 2022. The shareholder became a designated person and, at a stroke, CargoLogicAir found itself cash-flow insolvent, yet with £13m frozen in the bank.
Recent dynamics in international relations suggest that sanctions are set to remain a key form of government retaliation in times of conflict. Buchler Phillips offers co-advisors, corporates and individuals invaluable experience of navigating the maze of official restrictions to achieve an optimal outcome.
These include:
- Extensive pre-appointment due diligence and understanding of a business and its structure, assets (both contingent and actual), liabilities and creditor position
- Working closely with specialist legal advisors as a committed team with as few participants as possible
- Early and open direct engagement with OFSI and key stakeholders, including relevant industry regulators and the company’s bank
- Relations with the Official Receiver, the broader Insolvency Service and its own banking provisions
- Proactivity with essential suppliers and key stakeholders to mitigate any potential delays or gaps in the company’s records that may fetter the office holder’s ability to operate; and
- Timely identification of inter-related issues cause by the domino effect of sanctions, avoiding further unexpected costs that might impact the position of creditors
- An appreciation of employees’ issues and routes to protect their position as far as possible within restrictions
We welcome discussions with managers of businesses that risk longer term sanctions as a result of their ownership or international activities, as well as with existing legal representatives of those entities.
The article is written by the analysts’ team at Buchler Phillips, UK based independent boutique firm with an impeccable Mayfair heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.