The issue of whether a non-sanctioned company is subject to a freezing order because a designated person who has been sanctioned under the Russia Sanctions Regulations ‘controls’ the entity has recently received a binding court decision in Litasco SA v Der Mond Oil and Gas Africa SA & Locafrique Holdings SA [2023] EWHC 2866 (Comm) (“Litasco SA”).
Sitting in the High Court, Mr Justice Foxton found a middle ground between the narrow test suggested in the High Court case of PJSC National Bank Trust and another v Mints and others [2023] EWHC 118 (Comm) (“Mints”) and the broad test proposed by the Court of Appeal in the subsequent appeal of the aforementioned decision.
Facts of Litasco SA v Der Mond Oil and Gas Africa SA & Locafrique Holdings SA
Litasco SA, a Swiss oil marketing and trading company wholly owned by the Russian oil company Lukoil PJSC, sought a summary judgment against Der Mond Oil and Gas Africa SA, along with its parent company, Locafrique Holdings SA, The dispute arose from a contract entered into in April 2021 between Litasco SA and Der Mond, where Litasco SA agreed to supply Nigerian crude oil to Der Mond. An addendum on 7 November 2022, modified the contract’s obligations. Der Mond faced allegations of failing to meet certain payment obligations, leading Litasco SA to issuing proceedings for the outstanding amount.
Der Mond presented several defences, invoking sanctions and force majeure clauses contained in the addendum. Additionally, Der Mond contended that, despite neither Litasco SA nor Lukoil being designated persons under the UK sanctions regime, it was prohibited from making payments to Litasco SA under regulation 12 of the Russia Sanctions Regulations because Litasco SA should be treated as a designated person due to it being controlled by one or more designated persons, including Mr Alekperov, Lukoil’s founder and CEO until April 2022, and President Vladimer Putin.
The applicable law concerning the UK Sanctions ‘control test’
Regulation 12 of the Russia Sanctions Regulations provides that neither a person nor entity can make funds available directly or indirectly to a designated person, which includes a person owned or controlled, directly or indirectly, by a designated person.
Regulation 7 of the aforementioned regulations addresses the concept of ‘ownership or control.’ Ownership criteria are met if a designated person holds over 50% of the shares or voting rights or has the authority to appoint or remove most of the board of directors. An entity is considered to be controlled by a designated person if, considering all circumstances, it is reasonable to expect that the designated person could ensure the entity’s affairs are conducted according to their wishes.
In a recent article, we discussed the obiter comments concerning what constituted ‘control’ made by Mrs Justice Cockerill in Mints. The Judge concluded the Claimants, two state-owned Russian banks, were not owned or controlled by a designated person within the meaning of Regulation 7, because control is not established under Regulation 7 where a designated person controls an entity through a political office which they hold.
However, on appeal, Sir Julian Flaux, Chancellor of the High Court (sitting in the Court of Appeal), again in obiter comments, deemed ‘control’ to be a much wider concept than that provided by Mrs Justice Cockerill’s reasoning:
i) By excluding control arising from a political office, the Judge [Mrs Justice Cockerill, sitting in the High Court] had put “an impermissible gloss on the language of the Regulation because of a concern on her part that, if the appellants were correct about the construction of the Regulation, the consequence might well be that every company in Russia was ‘controlled’ by Mr Putin and hence subject to sanctions.”
ii) “If, as may well be the case, that is a consequence of giving Regulation 7 its correct meaning, then the remedy is not for the judge to put a gloss on the language to avoid that consequence, but for the executive and Parliament to amend the wording of the Regulations to avoid such a consequence.”
iii) The relevant language “is not concerned with ownership, but with influence or control” and “is apt to cover the case of a designated person who, for whatever reason, is able to exercise control over another company irrespective of whether the designated person has an ownership interest in the other company, economic or otherwise.”
iv) “The provision does not have any limit as to the means or mechanism by which a designated person is able to achieve the result of control, that the affairs of the company are conducted in accordance with his wishes”.
By virtue of the above, the Court of Appeal appeared to interpret ‘control’ extremely broadly and acknowledged that under such an interpretation, President Vladimir Putin could be deemed to control everything in Russia.
The High Court decision in Litasco
Mr Justice Foxton determined that Mr Alekperov did not exert control over Litasco SA for several reasons, namely:
- first, Mr Alekperov resigned from Lukoil’s board soon after facing sanctions;
- his ownership stake in Lukoil was limited to 8.5%, falling short of a controlling interest; and
- the defendants failed to present any evidence indicating that Mr Alekperov maintained control over Lukoil.
In dealing with the question of whether Litasco SA and Lukoil were controlled by the Russian President, Mr Justice Foxton distinguished Mints on the grounds that in that particular case, the bank in question was owned by the Central Bank of Russia which was “an organ of the Russian state”. In the case before him, the Defendant provided no evidence to show that Litasco SA was owned by the Russian state.
Mr Justice Foxton directed his attention to whether “making funds available to Litasco SA amounts to making funds indirectly available to President Putin.” He concluded that “the issue of control has, as its central focus, the ability of the designated person to control the use of the funds made available.” In addition, to have ‘control’ the Russian President would have to have “an existing influence” over the company, not merely the ability to gain control sometime in the future.
Given the above test, the Court deemed it was “wholly improbable” that any funds made to the Defendant would be made available to President Putin as it was likely that the President had no idea of Lukoil or Litasco SA’s existence.
Final words
Litasco SA is the first binding decision to provide a test as to what constitutes ‘control’ under the Russia Sanctions Regulations. It strikes a middle ground between the High Court and Court of Appeal comments in Mints, concluding that whether a designated person has ‘control’ of an entity must be decided on a case by case basis and the key question is whether or not the designated person exercises control on a routine basis. Therefore, the test is a subjective, practical test, rather than an objective, abstract one.
To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.
Note: The points in this article reflect sanctions in place at the time of writing, 27 November 2023. This article does not constitute legal advice. For further information, please contact our London office.
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