Context
The EU has progressively imposed sanctions and restrictive measures against Russia since 2014 in response to the illegal annexation of Crimea.
Following Brexit, Parliament introduced The Russia (Sanctions) (EU Exit) Regulations 2019 (S.I. 2019/855) ("Sanctions Regs") under the Sanctions and Anti-Money Laundering Act 2018 (the Sanctions Act) to ensure that these sections were implemented effectively after the UK left the EU . Since then there has been various amendments to sanctions regime. Compliance with these regulations is compulsory. Non-compliance can result in imprisonment of up to 12 months or a fine.
In response to Russia's invasion of Ukraine, The Economic Crime (Transparency and Enforcement) Act 2022 (Economic Crime Act) received royal assent on 15 March 2022. The sanctions are wide ranging and include ban various Russian banks from the UK financial system as well as freezing assets of over 1,400 individuals and businesses and other restrictions.
How may sanctions on designated persons impact lenders?
Under regulation 17 of the Sanctions Regs a person must not directly or indirectly grant a relevant loan if that person knows, or has reasonable cause to suspect, that he is granting a loan with a maturity exceeding 30 days to a designated (sanctioned) person. However, there are lenders who will have advanced loans to borrower before they became sanctioned.
Can the Lender request the repayment of their debt?
Lenders may be able to rely on mandatory prepayment provisions in a facility agreement. The provisions usually ensure that lenders will be entitled to require prepayment (usually of the full loan) if it becomes illegal for it to make a loan. However, the illegality wording will need to be reviewed to assess whether it is wide enough to allow a lender to demand repayment, when a designated person has had their assets frozen after the loan has been made.
Events of default provisions may also be triggered by borrowers and/or guarantor's assets being frozen. It is important for lenders to check the events of default provisions in the relevant finance documents. These will describe the action lenders can take if the sanctions amount to an event of default. There may be a specific event of default that deals with sanctions. If not, attention should be paid to the more general material adverse change (MAC) events of default. MAC clauses do not usually specify the exact circumstances that might constitute a MAC. Lenders will instead have to rely on the general meaning of the words to determine whether sanctions applied against the borrower and/or its assets and/or income would constitute a MAC within the meaning of the definition in the facility agreement. In contrast, if the facility agreement contains a force majeure clause, these do often contain a list of events which constitute force majeure (and this might include sanctions).
Can a lender's security be enforced?
If the lender has the right to demand repayment of its loans to a sanctioned borrower it will need to consider whether it can enforce any security it holds over the borrower's assets, and if the loan is unsecured, whether it can commence debt enforcement proceedings against the borrower and any guarantors. If the lender has called a default under the facility documentation, it is likely that the rights to enforce its security will be activated, although the precise trigger will be determined by the terms of the finance and security documents.
The Sanctions Regs says:
Regulation 11 – A person ("P") must not deal with funds or economic resources owned, held or controlled by a designated person if P knows, or has reasonable cause to suspect, that P is dealing with such funds or economic resources.
Under the terms of the Sanctions Regs, funds or economic resources in which the designated person has any legal or equitable interest, includes any tangible property or bearer security (other than real property). This is likely to apply to any security over the borrower's cash in accounts, any share security and could apply to any other receivables and assets so long as they are not "real property".
"Deal" is defined extremely widely. It includes moving, transferring, allowing access to and changing ownership or possession of the relevant funds or economic resources of the designated person. Therefore, there is an argument that by enforcing share security (whereby the secured shares could be transferred) and any security over cash, receivables and any other economic resources that are held or controlled by the designated person, the enforcing lender could be in breach of the Sanctions Regs.
Where there are areas of concern with enforcement of these types of assets there are certain specific Treasury Licences, which may be applicable (Regulation 64 of the Sanctions Reg). Lenders will be well advised to apply to the Treasury for a licence prior to enforcement of its security over any of the assets listed above. In the event that this is not forthcoming, lenders may need directions from the court.
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