Webinar on EU sanctions against Russia and their effects on the bankruptcies of EU-based enterprises
On Wednesday 26 April 2023, the Conference on European Restructuring and Insolvency Law (CERIL) together with Lazarski University in Warsaw and Adam Mickiewicz University in Poznan organized an online seminar titled “EU sanctions against Russia and their effects on the bankruptcies of EU-based enterprises.” The event scheduled for 2 hours convened more the 60 attendees from various European countries with the majority of Polish.
Professor Emeritus Bob Wessels of the University of Leiden in the Netherlands and chair of CERIL welcomed the audience, emphasized the importance of cooperation between CERIL and the two Polish universities, and made a brief introduction to the subject matter, explaining how the questions related to sanctions were increasingly being raised in trade among the European Union member states. Then the moderation was handed over to Dr Patryk Filipiak who explained the agenda and introduced the speakers.
Toward a legal approach to dealing with EU sanctions in bankruptcy: the Polish case
The EU sanctions against Russia following the invasion of Ukraine, together with their national executive implementations affected several viable businesses to freeze their operations and in consequence, become insolvent and bankrupt. These enterprises pushed into bankruptcy (liquidation) proceedings, in one single moment, have lost their ability to buy, sell, pay, and hire personnel. Bankruptcy regimes had to comply with the sanctions regime – and to say, they were inconsistent is to say nothing.
In the first part of the seminar Professor Anna Hrycaj of Lazarski University, judge at the Appellate Court in Warsaw together with Christoph Paulus, Professor emeritus at Humboldt University in Berlin presented the European and Polish legislative framework implemented in order to effectively introduce the sanctions system. Professor Hrycaj put light on how the Polish law concerning sanctions has evolved. Originally, the solutions did not provide any specific measures to secure the current operations of the company. This led to insolvency. Today, the existing solutions provide for establishing a temporary administration and allow businesses to continue and protect employees and suppliers.
An example: the Polish GoSPort bankruptcy case
In one of the premiere Polish cases – the GoSport bankruptcy proceedings – the once successful and fully viable sports equipment retailer with a broad chain of shops could not exercise its basic, day-to-day duties and operations without the special permission of the head of Polish tax and duties authority. The employees had to be dismissed and the piecemeal liquidation had to be performed by the receiver. Dr. Bartosz Sierakowski of Lazarski University who is acting in this case as a receiver of Zimmerman Filipiak Restrukturyzacja gave a profound insight into the very specific challenges on how bankruptcy was meeting the sanctions system. Dr. Sierakowski presented how important was to establish direct communication and cooperation with the Head of the National Revenue Administration (NRA), which is an official public authority responsible for supervising and enforcing the sanctions regime in Poland. The Head of NRA issued general consent that allowed the receiver to fulfill its duties, make payments, etc.
Dutch and English cases
Then, Dr. Patryk Filipiak of Adam Mickiewicz University in Poznan introduced and commented briefly on a few cases of Dutch and British origin. In the first case (the Amsterdam Trade Bank NV, ECLI:NL:RBAMS:2022:4452), the major problem was an interreaction between insolvency law and the sanctions regime. After ATB had been listed on a sanctions list, Microsoft refused the Dutch administrators to grant access to digital data. In reaction to this and to facilitate insolvency proceedings, the Amsterdam court issued a preliminary relief where it held it unlikely that granting access conflicted with the spirit of the sanctions rules. The judge ruled also that there was an urgent interest of the IPs to have information available and that an official route through various public authorities coordinating sanctions regime in Holland (to achieve an exception from sanctions rules) for IP would take months and was not aligned with the interests of the many thousands of creditors.
The next two cases (Nostrum Oil and Gas Plc  EWHC 2249 [Ch] and Fortenova Group STAK Foundation / SBK Art / SberBank, District Court in Amsterdam, 6 Sep 2022, ]ECLI:NL:RBAMS:2022:5466], Court of Appeals in Amsterdam, decision of 29 Dec 2022) raised questions on whether the sanctioned stakeholders – creditors or shareholders – should execute their rights under the insolvency or – as in one case – under corporate regulations of companies law. The courts stated that those stakeholders could not exercise their rights, however, they should be adequately protected. In Nostrum case the British court was satisfied that denying the voting rights did not put the sanctioned creditors at any greater disadvantage than they had already faced under the relevant sanctions regulations.
The last case (Petropavlovsk Plc (in administration)  EWHC 2097 (Ch) is an example of how determined the British insolvency court along with the administrators were in their efforts to save and salvage the ongoing business of the insolvent company, whereas the insolvency was procured by the implementation of sanctions. The court issued consent for the sale of assets to a buyer even before a formal verification made by the Office of Financial Sanctions Implementation (“OFSI”, i.e. the UK body responsible for the enforcement of the sanctions regime), as a lack of prompt actions could make the buyer may pull back from the transaction. The court itself assessed that the risk of the sale breaching the UK sanctions regime was not high.
Where to go from here?
The last part of the seminar was dedicated to a discussion aimed to bring forward a model shape of the legal consequences of including an enterprise on the sanctions list. The first question referred to how the law could protect viable businesses under sanctions and whether the law system should refrain from the insolvency proceedings being opened provided the insolvency is an effect of the sanctions regime. Professor Hrycaj responded that the freezing of assets can indeed lead to bankruptcy and therefore to negative economic consequences, but declaring bankruptcy – if a company becomes insolvent - is necessary to protect the market and the creditors. To mitigate the negative factors there should be a compulsory administration established just after the company enters a sanctions list. The compulsory administrator should ensure that the company continues to operate, obviously without benefiting Russian owners, creditors, and partners. Ultimately, the measures applied should distinguish between protecting against insolvency and the general insolvency measures applied in regular insolvency proceedings.
The second matter discussed was whether public law sanctions should override bankruptcy law regulations when it comes to inter alia selling assets during insolvency proceedings. Dr. Filipiak made a point that the focus in insolvency proceedings should remain on protecting creditors, stakeholders, the enterprise, and its employees. The insolvency court should have the final say on inter alia asset sales or voting rights, without the need for a sanctions authority as a part of an executive branch, to enter the area of the judicial competence of the court. However, the insolvency judge cannot override mandatory provisions of sanctions law. Overall, public sanctions law, limiting freedom of contracting, must be obeyed in insolvency proceedings.
The third and final part of the discussion referred to the ultimate goals of sanctions and the way they could be achieved in bankruptcies. It is still politically unclear what would be resolved in the future with the frozen assets and whether the proceeds from the sale of assets would be handed back to their original Russian owners or they would be transferred for instance for the sake of reconstruction of Ukraine. Professor Hrycaj commented that these complex questions require consideration of bankruptcy law and creditor equality. Sanctioned companies should go through regular bankruptcy proceedings, with any remaining funds going to non-Russian creditors. If frozen funds are to be handed over to the reconstruction fund of some sort, the creditors in bankruptcy proceedings should be treated under general insolvency regulations.
The discussion was then followed by short contributions delivered by Prof. Christoph Paulus, Prof. Carlos Mack-Castelletti, and Mr. Ivan Ikrenyi and finally with a closing address of Dr. Patryk Filipiak.