Sova Capital – court rules in favour of unsecured credit bid providing welcome guidance for restructuring professionals
The UK High Court has ruled in favour of the first reported credit bid by an unsecured creditor in the UK.
Background
Sova Capital Limited was an investment brokerage which principally traded in the Russian markets. The Russian invasion of Ukraine caused turmoil in those markets and the company was rendered cashflow insolvent. Joint special administrators were appointed to Sova on 3 March 2022 under the Investment Bank Special Administration Regulations 2011 (the JSAs).
The sanctions imposed by the UK, US and EU as a consequence of the invasion and the Russian countermeasures made it extremely difficult for the JSAs to realise the value of Sova’s portfolio of Russian securities via a traditional marketing process. As a result, the JSAs received only two commercially attractive bids for the securities, being:
- An offer from LCC Holding Company Dominanta (Dominanta), in consideration for Dominanta waiving part, or all, of its GBP233 million admitted, unsecured claim; and
- An offer from Boris Zilbermints (BZ), another unsecured creditor of Sova, for a combination of a waiver of his claims against Sova and GBP125 million cash.
As both offers were similar in value but the JSAs had serious concerns about the deliverability of BZ’s Offer, the JSAs proceeded with the offer made by Dominanta (Transaction).
The JSAs applied to court for its approval to carry out the Transaction. The application was challenged by BZ, who claimed that the Transaction went against basic principles of insolvency law (most notably the pari passu principle – that all unsecured creditors in insolvency processes must share equally any available assets (or the proceeds from the sale of those assets) of the company in proportion to the debts due to each creditor) and that the JSAs had surrendered their discretion to the court.
Surrender of the JSAs’ discretion
The judge ruled that the JSAs had not surrendered their discretion in making completion of the Transaction conditional on obtaining the court’s approval. The JSAs had already made the commercial decision to enter into the Transaction and the court’s approval had been sought merely because the Transaction raised novel issues, particularly regarding the intention for an unsecured claim to be waived as consideration and the potential application of the sanctions regime.
The judge made it clear that administrators must, however, generally rely on their own commercial decisions in the ordinary course, stressing that the court is not a “bomb-shelter” for office holders.
Insolvency law
The judge ruled that the Transaction did not go against the pari passu principle; the transfer of the Russian securities was not a distribution which favoured Dominanta ahead of the other unsecured creditors, but rather a sale with the consideration for such being the waiver of Dominanta’s claim (and it is accepted that a waiver of an unsecured claim can constitute consideration).
In finding this, it was noted that the Transaction benefitted the wider creditor population by increasing the dividend rate for the other creditors and making the remainder of Sova’s business potentially more attractive to investors by removing the illiquid securities. Although the facts of the case are novel, it does show that unsecured credit bids are possible where in the best interests of creditors, which is likely to be of great interest to office holders and investors in distressed business structuring transactions out of insolvency processes.
The judge also noted that in light of the competing offers, the JSAs had held an indicative vote of Sova’s creditors (being institutional and professional parties) and that 97% by value of non-conflicted creditors supported the Transaction. Although the vote was not binding, this was a powerful tool at the JSAs’ disposal to demonstrate that the Transaction is likely to be in creditors’ best interests. Whilst not being determinative in this case, the judge’s positive comments clearly vindicate the JSAs’ decision to seek approval from the creditors prior to proceeding with the Transaction, which office holders generally might be well advised to consider when faced with competing offers, particularly when dealing with a sophisticated body of professional creditors, as in this case.
