Background
PJSC VTB Bank, a majority Russian-state-owned bank, was designated under the Russia (Sanctions) (EU Exit) Regulations 2019 following Russia’s invasion of Ukraine. Its UK subsidiary, VTB Capital plc, entered administration in December 2022. VTB Bank was a major creditor, with a proof exceeding £205 million, while substantial assets and receivables were located in Russia and difficult for the administrators to recover. VTB Bank also pursued enforcement against the subsidiary’s Russian assets.
After VTB Bank blocked a proposed scheme of arrangement, the Office of Financial Sanctions Implementation amended the subsidiary’s general licence in January 2025. The amendment permitted certain distributions but stated that no funds, economic resources, or provision for a later payment could be made for VTB Bank without deductions reflecting its Russian enforcement recoveries and specified group receivables. VTB Bank challenged the amendment under section 38 of the Sanctions and Anti-Money Laundering Act 2018. The High Court dismissed the challenge, and the bank appealed on improper-purpose, Article 6, irrationality, and procedural-fairness grounds.
The Court’s Holding
The Court of Appeal dismissed the appeal. It held that the licence amendment was permissive: it decriminalised conduct that otherwise might breach sanctions, but neither required the administrators to act nor displaced insolvency law. Any proposal affecting VTB Bank’s substantive creditor rights would still require consideration by the Insolvency Court, where the bank could contest it.
The Court further held that making an insolvency provision for a designated creditor’s claim does not itself make funds or economic resources available to that creditor. Consequently, the amendment’s words purporting to prohibit such provision without the specified deductions had no legal effect, apart from possibly indicating a suggested course to the administrators. Even if that interpretation were wrong, the amendment still could not override insolvency law or extinguish the bank’s rights.
OFSI acted within the broad purposes of the sanctions legislation by seeking to make sanctions effective and relaxing the asset freeze on limited conditions. The amendment did not predetermine VTB Bank’s insolvency rights or deny it an independent hearing, and its permissive character meant that prior consultation was not required. Consultation with every affected creditor would also have been impracticable.
Key Takeaways
- An OFSI licence authorises conduct otherwise prohibited by sanctions; it does not override insolvency law or direct an insolvency court’s decision.
- Reserving assets within an administration for a designated creditor’s possible future payment does not, without more, make funds or economic resources available to that creditor.
- Any reduction of VTB Bank’s substantive entitlement must arise from an order of the Insolvency Court, where the relevant insolvency-law issues remain open for determination.
Why It Matters
The decision defines the boundary between sanctions licensing and insolvency adjudication. OFSI may condition a relaxation of sanctions and suggest a route that advances sanctions policy, but it cannot use a licence to impose a distribution scheme, extinguish creditor rights, or displace rules that the Insolvency Court must apply.
The judgment also leaves the administrators’ practical problem unresolved. The Insolvency Court may potentially reach a comparable result through doctrines such as hotchpot or by treating the Russian assets and group receivables as provision for VTB Bank’s claim, but the Court of Appeal expressly declined to decide those disputed insolvency questions without full argument.