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Sanctions Against Russia: The Impact For Lenders – Export Controls & Trade & Investment Sanctions



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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.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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