Navigating sanctions in the context of an administration is no easy feat. The statutory requirements of administration combined with sanctions regime compliance and additional reporting mean that any insolvency practitioner considering taking such an appointment should carefully understand the context of the company’s situation. The case of CargoLogicAir (CLA) is a case in point.
Until March 2022, CLA was the UK’s only maindeck freighter airline – it held a major contract to transport urgent medical supplies to combat COVID-19 and had undertaken many operations in the humanitarian field. It was a profitable, English registered company and a wholly owned subsidiary of CargoLogic Holding Ltd. CLA had a highly skilled workforce of approximately 110 employees, mainly in the UK but also in other European jurisdictions.
Following Russia’s invasion of Ukraine in February 2022 and the subsequent imposition of EU and UK restrictions against Russian carriers and their owners (but before the company itself became subject to UK sanctions), it became increasingly difficult for CLA to continue its commercial operations.
Prior to the invasion it leased two B747 aircraft in carrying on its business. In February 2022, the EU refused access to EU airports for Russian carriers and prohibited them from flying over EU airspace. Then in March 2022, the UK and EU introduced additional measures prohibiting the provision of technical assistance to Russian carriers, effectively grounding the aircraft.
On 16 June 2022, the majority shareholder of the parent company, Alexey Isaykin – who was also its sole director – was designated as a target of asset-freezing measures pursuant to The Russia (Sanctions) (EU Exit) Regulations 2019. Consequently, the company’s assets were frozen.
Was a solvent solution available?
CLA engaged legal advisors DLA Piper to prepare an application to the Office of Financial Sanctions Implementation (OFSI) for a licence enabling it to continue to meet its basic needs and prior obligations payments. While waiting for this licence, the management team explored various options to save the business and alleviate the impact of sanctions on creditors and employees.
In early July 2022, CLA applied to OFSI requesting authorisation for its ownership to be transferred to a British-based and registered employee-owned trust (EOT), with control moving from the parent majority shareholder to the company’s employees. It was clear that if such a transfer was not effected quickly, the business would be damaged beyond repair. However, senior decision makers at OFSI refused the EOT licence application.
Now cash-flow insolvent, CLA had one operational bank account with Citibank. In June 2022, it informed Citibank promptly about the sanctions and tried to maintain a regular dialogue. However, despite being granted the basic needs licence and providing it to the bank, it faced considerable delays in processing payments, including salaries. On 28 October 2022 the bank gave notice that it intended to close the account on 30 November.
Despite turning a profit of around $45.4m in 2020, with more than $13m in the bank – sufficient to deal with all its liabilities – it was unable to pay creditors because of circumstances entirely outside of its control.
Sanctions in administration
In October 2022, CLA engaged insolvency practitioners to assist with contingency planning and options analysis. Multiple routes were explored, including whether the circumstances were “extraordinary” enough to meet OFSI’s guideline to authorise a sale of the business and assets to a potential investor.
Acutely conscious of his fiduciary and statutory duties and concerned at the prospect of wrongful trading, the sole director applied to the court for the appointment of administrators. An order was made by the court on 16 November.
The judge noted that the closure of the bank account would not lead to funds being divested but a cessation of activity on that account because the bank would cease to administer it.
Since CLA was subject to sanctions, and no alternative commercial bank was willing to do business with it, it was felt that an administration order was the only way the company could avoid a disorderly wind-down and realise value for its creditors.
Access to the bank account
The proposed administrators knew that they needed to engage quickly to find alternative banking providers to hold the company’s funds. There are presently no provisions in UK legislation for companies with ultimate beneficial owners subject to sanctions to enjoy any sort of partial relief from the sanctions regime.
Consequently, banks treat such companies as they would any other entity impacted by sanctions and they generally steer away from offering any banking facilities – despite, in this case, the administrators applying for a separate licence from OFSI, potentially being personally liable for possible infringements of the sanctions regime and being officers of the court.
The joint administrators could not use the existing company bank account and, despite strenuous efforts, have not been able to identify a UK-based, FCA-registered bank willing to open a new account for a company in administration.
Prior to their appointment therefore the proposed administrators reached out to the Insolvency Service to use the Insolvency Service Account (ISA) as a bank of last resort.
Navigation of sanctions post-appointment
OFSI finally granted the administration licence and an updated basic needs licence on 6 February 2023, some three months after the appointment. Because of these delays the joint administrators reached the disappointing conclusion that achieving a sale of the business and assets of the company was unlikely.
The administration strategy has now shifted to achieving the best possible result for creditors with a key focus on ensuring employees can be paid as soon as possible. Some CLA staff have not been paid since the autumn of 2022.
Once the OFSI licences were granted, the joint administrators liaised with the bank and the Insolvency Service and its bankers to effect the transfer of the balance on the bank account. Although ISA officials agreed to permit the use of the ISA, objections were subsequently received from the ISA’s own bankers because of the sanctions issue and the general reluctance of UK bankers to deal with companies such as CLA.
(At the time of writing, the approval of the ISA’s bankers consent has still not been granted although developments are leading to greater optimism that a solution will shortly be found.)
Throughout the entire process, obtaining full access to the company’s books and records has been fraught with difficulties. The majority of the company’s records were stored in online databases and within IT systems. As a result of the sanction, the company had lost access to some of the services provided, including Microsoft Outlook and key databases housing both the technical records for the aircraft and the stock, parts and tooling records, all essential for any possible sale of the parts.
An immediate issue faced was the potential recovery of significant security deposits for the leased aircraft, both of which had been repossessed by the leasing companies. Prior to June 2022 CLA had issued a claim against one of the aircraft lessors seeking to recover the security deposit following the lessor’s purported termination of the aircraft lease.
The claim remains live at the date of writing, however the joint administrators must first assess its merits prior to taking any decision to pursue it. This is extremely difficult without full access to records. It is therefore not presently possible to engage meaningfully with after-the-event (ATE) insurers, nor to pay any ATE insurance premium given the lack of access to the company’s funds.
Once the joint administrators are able to establish an operational bank account, they will also be able to commence realising other known assets in the estate for value, such as stock, parts and tooling.
Joanne Milner is Managing Director of Buchler Phillips Ltd. She will present a session on the CargoLogicAir case at ICAEW’s virtual Restructuring and Insolvency Conference, taking place on 27 and 28 June 2023.
[A longer version of this article first appeared in the International In-house Counsel Journal (IICJ) Vol 16 No 62 2023]
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