The High Court has approved the sale of a portfolio of securities owned by Sova Capital Limited (Sova) to an unsecured creditor in consideration of the release of that creditor’s claim. The court’s approval of the transaction in this case marks the first reported decision on an unsecured credit bid for the assets of a company in administration (Re Sova Capital Limited (in special administration)  EWHC 452 (Ch)).
Sova is a FCA authorised and regulated wholesale broker that provided trading and execution services, including access to the Russian markets. The vast majority of Sova’s assets consisted of shares in Russian securities. Sova’s reliance on the Russian market, coupled with the economic sanctions imposed by various jurisdictions as a consequence of Russia’s invasion of Ukraine, resulted in the rapid deterioration of Sova’s business. The court appointed special administrators over Sova on 3 March 2022, following an application by the company’s directors.
The administrators applied to Court for the approval of the sale of certain Russian securities to an unsecured creditor of Sova, Dominanta. The sale was to be entered into on a “cash free basis”, and in consideration of the release of Dominanta’s unsecured claim in Sova’s administration – effectively allowing Dominanta to “credit bid” equivalent to the value of its claim.
Given the nature of the assets in this case – namely, illiquid Russian securities which were very difficult to dispose of due to Western-imposed sanctions - realising their value would, in the administrators’ view, be near impossible outside of the scope of the transaction proposed.
The value of Dominanta’s unsecured claim in Sova’s administration was around £233m. The estimated value of the Russian securities was approximately £274m, albeit it was acknowledged that the realisable value was likely significantly lower given the impact of sanctions and other Russia-specific issues associated with the ongoing conflict in Ukraine.
What is "credit bidding"?
Credit bidding facilitates the acquisition of an asset, usually by a secured creditor, who effectively “bids” the value of the secured debt it holds in order to acquire an asset over which it has security. The concept is well-recognised in many jurisdictions. While it does not have statutory footing within the UK (unlike in the USA, where it is enshrined in US bankruptcy legislation), the ability of a secured creditor to leverage the value of its debt in this way has gradually become accepted practice in the restructuring market.
In an effort to realise the value trapped in the illiquid assets, the administrators applied to the Court (pursuant to paragraph 63 of Schedule B1 of the Insolvency Act 1986) to sanction the proposed sale of the shares to Dominanta in consideration for the release of Dominanta’s unsecured claim against the administration estate. The application was made on the basis that the proposed waiver of Dominanta’s unsecured claim would clearly improve the overall position for Sova’s remaining unsecured creditors and any likely distribution they may receive in the administration.
Challenge to the application
The proposed share sale was challenged by another of Sova’s unsecured creditors - and potential bidder for the same assets - who argued that it would amount to a distribution in specie and would undermine the principle of a pari passu distribution (which requires the distribution of assets available in an insolvent estate equally among unsecured creditors). However, considering the position, the Court held that the transaction constituted a sale, rather than a distribution, and therefore it did not undermine the pari passu principle, which does not apply to the sale of assets.
After careful consideration of the current sanction regime, the Court approved the transaction proposed by the administrators of Sova, while rejecting the challenging creditor’s argument that the administrators had effectively “surrendered their discretion” to it.
The Court found that the Sova administrators’ decision to seek directions from the Court had been justifiable in the circumstances – particularly given the complexities surrounding Russia and the novel approach of an unsecured credit bid. The administrators had chosen to exercise their discretion to enter into the transaction, subject to the Court’s approval.
Tim Carter, co-head of the restructuring and insolvency practice at Stevens & Bolton LLP comments that:
"The court’s blessing of the administrators’ innovative approach to seeking to unlock value for the administration estate, which might otherwise have remained trapped in illiquid assets, provides a welcome option for officeholders and certain creditors alike. While credit-bidding as a concept in relation to secured debt will be familiar to many operating in the insolvency and restructuring sector, the court’s extension to encompass unsecured debt significantly broadens its potential application.
It will be interesting to observe the extent to which this decision encourages other unsecured credit bids or whether this remains an outlier, given the specific challenges and highly fact-specific circumstances that the Sova administrators were required to navigate."