Following the decision of Rose J on 8 June 2015 setting aside a statutory demand served on Mr Maud (see our previous article dated 16 June 2015), the Libyan Investment Authority ("LIA") appealed to the Court of Appeal. The Court of Appeal handed down judgment on 27 July 2016 reversing the decision of Rose J that the LIA could not claim on the personal guarantee given by Mr Maud (the "Guarantee") before the imposition of sanctions against Libya. The decision of the Court of Appeal is of interest to those involved in sanctions, including in particular the Iranian sanctions regime, as set out below.

The background

A short recap of the facts is as follows. In April 2008 Mr Maud guaranteed a loan made by the LIA to Propinvest Group Limited ("Propinvest"). Propinvest defaulted and Mr Maud became liable under the Guarantee to the LIA. The LIA served a statutory demand on Mr Maud who applied to have the statutory demand set aside on the grounds that payment of the debt would contravene the Libyan sanctions regime set out in Council Regulation (EU) No 204/2011 as amended (the "Regulation") and the Libya (Asset-Freezing) Regulations 2011 (the "UK Regulations"). At first instance, Rose J held that payment of the guarantee would breach sanctions and, therefore, the statutory demand should be set aside.

The Court of Appeal reversing Rose J's decision decided:

  1. Funds
    The Regulation and UK Regulations must be construed as far as possible compatibly with the Security Council resolutions to which they are intended to give effect.

    The Regulation provides an extensive definition of "funds". There is a difference between the "asset" and the "funds" into which it can be turned. In this case the asset was the guarantee. Dealing with the guarantee would involve discounting it or using it as security in order to obtain new funds. Paying the debt under the guarantee is not dealing with the asset itself; it is performing the obligation to which it gives rise. Rose J had confused "funds" in the sense of the guarantee with "funds" in the sense of the proceeds of payment.
  2. Derogations applicable to pre-existing contract
    Mr Maud advanced the argument that paying a debt involves dealing with the chose in action in a way that enables the funds it represents to be used. The Court of Appeal disagreed; if this was correct, it would make it impossible for any payments to be recovered under the pre-existing contract exception. That can hardly have been the intention of the Security Council or the EU Council of Ministers.

    The payment of debts arising under obligations which came into existence before sanctions were imposed falls within the making available prohibition rather than dealing with existing assets prohibition. Thus, debts arising under frozen assets continue to be recoverable subject to the provision of new or additional funds.
  3. HM Treasury Licence
    The burden of proof rests with the person asserting that he is prevented from performing an obligation. Therefore, in this case it would have been for Mr Maud to show that the imposition of sanctions prevented him from performing his obligations and that he could not have obtained the necessary licence from HM Treasury allowing performance in any event.
  4. Immunity
    Mr Maud maintained that the statutory demand constituted a "claim" within the meaning of article 12(1), the provision granting immunity for certain sanctions related claims, and that the judge should therefore set it aside because a failure to do so would amount to satisfying it. The Court of Appeal found that the purpose of the immunity provision was to stop the LIA from obtaining funds owed to it by means of judicial process. A common feature of a "claim" is that it may lead directly to the grant of the relief which the claimant seeks. Similarly, the satisfaction of a claim involves the grant of relief to the extent that the law allows.

    A statutory demand does not fulfil either of those criteria. It is simply a means of proving that a person is unable to pay his debts and is a precursor to a claim.

    Consequently, the Court of Appeal disagreed that the statutory demand should be set aside on the basis that it is a claim within the meaning of the immunity provision.

Comments

Although to some extent specific to the Libyan sanctions regime, the decision of the Court of Appeal is relevant to other sanctions regimes also which contain similarly or identically worded freezing restrictions and applicable derogations, such as the Iranian sanctions regime.

  • Unlike Rose J, the Court of Appeal found there is a distinction between an asset on the one hand and the obligations flowing from that asset on the other.In this case the asset was the guarantee and there was a prohibition in dealing with that asset which was frozen. So, the LIA could not if it wanted, assign the guarantee, discount or indeed sell it. On the other hand, the obligations and funds flowing from that asset were not frozen. Instead they were subject to the restriction in making available those obligations (in the form of funds) to a designated entity.

    This is entirely in line with the decision of Simon J in the DVB Bank SE and ors v Shere Shipping Company Ltd and ors (2013) case, in which Simon J held in relation to the Iranian sanctions regime that "whether one is looking at the broad intent of the Regulation or interpreting the detailed wording, it is (unsurprisingly) assets of the designated persons which are frozen and not the discharge of their liabilities". In that case the borrowers under a loan agreement guaranteed by designated entities argued that they were prevented from repaying the loan because to do so would make funds or economic resources available to the guarantors. Simon J disagreed and held that the borrowers were exchanging one debt for another and no additional funds were being made available in contravention of the broad purpose of the regulations.
  • Both the Libyan and Iranian sanction provisions are subject to the exception which allows the crediting of accounts for payments under contracts or obligations pre-dating the imposition of sanctions. The Court of Appeal accepted that, but for an amendment relaxing the Libyan regulations, the proceeds of the guarantee could have been paid to LIA into a frozen account. That stems from a purposive interpretation of the sanctions regime as a whole and in particular that if the position were otherwise the derogation of allowing payment of pre-existing obligations would be impossible to perform and as such would make no sense. That interpretation must be right.

    It certainly accords with the decision of Simon J in DVB Bank in which he found that the effect of the pre-existing obligation provision is that the making available prohibition does not prevent the crediting of frozen accounts provided those accounts remain frozen. This was, of course, also the position adopted by Rose J at first instance in Maud.
  • The Court of Appeal did not deal with the question of a licence from HM Treasury in any great detail given that it was accepted that if the payment of the debt was not prohibited, the argument would not assist Mr Maud. However, the Court of Appeal disagreed with Rose J's approach that the burden for proving that the debtor could not have obtained a licence to pay the debt should be determined by reference to the nature of the sanctions regime and thus rests with the sanctioned entity. The Court of Appeal instead favoured the traditional breach of contract approach, that the burden must be discharged by the person seeking to rely on the argument that he could not have obtained the licence.
  • A common feature of many sanctions regimes is a provision providing immunity for certain "claims" that have been affected by the measures imposed by the sanctions regulations .The Court of Appeal has confirmed that this provision is intended to prevent claims arising under contracts where those claims arise out of obligations which are not lawfully performable by reason of the sanctions regime.Consequently, where performance is permissible the resulting claim is not "affected" by the sanctions regime. The Libyan and Iranian sanction provisions are comparable in terms of immunity for "claims", albeit the Iranian regime defines "claim" whereas the Libyan regulations do not. The Court of Appeal, taking a restrictive interpretation of the word "claim" held that this provision would not apply since the payment of monies under the guarantee was permissible. Accordingly, it was not "affected" by the measures imposed under the Regulation and the provision had no application. The Court of Appeal also found that the word "claim" must involve some process for judicial relief; alternatively, satisfaction of the claim meant the granting of relief.

    Again, this decision is in line with that of Simon J in the DVB Bank case in which he held that the immunity applies to those cases where the existence of the claim results directly or indirectly from the measures imposed by the sanction provisions. A claim arising by operation of a contract under which it is brought is not such a claim.

In interpreting the applicable sanctions regime, the Court of Appeal has taken a purposive rather than formalistic approach. The broad intent behind economic sanctions is to prevent the use of funds and economic resources for defined prohibited purposes and/or by designated persons.