Overview & Key Takeaways

The Alberta Court of King’s Bench recently provided guidance on the practical application of the economic sanctions imposed by the Special Economic Measures (Russia) Regulations (the “Russia Sanctions”). Angophora Holdings Limited v Ovsyankin, 2022 ABKB 711 (“Angophora”) examined whether civil enforcement activity taken by an entity that was jointly and indirectly owned and managed by a designated person (an entity named in the schedules to the Russia Sanctions) would likely contravene such Russia Sanctions. The key takeaways from this case are:

• An entity that is not a designated person may nonetheless be subject to sanctions where it is owned, held or controlled, directly or indirectly, by a designated person (being a “Shadow Designated Person”);
• Transactions with, or for, Shadow Designated Persons risk contravening the Russia Sanctions;
• Determining control for the purposes of the sanctions regime is a fact driven exercise that considers whether the entity is de facto controlled by a designated person; and
• The sale of assets undertaken in good faith by judgment creditors who are designated persons or Shadow Designated Persons may not contravene the Russia Sanctions (though it is unclear how such a dealing is permitted under the Russia Sanctions without a permit). However, the distribution of proceeds of such sales are likely to be subject to the Russia Sanctions.

Note that our International Trade Group has also prepared an analysis of the Angophora decision with specific regard to how it impacts the interpretation of the Russia Sanctions and similar sanctions regimes. You can find that post here.

Background

Canadian governments have increasingly turned to the economic sanctions available under the Special Economic Measures Act (“SEMA”). Functionally, sanctions are imposed under SEMA through regulations designating the prohibitions or restrictions and the states and persons to whom they apply. As of November 3, 2022, the Consolidated Canadian Autonomous Sanctions List names 3,093 persons subject to sanctions regulations made under SEMA.[1] Nearly half of those listed are designated persons under the Russia Sanctions.

The Russia Sanctions set out a host of sanctions, the most severe being a so-called “asset freeze” and “dealings ban”[2] that is effected through sections 3 and 5:

3. It is prohibited for any person in Canada and any Canadian outside of Canada to

(a) deal in any property, wherever situated, that is owned, held or controlled by or on behalf of a designated person whose name is listed in Schedule 1;

(b) enter into or facilitate, directly or indirectly, any transaction related to a dealing referred to in paragraph (a);

(c) provide any financial or other related services in respect of a dealing referred to in paragraph (a);

(d) provide any financial or related services to or for the benefit of a designated person listed in Schedule 1.

5. It is prohibited for any person in Canada or any Canadian outside Canada to knowingly do anything that causes, facilitates or assists in, or is intended to cause, facilitate or assist in, any activity prohibited by sections 3 to 3.5.

Case History

The Respondent was a wholly owned subsidiary of a Luxembourg investment fund MIR Capital SICAR (SCA) whose operations were managed by MIR Capital Management (SA) (“MIR Entities”). The MIR Entities were both equally owned by two international banks, Intesa Sanpaolo S.p.A, an Italian Bank, and Gazprombank JSC, a Russian Bank (“Gazprombank”).[3] The Applicant was an individual who provided a guarantee in favour of the Respondent, guaranteeing his company’s obligations under a shareholders agreement between his company and the Respondent.[4] The Respondent commenced an arbitration at the London Court of International Arbitration (“LCIA”) alleging breaches of the guarantee and shareholders agreement. The tribunal found in favour of the Respondent and issued a final award in December 2020 (“LCIA Award”) granting the Respondent damages of US$43.2 million.

In September 2021, the Respondent obtained an order recognizing and permitting enforcement of the LCIA Award in Alberta (the “Recognition and Enforcement Order” or the “REO”).[5] Both the LCIA Award and the REO were final and without further avenue of appeal or challenge.[6] After obtaining the REO, the Respondent began taking enforcement steps against the Applicant’s assets in Alberta, Canada, including several condominium properties.[7]

In February 2022, Gazprombank became a designated person subject to the dealings ban in the Russia Sanctions.[8] Thereafter, the Applicant sought to stay enforcement of the REO on the basis that the Respondent’s enforcement actions would constitute prohibited transactions under the Russia Sanctions (the “Application”).

Issues

1. Did the Applicant meet the requirements for a stay?
2. If the evidence established a strong prima facie case that the Respondent was controlled by, or acting on behalf of, an entity designated under the Russia Sanctions, what were the implications for enforcement of the REO?

Alberta Court of King’s Bench Reasons and Analysis

Issue 1 – Stay of Proceedings

The Court applied the tripartite test for a stay as set out in RJR-MacDonald Inc. v Canada (Attorney General),[9] which requires the applicant to establish:

1. a serious issue to be determined;
2. irreparable harm if a stay is not granted; and
3. the balance of convenience taking into account the public interest, favours granting the stay.[10]

(1) Serious Issue to Be Determined: The Application of Russia Sanctions to Respondent

In considering the first stage of the test, the Court considered whether the Applicant demonstrated a strong prima facie case that enforcement of the REO would contravene the Russia Sanctions.[11]

Justice Romaine found that the Respondent controlled the properties at issue by virtue of the REO and the provisions of the Civil Enforcement Act. Accordingly, dealings with those properties on the Respondent’s behalf risked contravening the Russia Sanctions.[12] The distribution of proceeds to the Respondent would pose an “even more clear” risk of contravening the Russia Sanctions for all parties involved in the process.[13] Thus, the material question before Justice Romaine was whether there was a strong prima facie case that the Respondent was “owned, held or controlled by or on behalf of” Gazprombank such that dealings with or on behalf of the Respondent would be dealings on behalf of a designated person.

Despite the language of section 3 of the Russia Sanctions applying to entities “owned, held or controlled by”, Justice Romaine focused on the issue of “control”, noting that control is not defined in the Russia Sanctions. Without a clear definition to apply, Justice Romaine noted that control is a “factual issue to be determined by the circumstances”,[14] bearing in mind a large and liberal interpretive approach that ensured the attainment of the objectives of the Russia Sanctions.[15]

Justice Romaine noted that the objectives of the Russia Sanctions were to demonstrate Canada’s commitment to a policy of non-recognition of Russia’s violation of Ukraine’s sovereignty, to underscore Canada’s unity with other international allies, and to impose an economic cost on Russia, including through designated persons.[16] Justice Romaine also noted that the broad language of sections 3 and 5 of the Russia Sanctions are designed to prevent Canadian persons from knowingly aiding designated persons (or those acting on their behalf) from dealing with property in Canada.[17]

Justice Romaine examined regulatory guidance from Canada’s international allies to determine how control is addressed in other jurisdictions. Justice Romaine noted that both the European Union and United Kingdom incorporate an approach that considers whether an entity is de facto controlled in a functional and practical sense.[18] Justice Romaine also noted that in the United States, an entity that is “owned in the aggregate, directly or indirectly, a 50 percent or greater interest is itself considered to be a blocked person.”[19]

In examining the corporate decision making structure of the Respondent, Justice Romaine found that while Gazprombank could not unilaterally direct the Respondent, it could, as an equal partner with Intesa, block unilateral action.[20] Justice Romaine also noted several instances of Gazprombank’s involvement in the management and operations of the Respondent, particularly in respect of its dealings with the Applicant.

While noting that the Court was not making a final finding on the issue of control, Justice Romaine accepted that the evidence established a strong prima facie case that Angophora was controlled by, or acting on behalf of a designated person, including because the corporate structure of the Respondent would meet the US definition of control and the facts relating to functional control.[21]

(2) Irreparable Harm

Justice Romaine held that the Applicant, as a judgment debtor that has exhausted all avenues of appeal, would not suffer irreparable harm if the stay was not granted and the REO was enforced.[22]

(3) Balance of Convenience

Justice Romaine acknowledged that it is in the public interest to enforce the Russia Sanctions, but that it would be contrary to the public interest to forestall “execution properly authorized by a recognition and enforcement order.” [23]

Issue 2 – Consequences of the Prima Facie Application of the Russia Sanctions

As the Applicant did not establish the second and third requirements for a stay, the Application was dismissed. However, Justice Romaine noted that the finding of a strong prima facie case that the Russia Sanctions applied to the Respondent may “create difficulties for Canadian persons and entities involved in the execution of the REO.”[24] In other words, Justice Romaine recognized that the Court was not prohibiting any steps from being taken, but made findings that would indicate that taking those steps could be in contravention of the Russia Sanctions. Accordingly, Justice Romaine went on in obiter to provide guidance to those individuals and agencies that would be involved in potential enforcement action, stating:

“Given the scope of the REO, and the fact that proceedings under it were pursued in good faith by the civil enforcement agency, in my view, it would not be a breach of the Russian Sanctions for the order to be enforced through the sale of the seized properties, including payment of the costs of enforcement. However, before distribution of the proceeds, persons in Canada may wish to be satisfied that they are not in breach of the Russian Sanctions by further action. That, of course, is their decision.”[25]

Commentary

The Angopohora decision provides helpful guidance on the issue of control under the Russia Sanctions. Specifically, the guidance regarding the enforcement of arbitral awards in Canada by, or on behalf of, designated persons may be of assistance to those involved with similar enforcement activities.

In this case, Justice Romaine appears to suggest, albeit in obiter, to sell the seized properties and hold the proceeds in trust. This is a pragmatic outcome, but it is not clear that it is supported by the text of the Russia Sanctions. The sale of seized properties by an entity that is prima facie controlled by a designated person was suggested to be permissible in this case because the LCIA Award and REO were obtained in good faith before Gazprombank became a Schedule 1 designated person. While the sanctions do provide specific carve outs for transactions entered before a person became a designated person,[26] those carve outs do not apply to the asset freeze set out in section 3 of the Russia Sanctions.

If the sale of seized assets were considered permissible in this case because the LCIA Award and REO were obtained before the Respondent could be considered subject to the asset freeze, it raises questions for future cases where enforcement steps are sought after the creditor is considered a designated person. The LCIA recently obtained a general exemption to allow it to receive payment from sanctioned entities under the UK’s sanctions regime,[27] indicating that it continues to be likely that designated persons may continue to obtain arbitral awards and to seek enforcement of those awards.

If nothing else, the Angophora decision serves as a cautionary tale for persons in Canada seeking to take enforcement action against entities “owned, held or controlled by or on behalf of” designated persons. It underscores that international sanctions are purposive and that remedial legislation requires counsel who are able to understand and apply the regime to fact-specific circumstances. McCarthy Tétrault’s International Arbitration Group is well positioned to assist parties navigating these complexities.

McCarthy Tétrault was counsel for the Applicant in the Angophora decision.

[1]Consolidated Canadian Autonomous Sanctions List (November 2022), online: (Government of Canada)<https://www.international.gc.ca/world-monde/international_relations-relations_internationales/sanctions/consolidated-consolide.aspx?lang=eng>.

[2] Canada Gazette Part II, Vol 156, No 6.

[3]Angophora Holdings Limited v Ovsyankin, 2022 ABKB 711 at para 8 [Angophora].

[4]Ibid at para 4.

[5]Ibid at para 5.

[6]Ibid at para 7.

[7]Ibid at para 7.

[8]Ibid at para 13.

[9]RJR-Macdonald Inc v Canada (Attorney General), 1994 CanLII 117 (SCC), [1994] 1 S.C.R. 311 [RJR-MacDonald].

[10]Ibid at para 40.

[11]Angophora, supra note 3 at para 17.

[12]Ibid at para 22.

[13]Ibid at para 23.

[14]Ibid at para 25.

[15]Ibid at para 26.

[16]Ibid at paras 27 and 29.

[17]Ibid at para 29.

[18]Ibid at paras 33-35 and 40.

[19]Ibid at para 31.

[20]Ibid at para 38.

[21]Ibid at para 43.

[22]Ibid at para 44.

[23]Ibid at para 47.

[24]Ibid at para 49.

[25]Ibid at para 50.

[26]Special Economic Measures (Russia) Regulations, SOR/2014-58, ss 3.1(2) and 3.2(2).

[27]LCIA procures a comprehensive, LCIA specific, general license regarding the Belarus and Russia (Sanctions) (EU Exit) Regulations (October 2022), online (LCIA): <https://www.lcia.org/News/lcia-procures-a-comprehensive-lcia-specific-general-licence-re.aspx>.