A British court will decide whether the insolvent broker Sova Capital is allowed to sell its Russian securities to Roman Avdeev, a Russian banker who also used to be the company's controlling shareholder.
Practitioners at management consultant Teneo — which were appointed by the court as Sova's administrators for the broker's formal insolvency procedure — said Avdeev plans to exchange a £233 million ($280.30 million) creditor claim he has over Sova for a discounted purchase of the broker's Russian securities, valued at £274 million ($331.15 million).
Mark Phillips, a lawyer representing Teneo, told the court that the Russian assets had become "trapped" inside Sova, which went into special administration about a year ago after facing a financial collapse due to sanctions imposed on Russia.
"There is a substantial portfolio of Russian securities," Phillips said, "significantly impacted by legal restrictions and sanctions imposed by authorities around the world."
The sanctions also prevented Teneo from selling the securities on the Russian exchange. Russian-based financial institutions are also "subject to sanctions or asset freezes," which limits the pool of potential buyers.
Sova's administrators had approached several non-Russian potential buyers for the assets, including Goldman Sachs and JPMorgan, but did not gain enough interest.
Phillips described Avdeev's offer, which is provided through his holding company Dominanta, as "the only alternative" to liquidate the Russian securities.
Boris Zilbermints, another Sova creditor from Russia, has filed an objection to the court, reasoning that the credit offer should be prohibited under British insolvency laws. He said the deal would cause an "unprecedented contravention of creditors' rights to equal treatment."
Zilbermints himself made a rival offer worth £125 million ($151.15 million) to the administrators. In his court filing, Zilbermints also urged Teneo to continue exploring other liquidation options.
Meanwhile, Avdeev and Dominanta did not respond to requests for comment regarding the bid. Lawyers at Dominanta said they did not receive instructions to comment on the live court proceedings.
According to analysts, this court case highlights how offshore owners of Russian assets face difficulty in trading their assets due to war-related sanctions and how these owners are "testing exit routes" a year after the war started.
Many international investors have been left with Russian stocks and bonds estimated to be worth billions of dollars when the assets are free to trade. Legal experts said wealthy individuals and institutional investors would likely continue to seek court approval for ways to liquidate their Russian investments while still complying with the sanctions.
"People are going to start testing the limits of what is permissible," Paul Feldberg, a partner at law firm Jenner & Block, said.
"The sanctions are not going away and there are a lot of people and institutions who have assets written down to nothing and they aren't going to just accept it."
Sova's bankruptcy
Sova is a London-based broker that provides trading and execution services, including helping investors to trade in Russian markets. Analysts said the broker's heavy reliance on its Russian business exposed the firm to various sanctions imposed on Russia by global institutions after the Ukraine invasion.
Directors of Sova applied for special administrators to fulfill commitments to stakeholders after the company assessment declared it was insolvent. The British Financial Conduct Authority (FCA) then announced on March 3, 2022, that the court had appointed three Teneo practitioners for the case — David Philip Soden, Stephen Browne and Ian Colin Wormleighton.
The three individuals were tasked to assess customer funds and custody assets held by Sova to determine its position and arrange to return these assets in compliance with the law.
In its official statement last year, Sova said the firm experienced liquidity issues due to "unusual circumstances." It pledged to stabilize the company's situation and protect the interests of its customers.