Mrs Justice Rose DBE:
- The Applicant ('Mr Maud') has applied under the Insolvency Rules 1986 r 6.4 to set aside a statutory demand served on him by the Respondent ('the LIA') on 19 February 2014. By the statutory demand the LIA claims that Mr. Maud owes it the sum of £17,574,778.01 pursuant to the terms of a guarantee dated 10 April 2008 and that this sum is payable to it now. Because the application to set aside was made out of time, the LIA has already presented a bankruptcy petition. That petition stands adjourned awaiting the outcome of this application and also of another application by Mr Maud to set aside a different statutory demand for about £40 million served on him by different creditors. The hearing of Mr Maud's application to set aside the other statutory demand was heard by me the day after the hearing of this application and is determined in a judgment of even date to this: see Maud v Aabar Block SARL and Edgeworth Capital (Luxembourg) SARL [2015] EWHC 1626 (Ch).
- The grounds on which the court may set aside a statutory demand are set out in the Insolvency Rules r. 6.5(4):
(a) The debtor appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt or debts specified in the statutory demand; or
(b) The debt is disputed on grounds which appear to the court to be substantial; or
(c) It appears that the creditor holds some security in respect of the debt claimed by the demand, or
(d) The court is satisfied on other grounds, that the demand ought to be set aside.
- Mr Maud does not dispute that he entered into the guarantee and that the principal debtor his company Propinvest Group Limited has defaulted. He accepts that the guarantee was overdue as from 2 March 2010. He also accepts that at present he does not have the money to pay the debt. He seeks to set aside the demand on the grounds that any payment of the amount due would amount to a breach of the sanctions regime currently in place prohibiting people in certain circumstances from dealing with the LIA. He therefore argues that the debt is substantially disputed or alternatively that the illegality of any payment under the sanctions regime constitutes 'other grounds' on which the court should be satisfied that the demand should be set aside.
- Both parties raise threshold issues which I will need to consider. Mr Maud's application to set aside was issued only on 13 August 2014, considerably after the 18 day deadline set by IR r 6.4(1) for making such an application. The LIA argues that I should not extend time for the making of this application and so should dismiss the application on that basis. Mr Maud argues that the bankruptcy jurisdiction of the court is not a suitable forum for dealing with the complex legal argument raised by his application: there clearly is, he argues, a substantial dispute about whether the guarantee is caught by the sanctions and that should be enough to justify setting aside the demand. I shall address these preliminary issues in this judgment but, since the substantive issue of whether the guarantee is caught or not was fully argued before me I will state my conclusions on that in any event.
The Libyan sanctions regime
- The provisions on which Mr Maud relies on are found in the EU regulations which implemented the sanctions regime established under resolutions of the Security Council of the United Nations, together with the domestic implementation of the EU law in the United Kingdom. I have set the full text of the relevant provisions of the UN, EU and UK legislation out in an Annex to this judgment and here describe the effect of the provisions.
- The first step in establishing the sanctions regime was UNSCR Resolution 1970 (2011) adopted by the Security Council on 26 February 2011 ('UN 1970 (2011)'). In the recitals to UN 1970 (2011) the Security Council noted its concern at the violence against the civilian population at the hands of the Qadhafi regime. The UN set in place a number of measures including an arms embargo, a travel ban on particular individuals and an asset freeze. The asset freeze was set out in paragraph 17 and applied to individuals listed in an annex to the Resolution ('the targeted entities'). It required Member States to ensure two things; first that 'all funds, financial assets and economic resources' belonging to the targeted entities and located in their territory were frozen and secondly that their nationals were prevented from making available to the listed individuals 'any funds, financial assets or economic resources'. The resolution also established a Committee of the Security Council ('the UN Sanctions Committee') charged with, amongst other things, monitoring the implementation of the sanctions and designating more people to be added to the people or entities who were subject to the sanctions.
- Paragraph 19 of UN 1970 (2011) set out some exceptions to the freeze imposed by paragraph 17. It provided that the freeze did not apply to funds that the Member State had determined were:
i) required for basic living expenses, medical expenses, legal services etc provided that such a determination was notified to the UN Sanctions Committee and that the Committee did not object;
ii) required for 'extraordinary expenses' provided that the UN Sanctions Committee approved;
iii) needed to satisfy a lien or judgment or arbitral lien entered against the targeted entity before the date the sanctions came into force, provided the judgment or award was not for the benefit of a targeted entity and that the UN Sanctions Committee had been notified.
- Paragraph 20 of UN 1970 (2011) provided that Member States can permit the addition to frozen accounts of (i) interest or other earnings due on those accounts or (ii) payments due under contracts, agreements or obligations that arose prior to the date the freeze came into operation provided that those monies are then frozen in the accounts. Paragraph 21 which is not relevant to the current dispute allowed a further exception for targeted entities to be able to honour their own contractual obligations entered into with third parties prior to the freeze being imposed.
- The targeted entities subject to the freeze in UN 1970 (2011) were Colonel Qadhafi and six members of his immediate family. However the number of targeted entities was expanded shortly afterwards by the adoption of UNSCR 1973 (2011) on 17 March 2011 ('UN 1973 (2011)'). That resolution stepped up the measures taken against Libya by establishing a no fly zone in Libyan airspace and tightening the arms embargo. Paragraph 19 of UN 1973 (2011) reaffirmed both aspects of the asset freeze in respect of targeted entities. Paragraph 22 provided that the asset freeze and the exceptions to that freeze set out in UN 1970 (2011) applied to additional individuals listed in the annex to the resolution. The annex listed some more members of the Qadhafi family plus five entities: the Central Bank of Libya, the Libyan Africa Investment Portfolio, the LIA, the Libyan Foreign Bank and the Libyan National Oil Corporation. The LIA was described in the annex as under the control of Colonel Qadhafi and his family and a potential source of funding for his regime.
- The European Union brought in measures to impose sanctions on Libya by adopting Council Regulation (EU) No 204/2011 concerning restrictive measures in view of the situation in Libya. It was adopted on 2 March 2011 and came into force on the day it was published in the Official Journal which was 3 March 2011 (OJ 2011 L 58 p. 1) ('Regulation 204/2011'). The recitals to Regulation 204/2011 referred to UN 1970 (2011) and noted that since some of the measures fell within the scope of the Union, it was necessary to adopt EU wide measures to ensure consistency across the EU Member States. Recital (4) stated that Regulation 204/2011 'fully respected' the EU Member States' obligations under the UN Charter and the legally binding nature of UNSC Resolutions.
- Article 1 of Regulation 204/2011 defined the terms relevant to the sanctions. 'Funds' were defined as 'financial assets and benefits of every kind' including but not limited to a list of things including at sub-paragraph (v) 'credit, right of set-off, guarantees, performance bonds or other financial commitments'. 'Freezing of assets' was defined as preventing any move, transfer, alteration, use of, access to, or dealing with funds in any way that would result in any change in their volume, amount, location, ownership, possession, character, destination or other change that would enable the funds to be used.
- Articles 2, 3 and 4 prohibited the supply of arms and other equipment used in internal repression and the provision of technical assistance in relation to such goods and equipment. Article 5 provided for the asset freeze. In its original form this article provided by article 5(1) that all funds and economic resources of the targeted entities listed in Annexes II and III to the Regulation were frozen; by article 5(2) that no funds or economic resources shall be made available directly or indirectly to or for the benefit of the targeted entities in Annexes II and III; and by article 5(3) that participation, knowingly and intentionally, in activities the object or effect of which is, directly or indirectly, to circumvent the measures referred to in paragraphs 1 and 2 shall be prohibited.
- Articles 7, 8 and 9 then set out exceptions to the prohibitions in line with paragraphs 19, 20 and 21 of UN 1970 (2011). Member States were required to designate a competent authority to be responsible for handling applications for exemption. In the United Kingdom, HM Treasury are the competent authority. Article 7 provided for the exemption for payment of living expenses and extraordinary expenses as broadly, covered by paragraph 19(a) and 19(b) of UN 1970 (2011). Article 7 also imposed requirements for the competent authority to notify the UN Sanctions Committee and seek its approval in the circumstances where that is required by UN 1970 (2011). Article 8 of Regulation 204/2011 provided for the exemption for payments of judgments, liens and arbitral awards as, broadly, covered by paragraph 19(c) of UN 1970 (2011), again, with the necessary notification to and approval of the UN Sanctions Committee.
- Article 9 of Regulation 204/2011 is important for the present proceedings. It provided that the prohibition in article 5(2) shall not apply to the addition to frozen accounts of (a) interest or other earnings on those accounts or (b) payments due under contracts, agreements or obligations that were concluded or arose before the entity concerned became subject to sanctions. This reflected, broadly, the exemption set out in paragraph 20 of UN 1970 (2011). Article 10 of Regulation 204/2011 allowed targeted entities to fulfil their own pre-existing contractual obligations in the circumstances described by paragraph 21 of UN 1970 (2011). Finally, article 12 of Regulation 204/2011 provided that no claims, including claims for compensation or a claim under a guarantee in connection with any contract the performance of which 'is affected' by the sanctions regime shall be granted to the Libyan Government or any person claiming for its benefit.
- Article 17 of Regulation 204/2011 required Member States to adopt measures to make sure that the prohibitions were properly enforced within their territory: the penalties provided for must be 'effective, proportionate and dissuasive'.
- The targeted entities were listed in Annexes II and III of Regulation 204/2011. Initially Annex II included Colonel Qadhafi and members of his family and Annex III included both those people and additional members of the Libyan regime. Following the adoption of UN 1973 (2011), the EU adopted Council Implementing Regulation No 360/2011 on 12 April 2011, replacing the original Annexes II and III with greatly expanded lists. The new Annex II included the five entities that had been targeted by UN 1973 (2011) including the LIA and the Libyan Africa Investment Portfolio. The new Annexes came into effect on the date on which the regulation was published in the Official Journal, that was 14 April 2011: OJ 2011 L 100 p 12.
- On the domestic front, the United Kingdom initially adopted regulations to implement UN 1970 (2011) but these were overtaken, for our purposes, by the instruments adopted under section 2(2) of the European Communities Act 1972 to give effect to the EU measures. The first such statutory instrument was the Libya (Asset-Freezing) Regulations 2011 (SI 2011/605) which came into effect at 3:30 pm on 3 March 2011 ('the Domestic Regulations'). These contained the following provisions.
i) They defined the entities subject to the prohibition by cross-reference to Annexes II and III of Regulation 204/2011 so as to avoid having to amend the instrument each time those Annexes were amended: see preamble and reg 2(1). They also provided in reg 2(3) that any expression used both in the Domestic Regulations and in Regulation 204/2011 has the meaning it bears in Regulation 204/2011.
ii) Reg 3 dealt with the freezing of assets by providing that a person ('P') must not deal with funds and economic resources owned or controlled by a targeted entity if he knows or has reasonable grounds to suspect that he is dealing with such funds or economic resources. To 'deal with' funds is defined as meaning (i) to use, alter, move, allow access to or transfer; or (ii) to deal with the funds in any other way that would result in any change of volume, amount, location, ownership, possession, character or destination; or (iii) to make any other change that would enable use: see reg 3(2).
iii) The 'making available' prohibition in article 5(2) of Regulation 204/2011 is split into four regulations in the Domestic Regulations: reg 4 prohibits making funds available to targeted entities; reg 5 deals with making funds available for the benefit of targeted entities; reg 6 deals with making economic resources available to targeted entities and reg 7 deals with making economic resources available for the benefit of targeted entities.
iv) Reg 9 sets up a licensing regime whereby none of the prohibitions applies to anything done under the authority of a licence granted by HM Treasury. Such a licence must specify the acts that are authorised by it and may be granted generally or granted to a category of persons or to a particular person; may be granted subject to conditions; and may be of indefinite duration or subject to an expiry date.
v) Reg 10 provides that it is a criminal offence to contravene any of the prohibitions imposed or to participate intentionally in activities knowing that the object or effect of them is (whether directly or indirectly) to circumvent any of the prohibitions or to enable or facilitate the contravention of any prohibition. A person guilty of an offence under reg 10 is liable on conviction on indictment, to imprisonment for up to two years or to a fine or to both and on summary conviction, to imprisonment for up to three months or to a fine not exceeding the statutory maximum or to both: see reg 14. Prosecution for an offence requires the consent of the Attorney General: see reg 16.
- Thus, the Domestic Regulations do not set out the exemptions to the sanctions described in the relevant articles of Regulation 204/2011 but confer an apparently unfettered power on HM Treasury to authorise conduct which would otherwise be prohibited. However, it was common ground between the parties to these proceedings that HM Treasury are bound to issue licences under reg 9 of the Domestic Regulations only in accordance with the United Kingdom's EU and international law obligations.
The relaxation of sanctions following the fall of the Qadhafi regime
- The Qadhafi regime fell in Autumn 2011 culminating in the death of Colonel Qadhafi on 2 October 2011. Thereafter amendments were made to the sanctions regime. The UN Security Council adopted UN Resolution 2009 (2011) on 16 September 2011 ('UN 2009 (2011)'). It relaxed various aspects of the sanctions regime including the asset freeze. It released two targeted entities from the sanctions regime altogether and modified the regime as it applied to the LIA and certain other entities. Paragraph 15 provides that the funds, other financial assets and economic resources of the LIA that were outside Libya and were frozen as at 16 September 2011 shall remain frozen unless subject to an exception provided by either articles 19, 20 or 21 of UN 1970 (2011) or by other provisions of UN 2009 (2011). Apart from that, the LIA shall no longer be subject to the prohibitions imposed by article 17 of UN 1970 (2011) - 'including that States are no longer required to ensure that any funds, financial assets or economic resources are prevented from being made available by their nationals or by any individuals or entities within their territories, to or for the benefit of these entities'. Paragraph 16 of UN 2009 (2011) provided a new exception to the sanctions imposed on the LIA namely that the prohibition in paragraph 17 of UN 1970 (2011) did not apply if the Member State had notified the UN Sanctions Committee of its intention to authorise access to funds or other assets for one of a number of purposes, and the UN Sanctions Committee had not objected. Those purposes included humanitarian need; establishing, operating, or strengthening institutions of civilian government and civilian public infrastructure; or facilitating the resumption of banking sector operations, including to support or facilitate international trade with Libya. The additional exemption was subject to a number of conditions, in particular that the funds were not going to a targeted individual (such as a member of the Qadhafi family) and the Member State had consulted with the new Libyan authorities and they had not objected.
- To implement the change in the UN regime, the EU adopted Council Regulation (EU) No 965/2011 of 28 September 2011 amending Regulation (EU) No 204/2011. It came into effect on the date it was published in the Official Journal, namely 29 September 2011 (OJ 2011 L 253 p. 8) ('EU Regulation 965/2011'). It made the following amendments which are relevant to the current dispute. First it amended article 5 to reflect the bespoke regime now in operation for the LIA and three other entities whose assets were only frozen if they were outside Libya and frozen as at 16 September 2011. It also amended the exceptions provided in articles 7 and 8 of Regulation 204/2011 and added a new article, article 8b so that Regulation 204/2011 now reflected the revised exceptions to the UN sanctions regime. It also removed the Central Bank of Libya, the LIA, the Libyan Foreign Bank and the Libyan Africa Investment Portfolio from Annex II of Regulation 204/2011.
- To implement the change to Regulation 240/2011, the Domestic Regulations were amended by the Libya (Asset-Freezing) (Amendment) Regulations 2011 (SI 2011/2390) which came into force on 29 September 2011 at 3 pm. The amendments did not need to remove the LIA from the domestic regime because that was automatically effected by its removal from Annex II of Regulation 204/2011. But they imposed a prohibition on the LIA and the other three entities in a similar position to reflect the effect of the new article 5(4).
- Subsequently there was a further amendment to the sanctions regime. Council Regulation (EU) 488/2013 was adopted on 27 May 2013 and came into effect on the day it was published in the Official Journal, namely 28 May 2013: OJ 2013 L 141 p1 ('EU Regulation 488/2013'). That Regulation again substituted a new version for article 8 of Regulation 204/2011 (enabling payments to be made by targeted entities to third parties in satisfaction of awards, liens or judgments made against them). It also added two more provisions to article 9 concerning potential additions of funds to frozen bank accounts. This in turn was implemented by the Libya (Asset-Freezing) (Amendment) Regulations 2013 (SI/2013/2071) which came into force on 13 September 2013 and which amended reg 8 of the Domestic Regulations to reflect the additions to article 9 of Regulation 240/2011. There was no need to amend the Domestic Regulations to reflect the new article 8 of Regulation 240/2011 although of course HM Treasury would have to take into account its amended terms when considering licensing applications.
- Finally on 20 January 2014 the EU made another regulation Council Regulation (EU) No 45/2014 (OJ 2014 L16 p 1) which modified article 12 of Regulation 204/2011 to introduce a new immunity from claims.
- The three provisions which are most relevant to the present dispute are articles 5, 9 and 12 of Regulation 204/2011. Those, in their current form, provide as follows.
"Article 5
1. All funds and economic resources belonging to, owned, held or controlled by the natural or legal persons, entities and bodies listed in Annexes II and III shall be frozen.
2. No funds or economic resources shall be made available, directly or indirectly, to or for the benefit of the natural or legal persons, entities or bodies listed in Annexes II and III.
3. The participation, knowingly and intentionally, in activities the object or effect of which is, directly or indirectly, to circumvent the measures referred to in paragraphs 1 and 2 shall be prohibited.
4. All funds and economic resources belonging to, owned, held or controlled on 16 September 2011 by:
(a) Central Bank of Libya;
(b) Libyan Arab Foreign Bank (a.k.a. Libyan Foreign Bank);
(c) Libyan Investment Authority; and
(d) Libyan Africa Investment Portfolio,
and located outside Libya on that date shall remain frozen.
…
Article 9
1. Article 5(2) shall not apply to the addition to frozen accounts of:
(a) interest or other earnings on those accounts; or
(b) payments due under contracts, agreements or obligations that were concluded or arose before the date on which the natural or legal person, entity or body referred to in Article 5 has been designated by the Sanctions Committee, the Security Council or by the Council,
(c) payments due under judicial, administrative or arbitral lien or judgment, as referred to in Article 8(1);
(d) payments due under judicial, administrative or arbitral decisions rendered in the Union, or enforceable in the Member State concerned, as referred to in Article 8(2),
provided that any such interest, other earnings and payments are frozen in accordance with Article 5(1).
2. Article 5(2) shall not prevent financial or credit institutions in the Union from crediting frozen accounts where they receive funds transferred to the account of a listed natural or legal person, entity or body, provided that any additions to such accounts will also be frozen. The financial or credit institution shall inform the relevant competent authority about any such transaction without delay.
….
Article 12
1. No claims in connection with any contract or transaction the performance of which has been affected, directly or indirectly, in whole or in part, by the measures imposed under this Regulation, including claims for indemnity or any other claim of that type, such as a claim for compensation or a claim under a guarantee, in particular a claim for extension or payment of a bond, guarantee or indemnity, particularly a financial guarantee or financial indemnity, of whatever form, shall be satisfied, if they are made by:
(a) designated persons, entities or bodies listed in Annex II or III;
(b) any other Libyan person, entity or body, including the Libyan government;
(c) any person, entity or body acting through or on behalf of one of the persons, entities or bodies referred to in points (a) or (b).
2. In any proceedings for the enforcement of a claim, the onus of proving that satisfying the claim is not prohibited by paragraph 1 shall be on the person seeking the enforcement of that claim.
3. This Article is without prejudice to the right of the persons, entities and bodies referred to in paragraph 1 to judicial review of the legality of the non-performance of contractual obligations in accordance with this Regulation."
Permission to extend time for applying to set aside
- Rule 6.4(1) of the Insolvency Rules 1986 provide that an application to set aside must be made within 18 days of the service on the debtor of the demand. In fact Mr Maud only applied on 29 July 2014, some five months later. Section 376 of the Insolvency Act confers on the court a power to extend time on such terms if any as the court thinks fit. The parties agreed that the test I should apply is to consider first, the prejudice if any to Mr Maud if the application were to be refused and then secondly evaluate the weight to be given to that prejudice having regard to his conduct and to any explanation given by him as to why he failed to make the application in time. Thirdly, I must take account of the prejudice to the LIA if Mr Maud is able to proceed.
- As to the prejudice Mr Maud would suffer, I consider that it would be a considerable prejudice to him to have to deal with the further stages of bankruptcy proceedings if the demand is allowed to stand without challenge. I reject the LIA's submissions that he suffers no prejudice because his lack of funds means that he cannot be pushed into a position of having to make a possibly illegal payment. The prejudice he suffers is not just being pushed to pay, if he can, a sum which might put him in breach of the sanctions regime but rather the prejudice of facing a bankruptcy petition.
- However, as to how much weight should be given to that prejudice, I accept the LIA's submission that the explanation given by Mr Maud in his witness statement is highly implausible. Mr Maud says that he only became aware of the conflict in Libya in May 2014 when he was on a trip to Abu Dhabi where he read of the storming of the interim Libyan Parliament in Benghazi. On returning, he carried out further research on the internet and it became apparent to him that both the UN and the EU had imposed sanctions upon Libya. During June and July 2014 he made enquiries of the Sanctions Team at HM Treasury but did not receive a substantive response from them.
- I would have expected that a person with Mr Maud's complex business affairs who has regular dealings with the LIA to be aware of the imposition of sanctions. He knew, as from March 2010, that he owed the LIA a debt of over £17 million to which he has no defence. I would expect someone who owes such a large amount of money to keep a weather eye open for developments which might affect the enforceability of the debt – or at least to have people around him to advise him on such matters. If that were the only point for consideration on the extension of time application, I would place little weight on the prejudice to him.
- I do not see that there is much prejudice to the LIA in allowing the application to set aside to proceed. The assumption that they will, if the statutory demand is not challenged, proceed rapidly to the appointment of a trustee in bankruptcy may be over-optimistic. In any event, a trustee will need to have the issues raised by this application determined before making any payment to the LIA. Mr Swift QC appearing for the LIA argues that prolonging the proceedings has delayed the appointment of the trustee and increased the risk of potentially voidable transactions being put beyond the reach of creditors. That is a relevant factor that I have taken into account.
- The reason why I have concluded that I should extend time for the making of the application is that there is a public interest as well as the private interest of Mr Maud in ensuring that the sanctions regime is observed. The substantive issue of the applicability of the regime to Mr Maud's obligation under the guarantee will need to be resolved at some stage of these bankruptcy proceedings. It cannot be allowed to go by default because that would risk opening a crack in the regime through which other parties who wish to collude with each other to manipulate the bankruptcy process in order to evade the regime could slip. Given that I have heard full argument on the substantive issue it is convenient to determine it now rather than simply repeat the day's hearing at a later stage.
- The same applies in relation to Mr Maud's submission that I should determine simply that it is arguable that the debt is not payable rather than grappling with the point of law myself. Neither side argued strongly that there could be any additional material produced at a later stage. There was some suggestion that HM Treasury may wish to be represented at any future hearing, particularly on the issue I consider below of whether a licence would have been granted for the payment. However, HM Treasury have already been consulted by Mr Maud and have indicated that they are not prepared to state an opinion on the legal issues raised here. I consider it most unlikely that HM Treasury would be prepared to speculate as to whether they would have granted a licence, not least because the grant of the licence by them depends in part on approval being received from the UN Sanctions Committee. I do not see any benefit in deciding only whether there is a substantial dispute and requiring all the submissions I have heard to be re-run in the course of an action to enforce the guarantee.
- As regards the scope of the discretion conferred by the Insolvency Rules r 6.5(4)(d), the parties referred me to the judgment of Nicholls LJ in In re: A Debtor (1 of 1987) [1989] 1 W.L.R. 271 when he held at p. 276:
"The question arising on this appeal concerns the exercise by the court of its power to set aside a statutory demand "on other grounds" within sub-paragraph (d). In my view, the right approach to paragraph (4) of rule 6.5 is this. Under the Act, a statutory demand which is not complied with founds the consequence that the debtor is regarded as being unable to pay the debt in question or, if the debt is not immediately payable, as having no reasonable prospect of being able to pay the debt when it becomes due. That consequence, in turn, founds the ability of the creditor to present a bankruptcy petition because, under section 268(1), in the absence of an unsatisfied return to execution or other process, a debtor's inability to pay the debt in question is established if, but only if, the appropriate statutory demand has been served and not complied with.
When therefore the rules provide, as does rule 6.5(4)(d), for the court to have a residual discretion to set aside a statutory demand, the circumstances which normally will be required before a court can be satisfied that the demand "ought" to be set aside, are circumstances which would make it unjust for the statutory demand to give rise to those consequences in the particular case. The court's intervention is called for to prevent that injustice.
This approach to sub-paragraph (d) is in line with the particular grounds specified in sub-paragraphs (a) to (c) of rule 6.5(4). Normally it would be unjust that an individual should be regarded as unable to pay a debt if the debt is disputed on substantial grounds: sub-paragraph (b). Likewise, if the debtor has a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt: sub-paragraph (a). Again, if the creditor is fully secured: sub-paragraph (c)."
This passage was cited with approval by Ward LJ in John Remblance v Octagon Assets Limited [2009] EWCA Civ 581 where he described it as encapsulating the general approach which will require a statutory demand to be set aside when the interests of justice require it.
- The present case demonstrates the wisdom of including an 'other grounds' discretion in rule 6.5(4)(d) to cover situations like the present one which were probably not foreseen by the drafters of the rule. It would, in my judgment, be unjust to allow a statutory demand to found the ability of a creditor to present a bankruptcy petition when the payment of the debt referred to in the demand would contravene a sanctions regime and expose the debtor to criminal penalties. I do not see that it matters whether he is otherwise able to pay the debt or not.
- I turn therefore to the main issue between the parties which is whether the payment out by Mr Maud under the guarantee is prohibited under the sanctions regime. The subsidiary issue is whether, if it is prohibited, Mr Maud is prevented from relying on that prohibition to avoid payment because he could have applied to HM Treasury for a licence to enable him to make the payment but he failed to do so.
The application of the sanctions regime to the guarantee
- Mr Saini QC's argument on behalf of Mr Maud was that this case is straight forward. It is common ground that a payment by Mr Maud to the LIA is not exempted by article 9 of Regulation 204/2011 (as amended) because that article confers exemption only from the prohibition in article 5(2) and article 5(2) applies only to targeted entities in Annex II. The LIA is no longer such an entity. It is also common ground that Mr Maud's obligations under the guarantee date from before 16 September 2011 when article 5(4) came into force and that it is an asset outside Libya. Given that the words 'all funds and economic resources' in article 5(4) are given the very wide definition in article 1 of Regulation 204/2011, the guarantee is frozen and Mr Maud would be in breach of the prohibition imposed in article 5(4) if he paid it. To express the same argument in terms of the Domestic Regulations, Mr Maud argues that he would be in breach of reg 3(1A) if he made the payment under the guarantee and hence would be committing an offence under reg 10(1).
- The LIA argues that on its true construction, article 5(4) does not capture the payment of the guarantee. The LIA's argument is a subtle one. Mr Swift referred to the legislative history of the provisions in Regulation 204/2011, tracing back their origin to the relevant UN Resolutions. This showed, he argued, that the sanctions regime has always distinguished between two kinds of prohibition – a 'freezing prohibition' which prevents the targeted entities from using their assets and a 'making available' prohibition which prevents third parties from giving funds or economic resources to targeted entities. These two prohibition are rolled up in the one provision in paragraph 17 of UN 1970 (2011) (separated by the words 'and decides further') but they are split out in article 5(1) and (2) of Regulation 204/2011 and in regulations 3(1) and (1A) (freezing) and regulations 4, 5, 6 and 7 (making available) of the Domestic Regulations. He then points to the preamble to Regulation 204/2011 which states in recital (4) that the Regulation 'fully respects the obligations of the Member States under the Charter of the United Nations and the legally binding nature of United Nations Security Council Resolutions'. Mr Swift accepts that the definition of 'funds' in article 1 of Regulation 204/2011 is drafted very widely and refers expressly in sub-paragraph (v) to guarantees. However he submits that the opening words of article 5(4) do not in fact include within the term 'funds' the obligation of Mr Maud under the guarantee. This is because that obligation is the kind of obligation that would fall naturally within a 'making available' prohibition rather than within a freezing prohibition. So far as the application of the freezing prohibition to the rights and obligations under a guarantee is concerned, all that is frozen is the benefit of the guarantee in the hands of a targeted entity as creditor. Thus, the freezing prohibition would prevent the targeted entity from selling or monetising its rights under the guarantee because that would be dealing with an asset that it holds. But it does not make sense, the LIA submits, to treat the guarantor's obligations under the guarantee as affected by the freezing prohibition rather than by the making available prohibition. Mr Swift therefore submits that since the LIA is no longer subject to a 'making available' prohibition but only to the limited freezing prohibition in article 5(4), there is nothing now to stop Mr Maud paying out under the guarantee.
- The LIA draws support for this reading of the term 'funds' in article 5(4) from the conundrum that arises if Mr Maud is right that the guarantor's obligations under the guarantee are frozen as well as the chose in action created by the guarantee in the hands of the creditor. This conundrum relates to the operation of article 9(1) of Regulation 204/2011 in the following way. Article 9(1) of Regulation 204/2011 provides a derogation for the benefit of Annex II and Annex III targeted entities only from article 5(2) (the making available prohibition) but not from article 5(1) (the freezing prohibition). Yet article 9(1)(b) clearly contemplates that payments will be made under contracts, agreements or obligations that were concluded before the entity became a targeted entity, provided the proceeds are paid into a frozen account. If Mr Maud is right that the obligations on third parties to pay (as well as the right of the targeted entity to receive) money under those contracts is subject to the freezing prohibition rather than just the 'making available' prohibition, then article 9(1)(b) could never be relied on by a targeted entity or its contracting counterparty. That is because the payment under the contract would be a breach of article 5(1) from which there is no derogation conferred by article 9(1).
- To avoid that conundrum one must therefore conclude that the drafters of Regulation 204/2011 did not envisage that the making of a payment due under a contract etc would be caught by the freezing prohibition under article 5(1). That is why the drafters concluded that a derogation from the 'making available' prohibition in article 5(2) was sufficient to enable such payments to be made. This in turn means that the phrase 'all funds and economic resources' in the freezing prohibition in article 5(1) must bear a different meaning from the same term used in the 'making available' prohibition in article 5(2) because it does not include the obligations of the guarantor or other contractual counterparty to make the payment. That obligation is only covered by article 5(2). If that is right then since LIA is only subject now to a freezing prohibition in article 5(4) and is no longer subject to a making available prohibition, the term 'all funds and economic resources' in 5(4) must bear the same meaning as it bears in article 5(1) and not the same meaning as it bears in article 5(2). Hence the obligation of the guarantor or other counterparty to the LIA or LAIP to make payment can be performed without contravening the sanctions regime because the 'making available' prohibition has been lifted from them and the freezing prohibition in article 5(4) does not bite.
- To express the same point in terms of the Domestic Regulations, the exemption in reg 8(1) and 8(2) excepts the person only from the prohibitions in regulations 4 and 5, not from the prohibition in reg 3(1) or (1A). If the payment of the contracts referred to in reg 8(1)(b) were caught by the prohibition in regulation 3 as well, then the exception could never apply because the person crediting the frozen account would be in breach of reg 3 even if not of reg 4. This must mean that the 'funds or economic resources' referred to in reg 3(1) and (1A) have a narrower meaning that the same phrase used in regs 4, 5, 6 and 7 and do not catch the payment of sums due under contracts, agreements or obligations.
- Thus although the LIA accepts that article 9(1)(b) does not apply directly to the guarantee entered into by Mr Maud (because article 5(2) is directed only at Annex II and Annex III entities and so not, now, to the LIA) it nevertheless relies on its provisions as an aid to construing the scope of the freezing prohibition in article 5(4). Although the LIA has suggested that Mr Maud pay the money he owes them into a frozen account, if its argument is right this is not in fact necessary.
- The LIA further argues that there is nothing surprising about this construction of sanctions regime, given that the introduction of article 5(4) as a bespoke regime for the LIA was intended to relax the sanctions against it and enable it to start trading. If Mr Maud's construction of the provisions is right, then the entities who are still listed in Annex II and III who benefit from article 9 of Regulation 204/2011 (and reg 8 of the Domestic Regulations) are in a better position than the four entities for whom the bespoke regime in article 5(4) was created.
Discussion
- In my judgment the LIA's proposed construction of Regulation 204/2011 is not tenable. The term 'funds and economic resources' must mean that same thing in the three places that it is used in article 5. There is no indication that it is intended to have a different and narrower content where it is used in article 5(1) and 5(4) compared to its use in article 5(2). Similarly there is no indication in article 1(a)(v) that the draftsman intended to draw a fine distinction between the different elements of the guarantee; the obligation on the guarantor to pay on the one hand and the chose in action in the hands of the targeted entity on the other. The LIA's construction is also inconsistent with the very wide definition of 'freezing of funds' in article 1(b). This includes any alteration in funds which would result in any change in their character or other change that would enable the funds to be used. This is entirely apt to describe the conversion of the contingent rights under a guarantee into cash once the principal debtor has defaulted and liability under the guarantee has arisen.
- The conundrum that the LIA identify in article 9(1)(b) is real. But the solution to it is much more straightforward. It must mean that the payment of a frozen obligation into a frozen bank account does not amount to unfreezing it for the purpose of article 5(1) (or reg 3). I accept that it is unfortunate that the drafters of article 9 referred only to a derogation from article 5(2) rather than from both article 5(1) and 5(2). But that omission cannot support the weight of the chain of reasoning that the LIA seeks to place on it. The payment by Mr Maud of the sums due under the guarantee is prohibited by article 5(4) of Regulation 204/2011 and reg 3(1A) of the Domestic Regulations.
- I do not accept that the construction proposed by Mr Maud is inconsistent with the aim of UN 2009 (2011) being to relax sanctions against the four named entities. Although those entities do not benefit from the derogation in what became article 9 of Regulation 204/2011, they have the far greater benefit of no longer being subject to the 'making available' prohibition and having their assets within Libya or dating from 16 September 2011 unfrozen.
- Mr Saini submitted that if I was not satisfied that the proper construction of article 9 was clear, this might be a suitable case for a reference to the EU Court of Justice. I am sufficiently confident that the provision must bear the meaning I have ascribed to it for that not to be necessary. In any event, the fact that I have today handed down judgment refusing to set aside the statutory demand in the parallel case of Maud v Aabar Block SARL and Edgeworth Capital (Luxembourg) SARL means that the resolution of this point may be academic as far as the personal insolvency of Mr Maud is concerned. The Respondents to that application have applied to be substituted in the petition presented by the LIA and if trustees in bankruptcy are appointed, they will form a view on the instant dispute.
- Mr Maud also relies on article 12 (as amended) of Regulation 204/2011. This provides that no claims in connection with any contract the performance of which has been affected by sanctions measures, including in particular a claim for payment of a guarantee, shall be satisfied if they are made by any Libyan person, entity or body, including the Libyan government. Further article 12(2) provides that the onus of proving that satisfying the claim is not prohibited shall be on the person seeking to enforce that claim. Mr Maud says that the claim under the guarantee is clearly 'affected' by the sanctions measures and the service of the statutory demand is a 'claim' for this purpose. The LIA is a Libyan entity so the immunity conferred by article 12 applies to prevent the court from allowing the statutory demand to go forward. Mr Swift relied on his earlier argument to say that because the guarantee is not frozen by article 5(4), the contract is not 'affected' by the sanctions. I have rejected the LIA's construction of article 5(4) and therefore hold that this contract is affected by the sanctions regime. Mr Swift also argued that the term 'claim' is not apt to cover the service of a statutory demand. If looked at overall, he submitted, article 12 is directed at judgments following court proceedings - issuing a statutory demand cannot be the satisfaction of the claim and no question of satisfaction arises until the trustee in bankruptcy is in a position to satisfy the debt.
- In construing article 12, I must bear in mind that the provision has to be applied in all the Member States. Court procedures differ greatly between Member States and it is likely that the procedures for personal insolvency do too. The statutory demand is a document the content and purpose of which is prescribed by the Insolvency Act 1986 and which is an essential step in the course of most bankruptcy proceedings. A pending and timely application to set aside the demand precludes the presentation of the petition under section 267(2)(d) of the Insolvency Act and a failure to have the demand set aside generates the presumption that the debtor is unable to pay under section 268(1)(a) and (2). I consider that the service of a statutory demand is covered by the reference to a 'claim under a guarantee' in article 12 and a refusal of the court to set aside that statutory demand on the debtor's application does amount to a satisfaction of that claim for the purposes of article 12. I do not accept that article 12 is limited to judgments following court proceedings. There are other provisions in Regulation 204/2011 such as article 5 which refer expressly to judgments and the use of the words 'claims' in article 12 must encompass some earlier stage in proceedings. I therefore conclude that article 12 is a further reason why the court should set aside the statutory demand.
Application for a licence
- Regulation 9 of the Domestic Regulations provides that the prohibitions set out there do not apply to anything done under the authority of a licence granted by HM Treasury. As an alternative to its primary argument that the payment is not caught by article 5(4) of Regulation 204/2011, the LIA relies on the opportunity granted to Mr Maud to apply for a licence from HM Treasury to make the payment. The LIA argues that since Mr Maud is the debtor it is his responsibility to take whatever steps he can to enable the payment of the money he owes. The LIA referred me to authorities arising from earlier sanctions regimes. J W Taylor & Co v Landauer & Co [1940] 4 ALL ER 335 concerned the prohibition imposed by the British Government after the outbreak of the Second World War on the import of cereal without a licence. The purpose was to facilitate rationing and control the potential evasion of rationing by profiteers. The parties had entered into a contract for the supply of 25 tons of Madagascar butter beans under an ordinary c.i.f contract before the prohibition was imposed and the seller failed to perform. When sued by the buyer, the seller contended that he was excused from performance because performance had become illegal. Singleton J rejected that defence. He held that the effect of the prohibition order was not to put an end to the contract but only to suspend its operation. It was the duty of the seller to apply for a licence to enable them to perform the contract. The judgment of Singleton J makes clear that it was conceded by the seller that the onus was upon it to show that it could not get a licence: see page 338. The judge also noted that the real dispute between the parties was which of them was entitled to resell the butter beans to the Board of Trade, now that the Board of Trade was offering a better price for butter beans than that fixed in the contract. He also held that he had no reason to believe that a licence would have been refused if the seller had applied for a licence at the proper time – indeed he held that in all human probability it would have been granted: page 341. A similar situation arose in Vidler & Co (London) Ltd v R. Silcock & Sons Ltd [1960] 1 Lloyds 509 where a contract for the supply of 2000 tons of Egyptian undecorticated cotton seed cake was affected by the imposition of an export licensing regime by the Egyptian Government covering the contract. Pearson J noted that the regime imposed was not an absolute prohibition on export but a conditional prohibition. The seller had not made any attempt to acquire a licence and it had not been proved that a licence would not have been granted if it had applied for one. The seller was therefore liable to the buyer for its failure to perform.
- I do not consider that these cases assist the LIA here for three reasons. First, the question of upon whom the burden of applying for a licence to approve an otherwise prohibited transaction must be answered by looking at the terms of the sanctions and licensing regime itself. Those cases are not authority for the proposition that the burden must always fall on the seller regardless of the nature or scope of the sanctions. HM Treasury cannot grant a licence unless they can be satisfied that one of the exemptions conferred by Regulation 204/2011 applies. Those exemptions depend on the purpose for which the unfrozen money is going to be used. Whether the money is going to be used for a purpose envisaged by the relevant articles of Regulation 204/2011 is something exclusively within the knowledge of the Libyan entity. It does not make sense in this regime for the burden of applying for a licence to lie on someone other than the Libyan entity which wants the transaction to take place. Mr Swift argued that Mr Maud could make the application for a licence and HM Treasury could then contact the LIA to ask for information about the intended use of the money. That seems to me a very roundabout way to operate a licensing system. The Frequently Asked Questions guidance issued by HM Treasury in August 2013 covering all the different sanctions regimes in operation states that applications should set out clearly the grounds on which a licence is being sought and provide all the relevant information, full details of the transaction and supporting documentation. This information is necessary given that HM Treasury is required by several of the exemptions in Regulation 204/2011 to notify the UN Sanctions Committee of its intention to grant an authorisation and give that Committee an opportunity to object. There may be occasions where the non-Libyan entity is in a position to complete the application form and the FAQs make clear that anyone affected by the sanctions can apply for a licence. However, in the circumstances of this case I do not consider that the regime places a burden on Mr Maud to apply for a licence.
- The second reason why this argument does not assist the LIA is that there is no reason to conclude in this case that a licence would have been forthcoming. The LIA has not explained what it wants to do with the money. Mr Swift pointed to some of the grounds on which a licence might be issued as likely to be satisfied by the payment of this money. For example article 8b(1)(a)(v) of Regulation 204/2011 refers to the release of frozen funds provided that they shall be used for facilitating the resumption of banking sector operations including to support or facilitate international trade with Libya. I do not accept that it is open to me to assume that this proviso would be satisfied if the guarantee were paid by Mr Maud or to assume further that the UN Sanctions Committee would not have objected. The involvement of the UN Sanctions Committee is intended, it seems to me, to ensure that someone is keeping track of all the payments requested by competent authorities controlling Libyan assets across the world to ensure that the sums proposed to be released do not, in aggregate, exceed sums that are plausibly needed for the purpose intended. Neither Mr Maud nor HM Treasury is necessarily aware of other assets being unfrozen in other jurisdictions on the grounds that they are needed for one of the purposes listed, only the UN Sanctions Committee has this overview. It would be wrong therefore for this court, with no knowledge of that overall position, to make an assumption about the likely use to which the money would be put or the likelihood of a licence being granted.
- Thirdly, this case is different from the other earlier sanctions in that the relief sought in those cases was the payment of money which would not in itself be a breach of the sanctions regime in issue. If the buyer in J W Taylor & Co v Landauer & Co cited earlier had been seeking specific performance of the delivery of the butter beans in circumstances where that delivery would put the seller directly in breach of the prohibition order, the conclusion of Singleton J may well have been different. There was nothing unlawful or contrary to the public interest about the payment of damages for breach of contract in either that case or the Vidler case. In this case the payment of the guarantee would of itself be unlawful and a breach of sanctions.
- In the circumstances of this case, I reject the LIA's contention that Mr Maud is precluded from relying on the illegality of the payment under the guarantee because he failed to apply for a licence from HM Treasury. I therefore grant Mr Maud's application and set aside the statutory demand.
RELEVANT LEGISLATIVE PROVISIONS
(1) UNITED NATIONS SECURITY COUNCIL RESOLUTIONS
Resolution 1970 (2011)
Adopted by the Security Council on 26 February 2011
Asset freeze
17. Decides that all Member States shall freeze without delay all funds, other financial assets and economic resources which are on their territories, which are owned or controlled, directly or indirectly, by the individuals or entities listed in Annex II of this resolution or designated by the Committee established pursuant to paragraph 24 below, or by individuals or entities acting on their behalf or at their direction, or by entities owned or controlled by them, and decides further that all Member States shall ensure that any funds, financial assets or economic resources are prevented from being made available by their nationals or by any individuals or entities within their territories, to or for the benefit of the individuals or entities listed in Annex II of this resolution or individuals designated by the Committee;
…
19. Decides that the measures imposed by paragraph 17 above do not apply to funds, other financial assets or economic resources that have been determined by relevant Member States:
(a) To be necessary for basic expenses, including payment for foodstuffs, rent or mortgage, medicines and medical treatment, taxes, insurance premiums, and public utility charges or exclusively for payment of reasonable professional fees and reimbursement of incurred expenses associated with the provision of legal services in accordance with national laws, or fees or service charges, in accordance with national laws, for routine holding or maintenance of frozen funds, other financial assets and economic resources, after notification by the relevant State to the Committee of the intention to authorize, where appropriate, access to such funds, other financial assets or economic resources and in the absence of a negative decision by the Committee within five working days of such notification;
(b) To be necessary for extraordinary expenses, provided that such determination has been notified by the relevant State or Member States to the Committee and has been approved by the Committee; or
(c) To be the subject of a judicial, administrative or arbitral lien or judgment, in which case the funds, other financial assets and economic resources may be used to satisfy that lien or judgment provided that the lien or judgment was entered into prior to the date of the present resolution, is not for the benefit of a person or entity designated pursuant to paragraph 17 above, and has been notified by the relevant State or Member States to the Committee;
20. Decides that Member States may permit the addition to the accounts frozen pursuant to the provisions of paragraph 17 above of interests or other earnings due on those accounts or payments due under contracts, agreements or obligations that arose prior to the date on which those accounts became subject to the provisions of this resolution, provided that any such interest, other earnings and payments continue to be subject to these provisions and are frozen;
21. Decides that the measures in paragraph 17 above shall not prevent a designated person or entity from making payment due under a contract entered into prior to the listing of such a person or entity, provided that the relevant States have determined that the payment is not directly or indirectly received by a person or entity designated pursuant to paragraph 17 above, and after notification by the relevant States to the Committee of the intention to make or receive such payments or to authorize, where appropriate, the unfreezing of funds, other financial assets or economic resources for this purpose, 10 working days prior to such authorization.
Resolution 1973 (2011)
Adopted by the Security Council on 17 March 2011
Asset freeze
19. Decides that the asset freeze imposed by paragraph 17, 19, 20 and 21 of resolution 1970 (2011) shall apply to all funds, other financial assets and economic resources which are on their territories, which are owned or controlled, directly or indirectly, by the Libyan authorities, as designated by the Committee, or by individuals or entities acting on their behalf or at their direction, or by entities owned or controlled by them, as designated by the Committee, and decides further that all States shall ensure that any funds, financial assets or economic resources are prevented from being made available by their nationals or by any individuals or entities within their territories, to or for the benefit of the Libyan authorities, as designated by the Committee, or individuals or entities acting on their behalf or at their direction, or entities owned or controlled by them, as designated by the Committee, and directs the Committee to designate such Libyan authorities, individuals or entities within 30 days of the date of the adoption of this resolution and as appropriate thereafter;
20. Affirms its determination to ensure that assets frozen pursuant to paragraph 17 of resolution 1970 (2011) shall, at a later stage, as soon as possible be made available to and for the benefit of the people of the Libyan Arab Jamahiriya;
…
Designation criteria
22. Decides that the individuals listed in Annex I shall be subject to the travel restrictions imposed in paragraphs 15 and 16 of resolution 1970 (2011), and decides further that the individuals and entities listed in Annex II shall be subject to the asset freeze imposed in paragraphs 17, 19, 20 and 21 of resolution 1970 (2011);
Resolution 2009 (2011)
Adopted by the Security Council on 16 September 2011
15. Decides to modify the measures imposed in paragraphs 17, 19, 20 and 21 of resolution 1970 (2011) and paragraph 19 of resolution 1973 (2011) with respect to the Central Bank of Libya, the Libyan Arab Foreign Bank (LAFB), the Libyan Investment Authority (LIA), and the Libyan Africa Investment Portfolio (LAIP) as follows:
(a) funds, other financial assets and economic resources outside of Libya of the entities mentioned in this paragraph above that are frozen as of the date of this resolution pursuant to measures imposed in paragraph 17 of resolution 1970 (2011) or paragraph 19 of resolution 1973 (2011) shall remain frozen by States unless subject to an exemption as set out in paragraphs 19, 20 or 21 of that resolution or paragraph 16 below;
(b) except as provided in (a), the Central Bank of Libya, the LAFB, the LIA, and the LAIP shall otherwise no longer be subject to the measures imposed in paragraphs 17 of resolution 1970 (2011), including that States are no longer required to ensure that any funds, financial assets or economic resources are prevented from being made available by their nationals or by any individuals or entities within their territories, to or for the benefit of these entities;
16. Decides that in addition to the provisions of paragraph 19 of resolution 1970 (2011), the measures imposed by paragraph 17 of that resolution, as modified by paragraph 15 above and paragraph 19 of resolution 1973 (2011), do not apply to funds, other financial assets or economic resources of the Central Bank of Libya, the LAFB, the LIA and the LAIP provided that:
(a) a Member State has provided notice to the Committee of its intent to authorize access to funds, other financial assets, or economic resources, for one or more of the following purposes and in the absence of a negative decision by the Committee within five working days of such a notification:
(i) humanitarian needs;
(ii) fuel, electricity and water for strictly civilian uses;
(iii) resuming Libyan production and sale of hydrocarbons;
(iv) establishing, operating, or strengthening institutions of civilian government and civilian public infrastructure; or
(v) facilitating the resumption of banking sector operations, including to support or facilitate international trade with Libya;
(b) a Member State has notified the Committee that those funds, other financial assets or economic resources shall not be made available to or for the benefit of the individuals subject to the measures imposed in paragraph 17 of resolution 1970 (2011) or paragraph 19 of resolution 1973 (2011);
(c) the Member State has consulted in advance with the Libyan authorities about the use of such funds, other financial assets, or economic resources; and
(d) the Member State has shared with the Libyan authorities the notification submitted pursuant to this paragraph and the Libyan authorities have not objected within five working days to the release of such funds, other financial assets, or economic resources.
(2) EU LEGISLATION
COUNCIL REGULATION (EU) No 204/2011 of 2 March 2011 concerning restrictive measures in view of the situation in Libya
(1) In accordance with UN Council Security Resolution 1970 (2011) of 26 February 2011, Decision 2011/137/CFSP provides for an arms embargo, a ban on internal repression equipment, as well as restrictions on the admission and the freezing of funds and economic resources of certain persons and entities involved in serious human rights abuses against persons in Libya, including by being involved in attacks, in violation of international law, on civilian populations and facilities. Those natural or legal persons and entities are listed in the Annexes to the Decision.
(2) Some of those measures fall within the scope of the Treaty on the Functioning of the European Union and regulatory action at the level of the Union is therefore necessary in order to implement them, in particular with a view to ensuring their uniform application by economic operators in all Member States.
Article 1
For the purposes of this Regulation, the following definitions shall apply:
(a) 'funds' means financial assets and benefits of every kind, including but not limited to:
(i) cash, cheques, claims on money, drafts, money orders and other payment instruments;
(ii) deposits with financial institutions or other entities, balances on accounts, debts and debt obligations;
(iii) publicly- and privately-traded securities and debt instruments, including stocks and shares, certificates representing securities, bonds, notes, warrants, debentures and derivatives contracts;
(iv) interest, dividends or other income on or value accruing from or generated by assets;
(v) credit, right of set-off, guarantees, performance bonds or other financial commitments;
(vi) letters of credit, bills of lading, bills of sale;
(vii) documents evidencing an interest in funds or financial resources;
(b) 'freezing of funds' means preventing any move, transfer, alteration, use of, access to, or dealing with funds in any way that would result in any change in their volume, amount, location, ownership, possession, character, destination or other change that would enable the funds to be used, including portfolio management;
(c) 'economic resources' means assets of every kind, whether tangible or intangible, movable or immovable, which are not funds but may be used to obtain funds, goods or services;
(d) 'freezing of economic resources' means preventing their use to obtain funds, goods or services in any way, including, but not limited to, by selling, hiring or mortgaging them;
Article 5
(in its original form)
1. All funds and economic resources belonging to, owned, held or controlled by the natural or legal persons, entities and bodies listed in Annexes II and III shall be frozen.
2. No funds or economic resources shall be made available, directly or indirectly, to or for the benefit of the natural or legal persons, entities or bodies listed in Annexes II and III.
3. The participation, knowingly and intentionally, in activities the object or effect of which is, directly or indirectly, to circumvent the measures referred to in paragraphs 1 and 2 shall be prohibited.
Article 5
(as amended by EU Regulation 965/2011)
1. All funds and economic resources belonging to, owned, held or controlled by the natural or legal persons, entities and bodies listed in Annexes II and III shall be frozen.
2. No funds or economic resources shall be made available, directly or indirectly, to or for the benefit of the natural or legal persons, entities or bodies listed in Annexes II and III.
3. The participation, knowingly and intentionally, in activities the object or effect of which is, directly or indirectly, to circumvent the measures referred to in paragraphs 1 and 2 shall be prohibited.
4. All funds and economic resources belonging to, owned, held or controlled on 16 September 2011 by:
(a) Central Bank of Libya;
(b) Libyan Arab Foreign Bank (a. k. a. Libyan Foreign Bank);
(c) Libyan Investment Authority; and
(d) Libyan Africa Investment Portfolio,
and located outside Libya on that date shall remain frozen.
Article 7
(as amended by EU Regulation 965/2011)
1. By way of derogation from Article 5, the competent authorities in the Member States, as identified on the websites listed in Annex IV, may authorise the release of certain frozen funds or economic resources, or the making available of certain funds or economic resources, under such conditions as they deem appropriate, after having determined that the funds or economic resources are:
(a) necessary to satisfy the basic needs of persons listed in Annex II or III or referred to in Article 5(4), and their dependent family members, including payments for foodstuffs, rent or mortgage, medicines and medical treatment, taxes, insurance premiums, and public utility charges;
(b) intended exclusively for the payment of reasonable professional fees or the reimbursement of incurred expenses associated with the provision of legal services;
(c) intended exclusively for the payment of fees or service charges for routine holding or maintenance of frozen funds or economic resources;
provided that, where the authorisation concerns a person, entity or body listed in Annex II or referred to in Article 5(4), the Member State concerned has notified the Sanctions Committee of that determination and its intention to grant an authorisation, and the Sanctions Committee has not objected to that course of action within five working days of notification.
2. By way of derogation from Article 5, the competent authorities of the Member States, as indicated on the websites listed in Annex IV, may authorise the release of certain frozen funds or economic resources, or the making available of certain frozen funds or economic resources, after having determined that the frozen funds or economic resources are necessary for extraordinary expenses provided that the following conditions are met:
(a) where the authorisation concerns a person, entity or body listed in Annex II or referred to in Article 5(4), the Sanctions Committee has been notified of that determination by the Member State concerned and the determination has been approved by that Committee; and
(b) where the authorisation concerns a person, entity or body listed in Annex III, the competent authority has notified the grounds on which it considers that a specific authorisation should be granted to the other competent authorities of the Member States and to the Commission at least two weeks before the authorisation.
Article 8
(as substituted by EU Regulation 488/2013)
1. By way of derogation from Article 5, with regard to persons, entities or bodies listed in Annex II, the competent authorities in the Member States, as listed in Annex IV, may authorise the release of certain frozen funds or economic resources, if the following conditions are met:
(a) the funds or economic resources in question are the subject of a judicial, administrative or arbitral lien established prior to the date on which the person, entity or body referred to in Article 5 was included in Annex II, or was referred to in Article 5(4), or of a judicial, administrative or arbitral judgment rendered prior to that date;
(b) the funds or economic resources in question will be used exclusively to satisfy claims secured by such a lien or recognised as valid in such a judgment, within the limits set by applicable laws and regulations governing the rights of persons having such claims;
(c) the lien or judgment is not for the benefit of a person, entity or body listed in Annex II or III, or referred to in Article 5(4);
(d) recognising the lien or judgment is not contrary to public policy in the Member State concerned; and
(e) the Sanctions Committee has been notified by the Member State of the lien or judgment.
2. By way of derogation from Article 5, with regard to persons, entities or bodies listed in Annex III, the competent authorities in the Member States, as listed in Annex IV, may authorise the release of certain frozen funds or economic resources, if the following conditions are met:
(a) the funds or economic resources in question are the subject of an arbitral decision rendered prior to the date on which the natural or legal person, entity or body referred to in Article 5 was included in Annex III, or of a judicial or administrative decision rendered in the Union, or a judicial decision enforceable in the Member State concerned, prior to or after that date;
(b) the funds or economic resources in question will be used exclusively to satisfy claims secured by such a decision or recognised as valid in such a decision, within the limits set by applicable laws and regulations governing the rights of persons having such claims;
(c) the decision is not for the benefit of a natural or legal person, entity or body listed in Annex II or III, or referred to in Article 5(4); and
(d) recognising the decision is not contrary to public policy in the Member State concerned.
3. The relevant Member State shall inform the other Member States and the Commission of any authorisation granted under this Article.
Article 8b
(inserted by EU Regulation 965/2011)
1. By way of derogation from Article 5(4), the competent authorities of the Member States, as indicated on the websites listed in Annex IV, may authorise the release of certain frozen funds or economic resources, provided that:
(a) the funds or economic resources shall be used for one or more of the following purposes:
(i) humanitarian needs;
(ii) fuel, electricity and water for strictly civilian uses;
(iii) resuming Libyan production and sale of hydrocarbons;
(iv) establishing, operating, or strengthening institutions of civilian government and civilian public infrastructure; or
(v) facilitating the resumption of banking sector operations, including to support or facilitate international trade with Libya;
(b) the Member State concerned has notified to the Sanctions Committee its intention to authorise access to funds or economic resources, and the Sanctions Committee has not objected within 5 working days of such a notification;
(c) the Member State concerned has notified the Sanctions Committee that those funds or economic resources shall not be made available to or for the benefit of any person, entity or body listed in Annex II or III;
(d) the Member State concerned has consulted in advance with the Libyan authorities about the use of such funds or economic resources; and
(e) the Member State concerned has shared with the Libyan authorities the notifications submitted pursuant to points (b) and (c) of this paragraph and the Libyan authorities have not objected within 5 working days to the release of such funds or economic resources.
2. By way of derogation from Article 5(4) and provided that a payment is due under a contract or agreement that was concluded by, or an obligation that arose for, the person, entity or body concerned, before the date on which that person, entity or body had been designated by the UN Security Council or the Sanctions Committee, the competent authorities of the Member States, as indicated on the websites listed in Annex IV, may authorise, under such conditions as they deem appropriate, the release of certain frozen funds or economic resources, if the following conditions are met:
(a) the competent authority concerned has determined that the payment is neither in breach of Article 5(2) nor is it to or for the benefit of persons, entities or bodies referred to in Article 5(4);
(b) the Sanctions Committee has been notified by the relevant Member State of the intention to grant an authorisation 10 working days in advance.
Article 9
(as amended by EU Regulation 488/2013)
1. Article 5(2) shall not apply to the addition to frozen accounts of:
(a) interest or other earnings on those accounts; or
(b) payments due under contracts, agreements or obligations that were concluded or arose before the date on which the natural or legal person, entity or body referred to in Article 5 has been designated by the Sanctions Committee, the Security Council or by the Council,
(c) payments due under judicial, administrative or arbitral lien or judgment, as referred to in Article 8(1);
(d) payments due under judicial, administrative or arbitral decisions rendered in the Union, or enforceable in the Member State concerned, as referred to in Article 8(2),provided that any such interest, other earnings and payments are frozen in accordance with Article 5(1).
2. Article 5(2) shall not prevent financial or credit institutions in the Union from crediting frozen accounts where they receive funds transferred to the account of a listed natural or legal person, entity or body, provided that any additions to such accounts will also be frozen. The financial or credit institution shall inform the relevant competent authority about any such transaction without delay.
Article 12
(as substituted by Regulation 45/2014)
1. No claims in connection with any contract or transaction the performance of which has been affected, directly or indirectly, in whole or in part, by the measures imposed under this Regulation, including claims for indemnity or any other claim of that type, such as a claim for compensation or a claim under a guarantee, in particular a claim for extension or payment of a bond, guarantee or indemnity, particularly a financial guarantee or financial indemnity, of whatever form, shall be satisfied, if they are made by:
(a) designated persons, entities or bodies listed in Annex II or III;
(b) any other Libyan person, entity or body, including the Libyan government;
(c) any person, entity or body acting through or on behalf of one of the persons, entities or bodies referred to in points (a) or (b).
2. In any proceedings for the enforcement of a claim, the onus of proving that satisfying the claim is not prohibited by paragraph 1 shall be on the person seeking the enforcement of that claim.
3. This Article is without prejudice to the right of the persons, entities and bodies referred to in paragraph 1 to judicial review of the legality of the non-performance of contractual obligations in accordance with this Regulation.
Article 17
1. Member States shall lay down the rules on penalties applicable to infringements of the provisions of this Regulation and shall take all measures necessary to ensure that they are implemented. The penalties provided for must be effective, proportionate and dissuasive.
2. Member States shall notify the Commission of those rules without delay after the entry into force of this Regulation and shall notify it of any subsequent amendment.
(3) UNITED KINGDOM LEGISLATION
The Libya (Asset-Freezing) Regulations 2011 (SI 2011/605)
Freezing of funds and economic resources (in its original form)
3.—(1) A person ("P") must not deal with funds or economic resources belonging to, or owned, held or controlled by, a designated person if P knows, or has reasonable cause to suspect, that P is dealing with such funds or economic resources.
(2) In paragraph (1) "deal with" means—
(a) in relation to funds—
(i) use, alter, move, allow access to or transfer;
(ii) deal with the funds in any other way that would result in any change of volume, amount, location, ownership, possession, character or destination; or
(iii) make any other change that would enable use, including portfolio management; and
(b) in relation to economic resources, exchange, or use in exchange, for funds, goods or services.
(3) Paragraph (1) is subject to regulation 9.
Freezing of funds and economic resources (as amended by SI 2011/2390)
3.—(1) A person ("P") must not deal with funds or economic resources belonging to, or owned, held or controlled by, a designated person if P knows, or has reasonable cause to suspect, that P is dealing with such funds or economic resources.
(1A) The prohibition in paragraph (1) also applies to funds or economic resources which—
(a) on 16th September 2011 belonged to, or were owned, held or controlled by—
(i) Central Bank of Libya;
(ii) Libyan Arab Foreign Bank (also known as Libyan Foreign Bank);
(iii) Libyan Investment Authority; or
(iv) Libyan Africa Investment Portfolio;
(b) were located outside Libya on that date; and
(c) were subject to the prohibition in paragraph (1) immediately before the coming into force of Council Regulation (EU) No. 965/2011 of 28 September 2011;
(2) In paragraph (1) "deal with" means—
(a) in relation to funds—
(i) use, alter, move, allow access to or transfer;
(ii) deal with the funds in any other way that would result in any change of volume, amount, location, ownership, possession, character or destination; or
(iii) make any other change that would enable use, including portfolio management; and
(b) in relation to economic resources, exchange, or use in exchange, for funds, goods or services.
(3) Paragraphs (1) and (1A) are subject to regulation 9.
Making funds available to a designated person
4.—(1) A person ("P") must not make funds available, directly or indirectly, to a designated person if P knows, or has reasonable cause to suspect, that P is making the funds so available.
(2) Paragraph (1) is subject to regulations 8 and 9.
Credits to a frozen account (as amended by S.I. 2013/2071)
8.—(1) The prohibitions in regulations 4 and 5 are not contravened by a person who credits a frozen account with—
(a) interest or other earnings due on the account,
(b) payments due under contracts, agreements or obligations that were concluded or arose before the account became a frozen account,
(c) payments due under a judicial, administrative or arbitral lien or judgment as referred to in Article 8(1) of the Council Regulation, or
(d) payments due under judicial, administrative or arbitral decisions rendered in the European Union or enforceable in the Member State concerned as referred to in Article 8(1) of the Council Regulation
(2) The prohibitions in regulations 4 and 5 on making funds available do not prevent a relevant institution from crediting a frozen account where it receives funds transferred to the account.
(3) A relevant institution must inform the Treasury without delay if it credits a frozen account in accordance with paragraph (1)(b), (c) or (d) or (2).
(4) In this regulation "frozen account" means an account with a relevant institution which is held or controlled (directly or indirectly) by a designated person.
Licences
9.—(1) The prohibitions in regulations 3 to 7 do not apply to anything done under the authority of a licence granted by the Treasury.
(2) A licence must specify the acts authorised by it and may be—
(a) general or granted to a category of persons or to a particular person;
(b) subject to conditions;
(c) of indefinite duration or subject to an expiry date.
(3) The Treasury may vary or revoke a licence at any time.
(4) On the grant, variation or revocation of a licence, the Treasury must—
(a) in the case of a licence granted to a particular person, give written notice of the grant, variation or revocation to that person,
(b) in the case of a general licence or a licence granted to a category of persons, take such steps as the Treasury consider appropriate to publicise the grant, variation or revocation of the licence.
(5) A person commits an offence who, for the purpose of obtaining a licence, knowingly or recklessly—
(a) provides information that is false in a material respect, or
(b) provides or produces a document that is not what it purports to be.
(6) A person who purports to act under the authority of a licence but who fails to comply with any conditions included in the licence commits an offence.
Contravention and circumvention of prohibitions
10.—(1) A person who contravenes any of the prohibitions in regulations 3 to 7 commits an offence.
(2) A person commits an offence who intentionally participates in activities knowing that the object or effect of them is (whether directly or indirectly)—
(a) to circumvent any of the prohibitions in regulations 3 to 7, or
(b) to enable or facilitate the contravention of any such prohibition.
