"Banking on protection? Supreme Court leaves unanswered questions in Celestial Aviation”

Introduction

Earlier this week, the Supreme Court ruled in favour of UniCredit in Celestial Aviation Services Ltd v UniCredit Bank GmbH [2026] UKSC 10, providing guidance on the application of Regulation 28(3) of the Russia (Sanctions) (EU Exit) Regulations 2019 (“UK Regulations”) and Section 44 of the Sanctions and Anti-Money Laundering Act 2018 (“SAMLA”).

The case concerned UniCredit’s refusal to pay under the standby letters of credit (“LCs”) issued in relation to the leases of aircraft to Russia, on the grounds that it was prohibited from doing so by Regulation 28(3) of the UK Regulations. Regulation 28(3) prevented financial services and funds from being provided “in pursuance of or in connection” with an arrangement whose “object or effect” is making civilian aircraft available to Russia or for use in Russia.

UniCredit further claimed that it was not liable for interest and costs, relying on the statutory defence under section 44 of SAMLA, which provides that a person is not liable to any civil proceedings in respect of an act (or omission) done in the reasonable belief that it is in compliance with the applicable sanctions legislation.

As reported in our earlier article here, the Court of Appeal held that Regulation 28(3) of UK Regulations applied and therefore prohibited UniCredit from making the payment under the LCs. However, in obiter, the Court of Appeal decided that the scope of section 44 of SAMLA did not apply so as to protect UniCredit from liability for interest and costs.

Decision

The Supreme Court upheld the Court of Appeal’s decision on Regulation 28(3), but overturned its decision on section 44.

On Regulation 28(3), it agreed with the Court of Appeal that:

The application of Regulation 28 was not limited to arrangements entered into after the sanctions (i.e., on or after 1 March 2022).
The purpose of Regulation 28(3)(c) was to cast a “wide net”, with the safety valve of a licencing system being able to mitigate any unintended consequences.
The words “in connection with” within Regulation 28(3) should be interpreted broadly and do not require any causal connection between the provision of funds and the prohibited supply of aircraft - it is sufficient that there is a factual connection between the payments under the LCs and the aircraft leases (which are themselves an arrangement whose object or effect is to make aircraft available).

The Court also added practical colour: on receipt of a compliant demand under an LC, a bank would be unaware as to whether the aircraft were still being made available by the lessors to persons connected with Russia or for use in Russia and the demand was being made for instance in relation to the failure of the lessee to pay rent. If a bank were to make enquiries to assess whether the payments were being made in respect of the ongoing availability of aircraft, there would be no obligation on the beneficiaries to respond to such an enquiry. As the Court stated at [78] “in the context of the vital public interests involved in sanction provisions it is consistent with the purpose of the Regulations and the Amended Regulations that the arbiter of the accuracy of the information should be the licensing authority rather than private individuals.”

The Court further explained at [79] that a bank or any other private individual will be unable to see the larger picture, which informed the “wide net” approach: suppose a bank provides funds to a person “X”, a national of “Ruritania”, solely confined to a payment for failure to comply with obligations prior to 1 March 2022 so that there is no causative connection between the provision of funds by the bank and the prohibited supply of aircraft in relation to that transaction. The bank may be unaware, “but the licensing authority may be aware”, that X intended to use the payment to fund another new commercial venture, from Ruritania, involving making aircraft available to a person connected with Russia or for use in Russia. The Court stated that “the licensing authority could refuse to grant a licence, thereby disrupting the further commercial venture and putting pressure on Russia.”

In overturning the Court of Appeal’s decision on the scope of section 44, the Supreme Court held that it protected UniCredit from the claimant’s claim for the (i) debt, (ii) interest on the debt, and (iii) associated costs:

Section 44(2) provides that “[a] person is not liable to any civil proceedings to which that person would, in the absence of [section 44], have been liable in respect of the act.” Section 44(3) provides that an “act” includes an omission.
UniCredit’s liability was “in respect of” its omission to pay under the LC – therefore, it falls within section 44(2).
Failure to pay a claim for interest on the amount of the debt or a claim for costs is also an omission “in respect of” the debtor’s failure to pay the debt – therefore, these would also fall within section 44(2).

Conclusion

Many of the thornier issues before the Court of Appeal – such as what constitutes a reasonable belief under section 44 – had fallen away by the time these proceedings reached the Supreme Court.

That said, the judgment is nonetheless a significant one, given the universal reliance on letters of credit in financial markets, and the Supreme Court’s weighting of public interests over private interests when interpreting Regulation 28. It raises a number of difficult questions:

The practical examples strike us as commercially unreal. For example, when receiving a seemingly compliant demand on an LC, should a bank ask questions of the Ruritania beneficiary, or (as the Court seems to suggest) make an immediate licence application? The Court’s assumption that that licensing authority would be informed of the wider picture of a transaction is naïve, in circumstances where the authority likely receives the information from applicants themselves.
In holding that section 44 provides protection against an action to recover a debt, the Court leaves unanswered questions on limitation defences: for example, is the clock suspended for the period in which a party has declined to make payment on the reasonable belief it would be in breach of sanctions if it made payment?
On a potentially positive note, the Court’s invitation for increased applications may mean the UK regulators are obliged to change their approach, and provide pro-active guidance to applicants on whether any given transactions are prohibited.

With thanks to Timothy Hon for his contribution to this article.

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