Yukos Capital S.a.r.l v OJSC Rosneft Oil Company & Ors

This was an application by the 6^th to 12^th Respondents to discharge or vary a freezing order granted to the Claimant on 11 March 2010 following an ex parte hearing. Since preparing this judgment I have been told that the parties have come to terms on the basis of the provision of security. The parties nonetheless invited me to give judgment which I agreed to do.

It was a domestic freezing order and was made, so far as these Respondents were concerned, on the basis that they transferred funds to bank accounts within the jurisdiction for onward transmission to the First Defendant. I shall refer to them as the “RT” companies. It is now common ground that RT 2 and RT 8 are dormant and that RT6 and 7 do not in fact have bank accounts within the jurisdiction. It is thus accepted that they should no longer be the subject of the freezing order and the application is therefore only concerned with RTs 3, 4 and 5.

It was not and is not suggested that the Claimant (“Yukos”) has any claim against the RT companies. The first and principal defendant is OJSC Rosneft Oil Company (“Rosneft”). There is no need to rehearse the background to the claim in any detail. It is sufficient to say that Yukos seeks to enforce four arbitration awards against Rosneft. That is resisted on the basis that the awards have been set aside by decisions of the Russian courts. The present application, however, proceeds on the admitted assumption for present purposes only, that Rosneft remains indebted to the claimants in the sum claimed (approximately £390 million) since in purporting to set aside the awards the Russian Courts were not acting impartially and independently but at the behest of the Russian Government. It is further to be assumed, again for present purposes only, that unless restrained Rosneft would take steps to frustrate any judgment by seeking to put its assets beyond the reach of Yukos.

The basis upon which the RT companies were joined as parties was summarised in the skeleton argument furnished at the ex parte hearing. It set out the following propositions:-

In support of the inter partes application to set aside the freezing order, the RT companies have now served a number of affidavits of a Miss Harris. She is a director of EQ Directors One Ltd and EQ Directors Two Ltd which are the “appointed corporate directors” of the RT companies. These corporate directors are beneficially owned by charitable trusts. Equity Trust (Jersey) Ltd. is the trustee, and Miss Harris is a director of that company as well.

She asserts that the assets of RT companies were not held as nominees for or under the control of Rosneft. The bank accounts were established at the request of Rosneft’s bankers so as to ensure that payment obligations were settled into accounts controlled by the banks. Thus the RT companies were simply intermediary purchasers of oil from Rosneft thereafter selling on to an offtaker such as Shell.

In seeking to justify the continuation of the freezing order in the light of the evidence and of documentation that has now been made available, Yukos pursues a somewhat different line of attack. In particular it was no longer suggested that the RT companies are nominees of Rosneft. As regards the question of control, it is now accepted that the RT companies are not subsidiaries of Rosneft, that the receivables are not as such assets beneficially owned by Rosneft, and that security arrangements in favour of various banks are paramount. The case is now put on the basis that although the RT companies are third parties, they have no independent purpose of their own, and only exist for the purpose of passing oil sale money from the buyer to Rosneft and no one else.

The contractual arrangements as they now appear are as follows:-

There was a dispute between the parties as to the scope of any jurisdiction to freeze assets in the hands of a third party where the claimant has no cause of action against that third party and the third party does not hold the assets as a nominee of, or a trustee for, the primary defendant.

It was the submission of RT that no jurisdiction existed absent beneficial ownership (that is to say where the primary defendant was the beneficiary of the relevant money under a trust) and that there was binding Court of Appeal authority to that effect. Yukos submitted that there was no jurisdictional limit on the power to injunct assets of third parties, subject of course to any considerations relevant to the exercise of discretion.

Before turning to the authorities which are directly relevant, it is worth rehearsing some general principles:

The question that therefore arises is whether the courts have confined the jurisdiction to circumstances where the third party holds or controls the money as trustee or whether the jurisdiction may be broader.

The starting point from the perspective of the RT companies is the decision in TSB Private Bank International S.A. v Chabra [1992] 1 WLR 231 where it was held that, so long as the claimant had a good arguable cause of action against one defendant, there was power to grant an injunction against another defendant against whom no cause of action lay, provided that the claim to the injunction was “ancillary and incidental” to the cause of action against the initial defendant.

Chabra was cited in Yukong Line Ltd v Rendsburg Investments Corporation [2001] 2 Lloyd’s Reports 113. In a passage at para. 44, Potter L.J. said:-

“Although it is plain that the Court’s Charbra-type of jurisdiction would only be exercised where there are grounds to believe that a co-defendant is in possession or control of assets to which the principal defendant is beneficially entitled, it does not seem to me that the jurisdiction is limited to cases where such assets can be specifically identified in the hands of the co-defendants.”

RT submitted that this constituted binding authority to the effect that, absent equitable ownership of an asset under a trust on the part of the defendant, no freezing order could be made against a third party in possession or control of that asset. It followed, it was further submitted, that the decision in C. Inc v L [2001] 2 Lloyds Reports 459 and in HM Revenue & Customs v Egleton [2006] EWHC 2313(Ch) on which the claimant’s relied were wrongly decided.

I am unable to accord the passage cited above with the significance suggested by RT. In Yukong, the allegation centred on the transfer of the first defendant’s assets to another company also controlled by a Mr. Yamvrias, the third defendant. The claim against Mr. Yamvrias was dismissed by Toulson J although a freezing order against him was continued. On an application to discharge that order, Aikens J. held that it had been properly granted as “ancillary and incidental to the order against Rendsberg” to pay the asset into court. As regards the inquiry into any damages under the undertaking that Mr. Yambrias had sustained, there had in fact been no loss.

Mr. Yambrias appealed. One of the principal issues on the appeal was whether the Chabra-type jurisdiction could be exercised where the relevant assets could not be specifically identified. Although it may well be that Potter L.J. was using the words “beneficially entitled” in the conventional sense of constituting an equitable interest in the assets, I am not persuaded that the court was doing other than briefly summarising the Chabra-type jurisdiction. Indeed the whole premise for the successful appeal was that specific assets did not need to be identified and thus no question of beneficial ownership arose. In my judgment the court was not invited to consider the legitimate outer reaches of the Chabra-type jurisdiction and should not be treated as having done so.

In the meantime the Australian High Court had handed down its judgment in Paul Cardile v LED Building Proprietary Ltd. [1999] HCA 18. The case concerned freezing orders made against the shareholders and associate company of a housing construction company against which proceedings for breach of copyright had been brought. The justification for seeking a freezing order was the payment of substantial dividends to those parties.

In summary the court concluded on appeal by the shareholders:

This decision of the Australian High Court was considered in detail by Aikens J. in C. Inc v L supra. He concluded that the Australian court had, in setting out the general principle that assets in hands of third parties could be frozen even when not beneficially owned by the potential judgment debtor, nonetheless required “that there must be some causal link between the fact that the claimant has obtained a judgment against the principal defendant and thus has a legal right as a consequence of that liability giving rise to the judgment, to go against the assets of the third party”.

In C. Inc v L a freezing order was sought against the defendant’s husband (who was outside the jurisdiction) following judgment in default against the defendant. Adopting Cardile (despite it is to be noted Yukong having being cited) Aikens J. concluded:-

Before turning to the decision specifically relied upon by Yukos, I should mention in passing a decision of Deputy High Court Judge Bartley-Jones QC. in Dadourian Group International Inc. v Azury Ltd. [2005] EWHC 1768 (Ch) and in particular a passage at paragraph 30. Having cited C v L to the effect that “generally it must be arguable that the assets even if in the third party’s name, are in fact beneficially owned by the relevant defendant before a Chabra-type injunction” could be made he went on:

“30.

For my part I do not believe it is necessary to establish beneficial ownership in the strict trust law sense. Clearly, if assets are held on a bare trust then the Chabra-type jurisdiction can be exercised. But, in my judgment, even if the relevant defendant of the substantive claim has no legal or equitable right to the assets in question (in the strict trust law sense) the Chabra-type jurisdiction can still be exercised if the defendant has some right in respect of, or control over, or other rights of access to the assets. The important issue, to my mind, is substantive control.”

I regard that passage as persuasive. I doubt the need to establish a structure under English trust law in determining the jurisdictional scope of a freezing order which would commonly involve both domestic and foreign parties.

Against that background I turn to HM Revenue and Customs v Eggleton [2006] EWHC 2313 (Ch). The claim arose out of a V.A.T. carousel. An issue arose as to the legitimacy of a freezing order where the respondent was not alleged to hold or have any custody of assets belonging to the defendant. Having cited Cardile and C. Inc v L Briggs J. observed:

He concluded his judgment as follows:

“41.

The conclusions to which I have come on the question of jurisdiction are as follows. First, the time has come for the English Courts to recognise, consistently with the carefully considered conclusion of the High Court of Australia, that the jurisdiction to grant freezing orders against third parties is not rigidly restricted by the Chabra requirement to show that, at the time when the order is sought, the third party is already holding or in control of assets beneficially owned by the defendant. However attractive that test is as a bright and focused boundary-line, it does not seem to me to accord with the dictates of justice and commonsense. To take a simple example, it would operate so as to distinguish between a case in which the third party misappropriated an asset of the defendant and held on to it and a case in which in otherwise identical circumstances the third party misappropriated the asset and dissipated it. It makes no sense that the first of those third parties should be amenable to the freezing order jurisdiction whereas the second, however separately wealthy, should not. In both cases the defendant or its officeholder would have an equally viable restitutionary personal claim, the frustration of which by yet further asset dissipation by the third party would in turn detract from the efficacy of any order for the winding up or bankruptcy of the defendant and from any prior judgment for which winding up or bankruptcy was a means of enforcement.

42.

Secondly, it seems to me that once the relatively clear Chabra boundary line is breached, there is no wider boundary which has any sufficient clarity to serve as a workable condition to the existence of jurisdiction, than the broad confines of the second limb of the principle in paragraph 57 of the main judgment in Cardile. In particular, it seems to me that a rigid causation test is too narrow and potentially unjust, in particular because it would protect third party fraudsters who had in reality caused the claimant’s loss from exposure to a freezing order while exposing honest third parties such as Mr L in the C Inc. case because the claimant’s claim was the cause of their exposure. By contrast, the supposed “sufficient connection test” which Mr. Shaw sought to extract from the minority judgment in Cardile, while having much to say for it in terms of justice and common sense, and being similar to the test which identifies the circumstances in which a third party may because he has become mixed up in the defendant’s wrong doing, be obliged to assist the claimant with the provision of information, is by its nature so subjective and unfocused as to make it quite unsuitable as the boundary for the existence of jurisdiction. It may however be a valuable tool in the analysis of the question of discretion.”

For my part, I am also un-persuaded that Cardile contained any “causation” condition. Equally in company with Briggs J, although a sufficient degree of causation or connection was available on the facts in C Inc. v L, I consider that the application of such a test in all cases would be unduly rigid. Accordingly, I would accord a question of connection or causation as pertinent to the general question of discretion to which I now turn.

Absent any proprietary interest on the part of the defendant in assets held by a third party it is appropriate to consider the extent to which the defendant has some interest in or control over the asset going beyond an actual or potential cause of action against the third party. This must be the more where as here it is not suggested that there is any causative link or other connection between the claimant’s claim (in the form of monies due under an arbitration award) and the assets in the third party’s hands (formed of the sale proceeds for oil).

Rosneft’s interest in the funds in the third party’s bank accounts is formidable:

In short, the RT companies are special purpose vehicles with no business or assets of their own. They exist solely to provide a portal for transfer of the purchase price in a manner preserving the bank’s security. RT have no interest in or control over the monies. Allowing for the bank’s security, the money is, as submitted by Yukos, Rosneft’s in all but name.

It is common ground that any sums in the account are exposed to recovery by Yukos, if necessary by the appointment of a receiver. Accordingly Yukos submits that it is clearly just and convenient for a freezing order to be made since it is accepted for the purposes of this application that otherwise Rosneft would take steps to dissipate the assets upon payment to them. But there are a number of factors relied upon by RT as demonstrating that it would nonetheless be appropriate to discharge the injunction:-

Accordingly Yukos submits, in my judgment properly, that it is clearly just and convenient for a freezing order to be made since it is accepted for the purposes of this application that otherwise Rosneft would take steps to dissipate the assets upon payment to them. Subject to the amendments already referred to, I would refuse the Respondents’ application to discharge the order. However, as already noted, this has been overtaken by events and I make no order.