New Law Journal | 24 February 2012 | www.newlawjournal.co.uk
SPECIALIST LEGAL UPDATE 291
Public
Right end, wrong means Richard Lang follows the winding path of the Yukos v Russia case IN BRIEF zzThe European Court of Human Rights has ruled on what was reputed to have been the biggest claim ever brought before it: Yukos v Russia. zzThe Russian Tax Ministry has received an unexpected endorsement from Strasbourg, even though a number of its procedures were found to be violative of Yukos’ rights. zzRussia’s actions were aimed only at levying tax arrears and penalties, & the allegation of a political motive was held to be unsubstantiated.
H
yped as the biggest claim ever submitted to the European Court of Human Rights (ECtHR), in 2004 the oil giant Yukos took the Russian government to Strasbourg, alleging violations of its fair trial and property rights. This followed the initiation by the Russian Tax Ministry of litigation which lasted two years and which culminated in the bankruptcy and liquidation of the company in 2006. The ECtHR reached its decision on 20 September 2011 in OAO Neftyanaya Kompaniya Yukos v Russia (App No 14902/04). Complicated hierarchy The applicant, Yukos, was at the centre of a complicated hierarchy of parent companies and diverse subsidiaries. In particular, 22 “trading companies” had been set up in low-tax areas of Russia, which then “commissioned” Yukos to buy crude oil and sell it, either before or after processing, on their behalf. These companies then declared the tax on income received by Yukos. The saga began on 14 April 2004 when the Tax Ministry, having declared the 22 companies to be “sham companies”, made a demand of Yukos for arrears for the year 2000 to the tune of just over 99bn roubles (nearly €3bn); payment was due on 16 April 2004. The company having failed to pay, the ministry took enforcement measures against it, including having the Moscow City Court attach its assets, freeze
its cash and seize many of its subsidiaries. An enforcement fee of 7% was added to the demand. Attempts by Yukos to obtain an injunction failed, and pleas for respite fell on deaf ears. In particular, requests to the City Court to take shares instead of assets, or to allow payment by instalment, were rejected. A complex court battle ensued, with particular judicial attention being paid in the higher courts to the lower courts’ suspension of Art 113 of the Russian tax code. This article provided for a time bar in the event of claims over three years old. However, the lower courts had decided that the bar did not apply in cases of bad faith (on the part of the taxpayer, that is). Eventually, the Russian Constitutional Court ruled that this suspension had been legal, and correct. The government issued similar demands, and took similar enforcement measures, in the years 2001, 2002, and 2003, before finally announcing in 2004 the forced auctioning of OAO Yuganskneftegas, one of Yukos’ principal production subsidiaries. The auction was won by a finance company, which was later taken over by Rosneft, the state oil company. Violation of right to fair trial? The ECtHR began by ruling on Yukos’ complaints that its right to a fair trial had been violated. Two of these complaints were upheld. To begin with, the ECtHR was satisfied that the company’s time to prepare for the first hearing had been
too short. Even having eight lawyers (a fact which the government was keen to point out), Yukos could not have been expected to get through 40,000 pages of disclosed evidence in four days. The court was further satisfied that the company’s deadline for appealing had been brought forward unjustifiably. The appeal should have started after 30 days but commenced after 21 days, again restricting Yukos’ ability to prepare. However, other complaints— that the City Court had failed to study the evidence, and that it delayed in the giving of its reasons—were dismissed. Nor could the court find any arbitrariness in the way the ministry had brought its action, or in the way the domestic courts had treated Yukos’ counsel during the hearings. Turning to the right to property, contained in Art 1 of Protocol No 1 (P1-1) of the European Convention on Human Rights (the Convention), both parties were in agreement that there had been an interference with Yukos’ property rights. The ECtHR began by characterising the interference as “control” under the third sentence of P1-1 rather than “deprivation” under the second sentence, although some might argue that the ministry’s ultimate goal was, in fact, deprivation. It should be noted at this point that, under the Convention, a state is permitted to control an individual’s property “to secure the payment of taxes”, subject (usually) to a fair balance’s being struck between the two parties’ respective interests. The ECtHR then stated that its principal concern in this case would be whether this interference had been lawful; this is in keeping with the court’s current trend in right to property cases of considering lawfulness ahead of, rather than alongside, other criteria (see Iatridis v Greece (App No 31107/96) for arguably the first example of this approach).
292 LEGAL UPDATE SPECIALIST Tax assessment The ECtHR took the tax assessment and the enforcement measures separately. With regard to the tax assessment, there were two main issues: zzwhether or not the prosecution for the alleged tax evasion during 2000 was time-barred; and zzwhether or not all of the tax assessments (2000-03) had been based on a reasonable and foreseeable interpretation of domestic law. Concerning the first of these issues, Yukos alleged that in the tax assessment proceedings for the year 2000, the domestic courts had failed to apply the three-year statutory time-bar set out in Art 113, and that this failure could not be remedied retroactively by a decision of the Constitutional Court in 2005. The ECtHR agreed. The constitutional court’s decision represented a change in the interpretation of Art 113 which could not have been foreseen by Yukos, especially given that it created an exception from a rule “which had had no previous exceptions”, and that the imposition of the time-bar had, up until then anyway, been a “well-established practice”.
www.newlawjournal.co.uk | 24 February 2012 | New Law Journal
assessments had pursued a legitimate aim and were proportionate, and rejected Yukos’ additional complaint, invoking Art 14 of the Convention, that it had been “singled out”. Enforcement measures With regard to the enforcement measures, Yukos contested the ministry’s refusal to accept shares or deferred payments, the (in its view) unlawful enforcement fee, and the inadequate two-day deadline for settlement, as well as making a series of allegations about the auction. In justification of its measures, the government remarked, somewhat melodramatically, that Yukos had been “unrepentant and defiant”. The ECtHR, satisfied that the enforcement proceedings had been lawful, went on to consider fair balance. Given that Yukos had had no cash funds and was unable to pay its debt, the ECtHR could see no problem with the attachment of Yukos’ assets, but was concerned with the speed at which this attachment, and for that matter the compulsory auction, had taken place. It listed a number of factors which in its view the government should have taken into account, including: zzthe character and amount of the existing debt;
Suspicions that this was a sham prosecution masking state burglary seem to have been wide of the mark Concerning the second issue, Yukos argued that the “legal theories” used by the ministry (and subsequently upheld by the courts), and particularly the concepts of “bad faith” and “sham entity”, were without precedent, and thus could not have been foreseen (foreseeability being a vital attribute for a domestic law if it is to satisfy the Convention requirement of lawfulness). This time the Strasbourg judges disagreed. It was not their place to interfere in domestic decisions unless they were arbitrary, manifestly unreasonable or in flagrant denial of justice, and, in this case, the domestic courts’ conclusions with respect to the tax assessments had been “sound”. Indeed, the evidence of the “sham nature” of the trading companies was “unambiguous”. Furthermore, the statutes and case-law relied on by the domestic courts in upholding the ministry’s case were “quite clear”, including on the issue of the reclassification of transactions conducted by sham entities. Finally, the ECtHR was satisfied that the tax
zzthe social implications of the
enforcement measures;
zzYukos’ conduct, and zzYukos’ capacity to survive enforcement
at all.
According to the ECtHR, the government had examined some of these factors, but not all. Aware that auctioning Yukos’ main production unit was capable of dealing the company a “fatal blow”, the government should have considered other options, but instead was “unyieldingly inflexible”. Further, the 7% enforcement fee was disproportionate. Overall, a fair balance had not been struck, and Yukos’ property rights had been violated. Government’s intentions Finally, Yukos invoked Art 18 of the Convention to question the government’s intentions in bringing the tax and enforcement proceedings. This lesserused provision reads: “The restrictions permitted under this Convention to the
said rights and freedoms shall not be applied for any purpose other than those for which they have been prescribed.” Yukos argued that the proceedings had been abusive, and that the government had wanted to destroy the company and take control of it. The government denied this, saying that the proceedings had been a lawful response to Yukos’ “gigantic tax fraud”. The ECtHR agreed with this position. The procedural violations notwithstanding, the government had been entitled to enforce Yukos’ tax debt, and its actions had been legitimate. In the ECtHR’s view, Yukos had failed to discharge its burden of proof to substantiate its allegations, and although the case may have attracted a lot of public attention, public attention did not have any evidentiary value. Suspicions that this was a sham prosecution masking state burglary seem to have been wide of the mark, when seven of Europe’s finest jurists could apparently find no fault at all with the Russian Tax Ministry’s conduct here, even if its procedure was in breach of the Convention. Either this was not a calculated commandeering of the company at all, or, if it was, it was so heavily cloaked in a garb of legality as to make the ultimate transfer of Yukos into state hands look more like a lucky side-effect than an intended consequence. It should be noted that the case before the ECtHR did not concern the individual prosecution and subsequent conviction of Yukos’ chief executive, Mikhail Khodorkovsky, whose continued imprisonment some see as a stain on the conscience of Vladimir Putin’s Russia, especially given that Khodorkovsky was also Putin’s political rival. However, the fact remains that, as far as the ECtHR was concerned, there was seemingly nothing wrong with the prosecution of the company in its conception, and only a little wrong with it in its execution. Had the Tax Ministry moved just slightly sooner and slightly slower, there might have been no violation at all; indeed, three judges dissented on the property right violations found by the majority, and one even dissented on the fair trial violation. Having run its tax affairs as it did, it seems that Yukos walked into a trap of its own making, a trap which could easily be sprung by the Russian authorities, with or NLJ without Putin’s encouragement. Dr Richard Lang BA(Hons) LLM, senior
lecturer, School of Law, University of Bedfordshire. E-mail:
[email protected]. uk Website: www.beds.ac.uk
