Dr Conor McCarthy is a barrister at Monckton Chambers, London and formerly fellow of the British Institute of International and Comparative Law.
On 31 July 2014 the European Court of Human Rights issued its decision in the just satisfaction phase of proceedings in Yukos v. Russia. In its judgment the Court made its largest ever award of compensation, ordering Russia to pay in the region of € 1.9 billion to the shareholders of the company at the time of its liquidation. In 2012, the Court had found Russia to be in violation of the rights to a fair hearing and the protection of property under the European Convention on Human Rights and its Protocol 1. The Court’s compensation decision follows on from the recent final awards of three arbitral tribunals, constituted under the Energy Charter Treaty, which found that the Russian Federation had taken measures with the effect equivalent to an expropriation of Claimants’ investments in Yukos, contrary to Article 13 (1) of the treaty. These final awards were issued on 18 July 2014. Russia was ordered to pay almost $ 50 billion in compensation in these proceedings. Claims arising from the circumstances surrounding Yukos liquidation have also been taken before the ICC International Court of Arbitration as well as in national courts in the United Kingdom, the Netherlands as well as, of course, in Russia itself. This post focuses on the ECtHR’s decision, with some reflections on its significance.
The events underlying the Yukos case occurred in the early 2000s, a period of considerable economic and political upheaval in Russia. Between 2002 and 2003 the Russian authorities investigated the tax affairs of Yukos. This culminated, in April 2004, in the company being assessed as having accumulated huge tax liabilities, in part, according to the findings of the Russians authorities, as a result of Yukos having used impermissible sham companies to evade tax. Yukos was ordered to pay approximately € 1.4 billion in tax arrears for the year 2000, € 1 billion in interest and a further € 0.5 billion in enforcement penalties. In the same month proceedings were initiated against Yukos alleging improperly declared tax liability and seeking the attachment of the company’s assets as security for the claim. A hearing was held at the Moscow City Commercial Court in respect of the tax assessment between 21 and 26 May 2004, with much of the evidence in support of the assessment (running to several tens of thousands of pages) being served on 17 May 2004 and in subsequent days immediately prior to the hearing. The assessment was upheld, with Yukos being found liable to pay well over € 1.3 billion in respect of tax in the year 2000, together with almost € 1 billion in interest and € 0.5 billion in penalties. Subsequently, the penalty imposed on Yukos (approximately € 0.5 billion) was doubled when the tax authorities determined that Yukos had used similar tax arrangements in 2001 to those used in 2000.
Yukos sought to appeal the decision of the Commercial Court. The appeal was dismissed by the Appeal Division of the Moscow City Commercial Court on 29 June 2004. On 30 June 2004, the Appeal Court issued a writ for the enforcement of Yukos’s assessed liabilities, compelling compliance within 5 days. Upon Yukos’s failure to pay the sums within the required period, further penalties of 7 % of the debt were levied. Yukos’s requests to extend the very short deadline for payment were unsuccessful. In the next six months there followed further tax re-assessments for each subsequent year to 2003, including in particular huge assessments to VAT as well as profits taxes, penalties and interest, ultimately totalling some € 24billion. The enforcement of these liabilities was immediate and in the absence of immediate payment in full incurred further surcharges.
Yukos were unable to obtain sufficient liquid funds to meet the liability. In December 2004 the majority of the shares in its largest and most profitable subsidiary, Yuganskneftegaz, (“YNG”), were auctioned to meet its tax liability, rendering insolvency inevitable. Yukos was declared insolvent in August 2006.
The treatment of Yukos by the Russian Federation has resulted in considerable litigation at the international level. Read the rest of this entry…