European Court of Human Rights finds for Yukos Oil Company

20 Sep 2011

The European Court of Human Rights has given judgment on the merits of the largest commercial dispute ever litigated.

Yukos Oil Company, formerly the largest and most successful Russian oil company, challenged the imposition and enforcement of additional tax liabilities for four years (2000-3) together with fines and penalty interest amounting to €19.6Bn. The Russian authorities took draconian enforcement measures, which involved freezing all the company’s assets as soon as the first assessment was made, sweeping its bank accounts, forbidding the company to use its assets to meet the tax liabilities and imposing fines for the resulting non-payment. As a result, Yukos was paralysed and its crown jewel asset, YNG which produced as much oil as Libya, was sold at an auction at which only one participant bid, at a price fixed not by reference to YNG’s value, but merely to a part of the Yukos tax liabilities which were outstanding. Yukos was declared bankrupt, its assets were sold, largely to the State controlled oil company Rosneft, and Yukos was dissolved in October 2007, without any dividend to its 50000 shareholders.

The European Court held that the Russian tax proceedings were unfair in breach of Article 6 and the retrospective reinterpretation of Russian law to ‘justify’ the imposition of fines and penalty interest was unlawful, contrary to the Convention standard.

Although the interpretation of the tax liabilities which were applied to Yukos was foreseeable, the Court held that the crux of the case was the rapid and inflexible enforcement of those liabilities. Yukos had been effectively paralysed because all its assets were frozen from the first assessment. In the Court’s view, two factors in particular contributed to Yukos’ demise and showed that the Russian authorities had failed to strike a fair balance and violated Article 1 of Protocol No 1:

1. the bailiff’s choice of Yukos’ principal subsidiary as the first target for auction, without considering the implications for the company’s future: this dealt Yukos a ‘fatal blow’;

2. the Russian authorities were unyielding and inflexible in response to requests for time to pay and the bailiffs imposed additional fines amounting to €1.15 Bn, which had to be paid before the taxes, but the payment of which was prohibited under the freezing orders.

The issue of just satisfaction under Article 41 ECHR was reserved to further pleading.

Yukos was represented throughout the proceedings by Piers Gardner.