Yukos Sham Bankruptcy

The conclusion of this long process was the forced bankruptcy of Yukos.

As a part of its usual business dealings, Yukos had been issued credit by a consortium of banks that was due to be repaid. This included a loan from Société Générale dating from 30 September 2003. Ordinarily meeting these commitments would not have presented a problem, but with its assets frozen Yukos was paralysed.

The majority shareholder of Yukos, Group Menetap Limited (GML), had earlier attempted to stave off disaster by dealing with the banks. Pursuant to a guarantee, a GML indirect subsidiary, Moravel, had taken over the position of Société Générale on 25 May 2004. In short, the money that Yukos had owed to Société Générale was now owed to Moravel.

Unfortunately this was not enough; it was clear that the Russian authorities were determined to destroy Yukos through an enforced bankruptcy.

As a consequence of the tax assessments and the fact that the Russian state itself ensured that these could not be paid, by late 2005 Yukos fell into default under a credit that had been issued to it by a syndicate of banks, of which some US$480 million was still outstanding.

On 13 December 2005 these banks entered into an agreement with the Russian state enterprise Rosneft, under which they sold their claim against Yukos to Rosneft. The agreement included a commitment that the banks petition for the bankruptcy of Yukos in Russia prior to the assignment of the claim. The banks accordingly proceeded to do so.

On 6 March 2006, the syndicate of banks petitioned for the bankruptcy of Yukos Oil Company. Thereafter, the claim was assigned and Rosneft took over the treatment of the bankruptcy application. In this way an earlier statement by President Putin could be cynically realised: that the Russian state would not apply for the bankruptcy of Yukos.

The Russian insolvency proceedings were opened on 28 March 2006, and overseen by the appointed Russian receiver, Eduard Rebgun. Rebgun’s task was to dispose of Yukos’ assets, should the company be declared bankrupt. These assets were, of course, substantial, and not just located inside Russian borders. Accordingly, Rebgun was to become a central figure in the Yukos Affair, as the legal battleground moved outside of the politically influenced Russian court system and into the courts of Europe and America.

After Rebgun’s appointment, a meeting of creditors was held in June and July 2006. In these meetings, Yukos presented ‘the Plan’ to the creditors’ committee as a proposal for the staged payments of all Yukos’ debts and the preservation of the company as a going concern. There was never any doubt that, as a result of the freezing orders and the sale of YNG, Yukos was insolvent on a cash flow basis. However, the Plan proposed a scheme that recognised what was also true: that Yukos was far from insolvent on an enterprise basis.

However the Russian tax authorities by now controlled more than half the votes in the creditor’s meeting. Unsurprisingly, Yukos’ Plan was rejected. It is worth noting that virtually all the other creditors voted in favour of the Plan, but to no avail.

In the same meeting, a second vote was taken as to whether to have Yukos declared bankrupt. The same situation occurred, with the Russian tax authorities, together with Rosneft and YNG (which had been acquired by Rosneft), voting in favour and virtually all other creditors voting against. Accordingly, on 1 August 2006, the Moscow court pronounced Yukos Oil Company bankrupt.

The bankruptcy was a sham. Yukos’ assets exceeded its liabilities.

The Russian authorities themselves admitted this fact. Shortly before the bankruptcy application in March, the Russian courts held, while confirming yet another freezing order in respect of all of Yukos’ assets, that these assets exceeded its liabilities by RUB 46.2 billion (EUR 1.38 billion, or about US$1.65 billion).

The fact is, Yukos was not insolvent, even if the tax assessments were taken into account. That this was the case is demonstrated by the simple fact that all the pre-bankruptcy claims recognised by the Russian receiver (including the non-existent claims of the tax authorities, Rosneft and YNG) were fully paid in the bankruptcy. Despite the fact that proceeds from auctions exceeded the debts, there were no shareholder dividends.

Yukos Oil Company was no more. Forced through a sham bankruptcy, it was struck from the Russian register of companies and its Russian-based assets expropriated by the state.

The international battle, however, had only just begun. The Russian courts were incapable of administering justice impartially, so the former management of Yukos turned to the European Court of Human Rights. And the Russian receiver, Rebgun, was now pursuing Yukos’ assets abroad, the former management moved quickly to protect them.