This update discusses an issue that may arise in relation to the recognition of foreign bankruptcies where the law of the receiving state does not provide for admittance proceedings. This issue recently arose in the Yukos proceedings.
Yukos Oil Company is a Russian company. Its Dutch subsidiary, Yukos Finance BV, carried out most of the company's non-Russian activities. In 2003 Russia commenced actions against Yukos and its affiliates. The chief executive officer and managing director of Yukos were imprisoned and the tax authorities subsequently issued substantial assessments against it. Furthermore, the tax authorities obtained freezing orders which prevented Yukos from selling or pledging assets in order to meet the tax assessments. In 2004 the tax authorities enforced part of their claims against the shares that Yukos held in its most important subsidiary and sold them via an auction to the sole bidder. Thus the shares ended up in the hands of the state-owned company Rosneft.
Since, as a result of the assessments and freezing orders, Yukos was prevented from paying its larger creditors, insolvency proceedings were opened against Yukos in Russia. Subsequently, a creditors' meeting voted Yukos into bankruptcy. The majority of the votes at that meeting were cast by the tax authorities.
The Russian receiver, Eduard Rebgun, announced that as the representative of Yukos Finance's sole shareholder he intended to adopt a resolution replacing that company's management. Yukos Finance and its managing directors commenced summary proceedings before the Amsterdam District Court seeking an injunction prohibiting Rebgun from adopting such a resolution.
Yukos Finance put forward two arguments in support of its claim. The first was based on the principle of territoriality as developed in two judgments of the Dutch Supreme Court. This principle implies that a foreign insolvency is not recognized in the Netherlands unless it is otherwise agreed in treaties or the EU Insolvency Regulation applies. Therefore, the assets of a foreign debtor situated in the Netherlands are not considered to be part of the foreign estate.(1)
In the summary proceedings Yukos Finance and its managing directors maintained, on the basis of the territoriality principle, that the Yukos Finance shares were not part of the Russian bankruptcy estate, and that therefore the Russian receiver could not exercise the sole shareholder's voting rights on those shares. This argument was rejected by the district court and, on appeal, by the Amsterdam Court of Appeal. Both courts held that the question of whether a Russian receiver can vote on shares in a Dutch company depends on whether he or she is entitled to represent the company under Russian law, which was undisputedly the case. Thus, the courts regarded the foreign receiver's right to vote on the shares as a matter of company law rather than bankruptcy law. Yukos Finance (represented by the old management) and the managing directors lodged an appeal against the court of appeal judgment with the Supreme Court. That appeal is still pending.
The second argument used by Yukos Finance in the summary proceedings at first instance was that the Russian bankruptcy was spurious and should not be recognized by the Dutch courts because it was contrary to Dutch public policy. The Amsterdam District Court held that a determination as to whether the Russian bankruptcy was illegitimate required a factual investigation beyond the scope of summary proceedings. Thus, the court:
- rejected the plaintiffs' arguments based on the territoriality principle;
- declined to determine whether the Russian bankruptcy was illegitimate; and
- refused to enjoin Rebgun from adopting a shareholders' resolution dismissing the management of Yukos Finance.
The district court's judgment in summary proceedings was rendered on August 11 2006 and on the same date Rebgun adopted the envisaged shareholders' resolution. As indicated above, the plaintiffs lodged an appeal against this judgment with the Amsterdam Court of Appeal. The appeal was limited to the question of whether the territoriality principle precluded Rebgun from voting on the shares and was not directed against the decision that the legitimacy of the Russian bankruptcy of Yukos Oil Company could not be investigated in summary proceedings. The court of appeal confirmed the judgment of the district court and a further appeal was lodged with the Supreme Court (but is still pending).
In the meantime, Yukos Finance and the former managing directors commenced regular proceedings before the Amsterdam District Court against Rebgun and against the new managing directors appointed by Rebgun. The plaintiffs took the position that the following actions were void:
- the dismissal of the former managing directors;
- all shareholders' resolutions adopted by Rebgun; and
- all actions taken by the new managing directors.
Although in the summary proceedings the Amsterdam District Court had refused to enjoin Rebgun from adopting resolutions dismissing the former management and appointing new management, this did not mean that such resolutions were valid, as a judgment in summary proceedings does not bind a court deciding the same case in regular proceedings. In addition, the Amsterdam District Court did not render a judgment on the validity of those resolutions because it had refrained from considering the legitimacy of the Russian bankruptcy in view of the factual complexity of this question.
In its judgment of October 31 2007 in the regular proceedings, the Amsterdam District Court held that in the absence of a relevant treaty, foreign court decisions are eligible for recognition in the Netherlands only if:
- the jurisdiction of the foreign court is based on grounds that are acceptable under international standards;
- the foreign proceedings were conducted with due observance of the principles of due process; and
- the foreign judgment does not violate Dutch public policy.
Thus, the court applied the rules which have been developed for the recognition of foreign judgments in general and not the stricter rules regarding territoriality which were developed by the Supreme Court specifically for the recognition of certain aspects of foreign bankruptcies. The court went on to investigate whether the criteria under the second and third bullet points had been met in the Yukos Case and held that the hearing before the tax court and the appeal violated the fundamental principles of due process, as generally accepted in the Netherlands and laid down in Article 6 of the European Convention on Human Rights. The court concluded that in the course of determining the tax it owed to the Russian state, Yukos Oil was deprived of a fair trial.
The district court then went on to decide whether there was a causal link between the determination of the tax obligation and the bankruptcy of Yukos Oil Company. It concluded that there was such a link, and also that in the bankruptcy proceedings there had not been a sufficiently safeguarded judicial review of the manner in which the additional tax assessments were determined. The district court held that the Russian bankruptcy order which appointed Rebgun receiver was not carried out in accordance with Dutch principles of due process and thus violated Dutch public order. Therefore, the bankruptcy order could not be recognized and the receiver's powers that ensued from it under Russian law could not be exercised in the Netherlands. Thus, Rebgun was not authorized to represent Yukos Oil in the Netherlands in regard to voting on its shares in Yukos Finance. The shareholders' resolutions taken by Rebgun on behalf of Yukos Oil, including the resolution of August 11 2006 to replace the managing directors, were not taken by the corporate body designated by law to take them and were therefore null and void. This also meant that the new managing directors of Yukos Finance were never appointed as directors and all decisions taken by them were also null and void. Rebgun and the directors have appealed against the judgment of October 31 2007.
The Yukos Case demonstrated an important feature of the recognition issue. Under Dutch law, it remains uncertain for a long time whether acts performed by a foreign receiver in the Netherlands are valid. Certainty comes only after a decision rendered in regular proceedings becomes irrevocable. Dutch law does not provide for any form of admittance proceedings to be won by the foreign receiver before he or she can exercise any powers in the Netherlands. Furthermore, summary proceedings cannot provide an adequate barrier against a non-bona fide foreign receiver because the court will deny an injunction against the foreign receiver if the matter is too complicated to be investigated in such proceedings. It is likely that most cases where there is serious doubt as to the application of the rule of law in foreign proceedings will be insufficiently clear cut to deny access without a more thorough investigation than summary proceedings can provide.
In the absence of an admittance test, a strict application of the territoriality principle as developed by the Supreme Court might provide a solution. As explained above, this principle provides that in the absence of a bankruptcy treaty, the foreign trustee cannot exercise control over assets in the Netherlands. However, the Dutch Supreme Court made inroads into the territoriality principle in the Gustafsen/Mosk judgment.(2) The alternative criteria discussed above, which the Amsterdam District Court used in the October 31 2007 judgment to determine whether Yukos's Russian bankruptcy proceedings should be recognized, could be useful but, as long as there are no admittance proceedings, courts in summary proceedings will be unable to keep foreign bankruptcies out on the basis of these criteria because a request for an injunction is likely to stand on the complexity issue.
It is interesting to see how other legal systems avoid facilitating foreign bankruptcies from non-treaty states in cases where human rights have been violated and where bankruptcy amounts to a surreptitious expropriation without fair compensation or the interests of creditors are insufficiently respected. The United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency (which has been implemented in the United States and in the United Kingdom) represents the 'legal state of the art' in this area. Pursuant to Article 17 of the model law, a foreign proceeding should be recognized as a main proceeding if:
- the debtor has its centre of main interests in the state where the proceedings have been opened;
- the proceedings and the receiver meet the definition of 'insolvency proceedings' within the scope of the Model Law; and
- documents proving the opening of the proceedings have been submitted.
These requirements do not necessitate an investigation into the characteristics of the foreign proceedings. However, Article 6 provides that nothing in the model law prevents the court in the receiving state from refusing to take an action governed by this law if the action would be manifestly contrary to its public policy. Therefore, the receiving court can apply a public policy test under local law before recognizing foreign proceedings. This actually amounts to an admittance test, albeit not a strict one.(3) However, this test can be regarded as adequate.