Why Russian billionaires prefer foreign courts

The popularity of Western courts among Russian billionaires has not declined, despite attempts to make domestic legislation and the judicial system more attractive for resolving major disputes.
26.06.2018
Forbes
Origin source
Quite recently the dispute between Roman Abramovich and the European Bank for Reconstruction and Development (EBRD) ended with a settlement agreement, which was to be considered by the Swiss court of the city of Freiburg. From the usual London disputes between the Russian oligarchs, this situation is different. A few years ago, the EBRD transferred the promissory note of Runicom SA, now a bankrupt company that was once engaged in oil trading for Sibneft. Abramovich is a former director of Runicom SA. For several years the EBRD tried to return this debt in court, and the defendants claimed that the debt was repaid. But before the consideration of the dispute on the merits it did not come about, the dispute was settled by the world, and the details of the settlement agreement are not generally available.

The appeal to the Swiss court came from the EBRD and was due not to special reservations in the agreement between the parties and not to distrust the Russian courts (which, incidentally, took the EBRD's side a few years ago in recognizing the original debt). Switzerland was the jurisdiction where Runicom SA was registered and where the EBRD saw the possibility of debt collection (according to the press, the EBRD stated that the assets of Runicom SA were taken out by the directors to the Gibraltar structure).

If you remember "how it all began," it is necessary to begin the narrative from the Soviet times, when practically all disputes between Soviet enterprises and foreign (especially American) counterparts were referred to the Arbitration Institute of the Stockholm Chamber of Commerce. The parties considered that Sweden was a neutral jurisdiction that would not trample on the interests of Soviet enterprises to suit capitalistic values.

But after the 1990s, the situation changed dramatically: more and more Russian businessmen began to seek judicial protection in England. Judges of Misty Albion are considered to be among the most independent and qualified in the world, therefore people from all over the world submit their disputes to England for consideration. Suffice it to say that a third of all disputes in England have no connection with Great Britain. The Russians also understood the delights of independent justice and became regular clients of the English judicial and arbitration system. In addition, the original popularity of foreign ships, and especially English, was the result of the widespread application of English law in agreements that were part of the creation and management of Russian assets. Russian law was not adapted to regulate new legal relations in "capitalist" Russia, so the parties sought protection and predictability in the legal concepts of English law. Naturally, the application of English legal concepts was not very logical to trust Russian courts, so the parties signed reservations "sending" disputes to London - especially the London International Arbitration Court (LCIA).

However, the peculiarities of English law allowed the parties to apply to the court and in the absence of a written agreement. Under English law, the courts of England have jurisdiction to consider the dispute if the summons was handed in on the territory of England (regardless of where the defendant lives or is located). Let us recall the legendary lawsuit of Berezovsky against Abramovich (Berezovsky v Abramovich [2012] EWHC 2463): the plaintiff managed to present the summons to Roman Abramovich in a London store, as a result of which the English courts accepted the case for consideration. In fact, Boris Berezovsky stated that, according to an oral agreement between the parties, he is, along with Roman Abramovich, a shareholder in Sibneft and Rusal. But the English court in a multi-page decision recognized that Roman Abramovich was paying money to Boris Berezovsky, not as a partner in business, but for a political "roof".

Over the years, more and more Russian businessmen (or their families) overgrew assets or even settled in London, which further simplified the treatment in English courts. Ultimately, the plaintiff wants to get money, and for this it is desirable to sue in the jurisdiction where this money is or whose court can trace this money and "freeze", including in other countries. Famous English security measures in the form of an order for freezing injunctions have become a fairly powerful tool in disputes involving Russian parties if there is a risk of withdrawing assets.

Actively pursues its debtors through the English courts of VTB and the Bank of Moscow and, I must say, achieve in many respects positive results. For example, in April 2018, the English court issued a positive decision on the lawsuit of the Bank of Moscow to Vladimir Kekhman (JSC BM Bank v Kekhman & Ors [2018] EWHC 791 (Comm)). Kekhman was the first Russian businessman who asked the English court to declare himself bankrupt, as a result of which all his obligations were to be considered extinguished in order to enable a bankrupt to start life "from scratch". But this rule is not unconditional. For example, if you prove that bankruptcy came as a result of fraud, then the existing debts of such a "bankrupt" remain outstanding. In the case, the Bank of Moscow stated that Kekhman provided false information when obtaining loans from JFC group companies, whose beneficiary he was. In particular, he knew that the JFC financial statements were falsified, did not inform the Bank of Moscow that about half of JFC's shares are pledged to Sberbank, and also began to withdraw assets from JFC when it realized that the group was facing financial collapse. The court found Kehman guilty of fraud. Consequently, Vladimir Kekhman, bankrupt himself in Russia and England, owed money to the Bank of Moscow.

And, finally, the most sensational decision of the English court in the dispute between Bank Otkritie Financial Corporation and the companies of Boris Mints was taken recently: EWHC 1343 (Comm). Important for London lawyers, this decision became regardless of the identity and nationality of the defendants, but based on the importance of the judge's conclusions on the interaction of processes within a single dispute in state courts and international arbitration.

Simplically, the essence of the dispute was as follows: the bank issued loans to companies associated with Boris Mintz, about $ 500 million on pledge of shares in the company O1 Properties. Pledge agreements provided for the consideration of disputes in the LCIA in the event of their occurrence. In August 2017, the parties restructured the debt obligations in such a way that the loan-for-equity agreements were replaced by long-term unsecured bonds. The manager, acting on behalf of the bank, said that this transaction was the result of fraud on the part of O1, and filed claims in the courts of Moscow and Cyprus. The Moscow court, in the framework of interim measures, even imposed a provisional arrest on shares of O1 Properties, registered in Cyprus. However, this measure has no extra-territorial effect, and therefore it turned out to be quite "toothless".

The companies of Boris Mints filed suits in the LCIA, and also appealed to the English court to suspend Russian and Cypriot court proceedings as violating the competence of the London arbitration chosen by the parties to resolve disputes - to issue so-called anti-suit injunctions. With regard to the Cyprus process, the judge refused to do this, because there is a precedent (the case of West Tankers), according to which a court of one EU country should respect all other courts of the EU countries and can not order a stoppage of proceedings in them.

With respect to Russian legal proceedings, the rules of the game are different: if an action is brought in court in violation of an arbitration agreement of the parties, the court may order the termination of the proceedings. Failure to comply with this order shall entail potential liability for the plaintiff and its directors (if any) in the form of imprisonment, confiscation of property or fine. In the case of Discovery, the English judge ruled that the Russian proceedings should be terminated in favor of LCIA arbitration. Time will tell what the outcome of the matter will be on the merits.

Russian businessmen are not the biggest "consumers" of judicial services in England and Switzerland - businessmen from all over the world are turning to England for an honest examination of their disputes. But the Russian side is judged with enviable regularity in the West. Improving Russian law and building an independent and business-oriented judicial system in Russia can change this trend, but so far this is a very long-term prospect.

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