High Court revisits the jurisdictional scope of freezing injunctions against third parties

It has long been held that the English court has power to grant a freezing injunction against a third party (against whom no claim lay), provided that it is ancillary and incidental to a good arguable claim against a defendant (TSB Private Bank International SA v Chabra [1992] 2 All ER 245). Such relief, known as the 'Chabra jurisdiction', is typically exercised against a third party who holds or controls assets beneficially owned by a defendant.

However, in Yukos Capital Sarl v OJSC Rosnef Oil Co [2010] EWHC 784 (Comm), David Steel J invoked the Chabra jurisdiction against certain third parties who held assets in respect of which the defendant had no proprietary interest, but exercised substantive control.

Facts

The facts of the underlying case will be familiar to many. In 2004, Yukos, Russia's then largest oil company, and its main shareholder, Mikhail Khodorkovsky, were accused of tax evasion and ordered to pay tens of billions of dollars in back-taxes. In December of that year, the Russian Government ordered the sale of Yukos’ main production unit, Yuganskneftegas, at auction and it was sold, allegedly at an undervalue, to state-controlled oil company Rosneft. Yukos finally went bankrupt in 2007. In 2008, the former shareholders of Yukos brought expropriation claims against Russia under the Energy Charter Treaty before the Permanent Court of Arbitration in The Hague. Yukos was ultimately successful and sought to enforce four arbitral awards against Rosneft.  To this end, it obtained freezing injunctions against various Jersey incorporated companies (the RT Companies), which had transferred oil sale proceeds to bank accounts in London for onward transmission to Rosneft.  In doing so, Yukos claimed that the RT Companies (a) were controlled by and used to facilitate the purchase and sale of oil on behalf of Rosneft, and (b) held the oil sale proceeds as its nominees. 

In seeking to discharge the freezing injunctions at the inter partes stage, the RT Companies claimed that they were simply intermediary purchasers of oil from Rosneft, which they sold on to offtakers. In other words, Rosneft had no proprietary interest in the oil sale proceeds in their hands. Accordingly, the English court had no power to grant freezing injunctive relief against third parties, who held assets in respect of which the defendant had no proprietary interest.

In support of this, the RT Companies sought to rely on a passage of Potter LJ's judgment in Yukong Line Ltd v Rendsburg Investments Corporation [2001] 2 Lloyd's Reports 113 (at para.44), which stated that the Chabra jurisdiction "would only be exercised where there are grounds to believe that a [third party] is in possession or control of assets to which the [defendant] is beneficially entitled ".

Yukos subsequently accepted that Rosneft did not have any proprietary interest in the oil sale money. However, it went on to contend that the freezing injunctions should be continued because the RT Companies had no independent purpose of their own: they existed solely for the purpose of passing oil sale money from offtakers to Rosneft. Moreover, there was no jurisdictional limit on the English court's power to freeze assets in the hands of third parties, subject to any considerations relevant to the exercise of the court's discretion.

Prior to judgment being handed down, the parties came to terms on the basis of the provision of security. Notwithstanding this, they asked David Steel J to rule on this matter, which he agreed to do.

Decision

David Steel J was not persuaded that the Chabra jurisdiction was premised upon a defendant having a proprietary interest in the assets held by a third party.

He noted that Potter LJ in Yukong used the phrase "beneficially entitled" simply to summarise in broad terms the scope of the Chabra jurisdiction, before going on to consider the relevant issue in dispute. This was whether the English court had power to freeze a third party's general assets, in circumstances where a defendant's assets in its hands could not be readily identified (which Potter LJ held that it did). Accordingly, the English court in Yukong was neither invited to, nor did it, consider the "legitimate outer reaches" of the Chabra jurisdiction.

David Steel J went on to hold that it was appropriate to consider the extent to which a defendant has some interest in or control over the assets, going beyond any actual or potential cause of action the defendant may have against the third party. In this regard, he cited with approval Dadourian Group International Inc. v Azury Ltd. [2005] EWHC 1768 (Ch), in which Judge Bartley-Jones QC stated (at para. 30) that "[t]he important issue, to my mind, is substantive control".

He also rejected as "unduly rigid" any requirement to establish a casual link between the claimant's claim against the defendant, and the assets held by a third party. Instead, he preferred to treat this question of connection as pertinent to the general question of discretion (noting that it would be all the more important to establish substantive control where no such connection could be established).

On the facts, there was no causal link between the sums owed by Rosneft to Yukos under the four arbitral awards, and the oil sales proceeds held by the RT Companies. However, David Steel J held that Rosneft's interest in the oil sale proceeds was "formidable" and that they were "Rosneft's in all but name". Accordingly, he refused to discharge the freezing injunctions made against the RT Companies.

Comment

This decision is an example of the English court adopting a less formalistic and more pragmatic approach when exercising the Chabra jurisdiction.

Instead of requiring claimants to establish a defendant's interest in or control over assets in the strict legal sense, the emphasis has been shifted to establishing substantive, practical control. In most cases, the two will go hand in hand: substantive control will ordinarily arise from a proprietary interest. In this regard, this decision may make little difference. However, there will be other cases where they do not (ie where a proprietary interest either does not exist or cannot be established).

Accordingly, by considering substance over form, the English court has sought to ensure its ability to grant freezing injunctive relief against third parties in all circumstances where it appears just and convenient to do so. Otherwise, cases such as the present could result in injustice, with assets being put beyond a claimant’s reach in order to frustrate the effective enforcement of court judgments/arbitral awards.

However, it is suggested that the English court may be cautious in granting freezing injunctive relief in the absence of any proprietary interest. Convincing evidence may need to be adduced to demonstrate that the defendant exercises substantive control (as had been the case here).

Nevertheless, this decision is to be welcomed as it illustrates the flexible and adaptable manner in which the English court is seeking to exercise the Chabra jurisdiction.