Hagstromer and Others v Sibneft Oil Trade Company Ltd (a company incorporated under the laws of the British Virgin Islands)

• Jurisdiction: British Virgin Islands
• Judge: Barrow, J (Ag.)
• Judgment Date: 20 October 2004
• Neutral Citation: VG 2004 HC 28
• Court: High Court (British Virgin Islands)
• Docket Number: BVIHCV2004.0055
• Date: 20 October 2004

IN THE HIGH COURT OF JUSTICE

BVIHCV2004.0055

BETWEEN

(1) Hagstromer & Qviberg Fondkommission AK (a company Incorporated under the laws of Sweden)

(2) Austro (Cyprus) Limited (a company incorporated under the laws of Cyprus)

Claimants

and

Sibneft Oil Trade Company Limited (a company incorporated under the laws of the British Virgin Islands)

Defendant

Appearances:

Mr. Francis Treager Q.C. and Mr. Phillip Kite for defendant

Mr. Guy Phillips Q.C. and Mr. Paul Dennis for claimant

REASONS FOR DECISION 1

Barrow, J (Ag.)

1 Transfer pricing is said to be a notorious practice whereby the controlling shareholders of a public company cause the company to transfer its assets for less than their true market value to another entity owned by the controlling shareholders. The entity then sells the assets for their true market value. Thus, the controlling shareholders receive the full market value of the assets at the expense of the minority shareholders in the transferring company.

2 The claimants accuse the defendant of transfer pricing. The claimants 2 are the legal but not the beneficial owners of shares in a Russian oil company quoted on the Moscow stock

exchange, called OJSC Slavneft-Megionneftegaz (‘SlavMeg’). The beneficial owner owns 1.5% of the ordinary shares in SlavMeg, together with some preference shares. The value of that investment is about US $40 million.

3 The defendant, a British Virgin Islands International Business Company, is a wholly owned subsidiary of OAO Siberian Oil Company (‘Sibneft’). Sibneft is the fifth largest oil company in Russia. Although Sibneft is a Russian company 88% of its shares are managed by an English company based in Surrey in England. Sibneft is also alleged, along with another, to own and/or control SlavMeg.

4 The significance of the fact that Sibneft owns the defendant and jointly owns and/or controls SlavMeg is that transactions between the defendant and SlavMeg are thereby to be treated as related party transactions for the purposes of articles 81 and following of the Russian Federal Law ‘On Joint-Stock Companies’.

5 That law provides that where a company (in this case SlavMeg) has entered into a transaction with a related party (in this case the defendant) without prior approval being given by the independent shareholders of the company (in this case the claimants and shareholders of SlavMeg other than Sibneft and its affiliates), a shareholder may bring proceedings to have the transaction declared invalid. It is the claimants' understanding that upon such a declaration being made the Court will order the transferee company (the defendant) to make restitution pursuant to Russian law of the benefits received by it under the transaction to the claimant shareholder (for the account of the company) or to pay compensation in lieu.

6 SlavMeg in its filing with the Russian federal Commission for the Securities Market for the first quarter of 2003 stated that 25.8% of its turnover in that period derived from sales of oil to the defendant. Because SlavMeg and the defendant were related parties those sales should have been approved by the independent shareholders, the claimants contend. The claimants say there was no such approval; none was even sought.

7 The claimants do not know the difference between the true market value of the oil sold by SlavMeg to the defendant and the price that the defendant actually paid to SlavMeg. That information the claimants propose to obtain through the process of disclosure. It is that difference that will be the measure of the restitution or compensation that the defendant will be required to pay to and/or for the benefit of SlavMeg, if the claimants succeed.

8 Protective proceedings were brought by the claimants in Russia just prior to their commencing these present proceedings. The claimants though it prudent to act within the Russian limitation period and file there to guard against their being left without a claim in the event this Court decided to accede to the present application by the defendant to strike out or stay these proceedings, which the claimants correctly anticipated would come. The claimants say it was never their desire to proceed in Russia and that if allowed to proceed in the BVI they will discontinue in Russia. It will emerge shortly why the claimants have no wish to litigate in Russia.

9 As part of its application the defendant had sought an order that the present proceedings should be dismissed as vexatious or oppressive or struck out as an abuse of the process of the court pursuant to CPR 26.3 on the ground that the claimants had commenced proceedings in Russia which raised the same issues. At the hearing counsel for the defendant abandoned this ground; properly so I thought.

10 The defendant pursued its application for the dismissal or strike out order on the ground that because SlavMeg is not a party, the proceedings are improperly constituted. The argument for the defendant is that the claim that the claimants make is for payment to SlavMeg and that SlavMeg is a necessary party to these proceedings. The defendant has placed before this Court the opinions of two Russian law experts. It is the opinion of Professor Kabatov that under the relevant legislative provision ‘a claim for a related party transaction to be held invalid could be filed by the company or by a shareholder’. He stated that in 2003 the Constitutional Court of the Russian Federation decreed that the legislation allows a shareholder including minority shareholders to instigate court proceedings for a related party transaction to be declared invalid.

11 Such claims have become known in Commercial (Arbitrazh) Court terminology as ‘indirect claims’, he explained, and when successful the direct beneficiary would be the company (in this case) SlavMeg. Where such a claim is filed by a shareholder the company itself (in this case SlavMeg) ‘must be joined to the proceedings since…the decision of the court will in effect always deal with the rights and obligations of the…company and will affect its legal interests in the outcome of the claim under consideration.’ A failure to join the company to the proceedings is a ground for the court order to be quashed by a higher court, he added.

12 It is clear that the claimants have a cause of action under Russian law against the defendant that they can litigate as a matter of a separate right given to them. There appear in the opinion of Professor Kabatov indications that the requirement for joinder of SlavMeg is a matter of procedural law and of ‘current court practice’. In the opinion of the defendant's other expert, Professor Yarkov, who was also of the opinion that the claimants had a cause of action, the requirement for the joinder of SlavMeg as a defendant ‘stems from the imperative rules of procedural legislation.’ The claimants seized upon this ascription to argue that it is indeed procedural law that determines the matter of parties but that it is the procedural law of this jurisdiction and not that of Russia that so determines and referred in support to Dicey and Morris, Conflict of Laws, 13 ^th ed. at 7R–001.

13 In my view it is enough for the claimants to be permitted to continue with these proceedings that they have established that they have a cause of action against the defendant. The claimants may be well advised to join SlavMeg as a matter of BVI procedural law. There may have been good practical reasons for not having joined them before, so the failure to have done so does not point to any abuse of process and none was suggested. The general rule that is found in CPR 8.5 therefore applies:

‘8.5 (1) The general rule is that a claim will not fail because a person—

• (a) who should have been made a party was not made a party to the proceedings; or

• (b)…’.

The rule goes on to provide that where some other person is jointly interested in the remedy that the claimant seeks all persons jointly entitled to the remedy must be parties to the proceedings, unless the court orders otherwise. If any such person does not agree to be a claimant that person must be made a defendant, unless the court orders otherwise. It remains open to the claimants to join SlavMeg, under Rule 19.2 (1), as a new defendant, without permission, at any time before the case management conference.

14 That being the scope given by the Civil Procedure Rules 2000 to the claimants as regards joining SlavMeg the application to strike out the proceedings for non-joinder is premature. I dismiss that limb of the application.

15 The second limb of the application was for a declaration that pursuant to CPR 9.7 (1) (b) the court should not exercise its jurisdiction on the ground that Russia is both an available and clearly and distinctly the more appropriate forum for the trial of this claim.

16 In this forum non conveniens challenge the proper starting point is that the domicile of the defendant in the British Virgin Islands founds jurisdiction in the BVI Courts. It is, of course, agreed that the onus is on the defendant to show why there should be a refusal to exercise jurisdiction which is founded as of right. Mr. Phillips submitted that the incorporation of the defendant in this jurisdiction placed a particularly heavy burden on the defendant in asking the court to decline to exercise jurisdiction. In support he referred to a statement by Bingham LJ (as he then was) in Banco Atlantico S.A. v The British Bank of the Middle East [1990] 2 Lloyd's Rep 504, 510 that ‘It must be rare that a corporation resists suit in its domiciliary forum. Rarely would this court refuse jurisdiction in such a case.’ Counsel also relied on the observation of Rawlins J in the BVI case Bitech Downstream Ltd. v Rinex Capital Inc. at [26] to [28] that ‘the fact that the defendants were incorporated in the Territory is a factor that clearly militates against...