Mr Justice Yeats of the Supreme Court of Gibraltar (equivalent to the High Court in England and Wales) handed down a judgment on 31 January 2023 in Tolkynneftegaz LLP & Anor v Terra RAF Trans Traiding Ltd & Ors, 2023/GSC/003 declining jurisdiction over an action seeking damages of roughly USD 500 million brought by Tolkynneftegaz LLP (“TNG”) and its bankruptcy manager, Orynbasar Kubygul (the “Claimants”) against Anatolie and Gabriel Stati (Moldovan nationals), Terra RAF Trans Traiding Ltd (Gibraltar) (“Terra”) and Tristan Oil Ltd (BVI) (“Tristan”) (the “Defendants”). Among other matters, the judge gave careful consideration to the applicability of the common law Revenue Rule.
Background
Anatolie Stati invested in the Kazakh oil and gas sector in 1999. A complex series of events (see Timeline of Events starting at paragraph 216 of the SCC Award) led to the arbitration of a claim by Mr Stati and related parties against Kazakhstan under the Energy Charter Treaty (“ECT”), culminating in an award of USD 497 million for breaches by Kazakhstan of its fair and equitable treatment commitment (the “Award”).
Simultaneous enforcement and set aside proceedings were initiated by the parties in various jurisdictions. Kazakhstan alleged that the Award had been obtained by fraud.
In August 2019, TNG was put into liquidation and a bankruptcy manager was appointed by a Kazakh court.
In July 2020, the bankruptcy manager and TNG filed a claim in the Supreme Court of Gibraltar against the Defendants. The Claimants acknowledged that they had the “financial and logistical backing” of the Kazakh Government but the Claimants said that the Kazakh Government neither “directed [n]or controlled” the litigation.
Proceedings in Gibraltar
The English Civil Procedure Rules 1998 apply to proceedings in Gibraltar pursuant to s. 38A of the Supreme Court Act 1960; r. 6 of the Supreme Court Rules 2000. Similarly, rules of English common law are in force in Gibraltar pursuant to s. 2 of the English Law (Application) Act 1962.
The Claimants alleged unlawful means conspiracy, fraudulent misrepresentation, and causing loss by unlawful means seeking recovery of approximately USD 470 million for the benefit of TNG’s creditors, most of which consisted of tax debts owed to two regional Kazakh tax authorities.
Terra (the anchor defendant) applied to challenge the court’s jurisdiction pursuant to CPR Part 11 and sought an order in the alternative striking out the Claimants’ claims under CPR 3.4(2) or CPR 3.3, or a stay of proceedings pursuant to CPR 3.1(2)(f). Once served outside the jurisdiction, the remaining defendants also objected to the court’s jurisdiction.
Terra’s Part 11 jurisdiction challenge was considered first by Yeats J because if it succeeded jurisdiction would not lie over the remaining, foreign, defendants.
Terra asserted that the common law Revenue Rule meant the court had to decline jurisdiction. In the alternative, it was argued that bringing the claims in Gibraltar – pursuant to Article 4(1) of the Brussels Recast Regulation (Regulation (EU) No. 1215/2012) which assigns jurisdiction to the courts of a defendant’s domicile (i.e. to Gibraltar) – was an abuse of EU law on the basis that TNG’s bankruptcy was a sham, and that Kazakhstan was using the Claimants as its proxies in a bid to frustrate the Statis’s ongoing ECT award enforcement actions.
Yeats J declined jurisdiction over Terra on the basis of the Revenue Rule, and having thus declined jurisdiction over the anchor defendant, set aside the previously granted permission to serve proceedings on the foreign defendants, indicating that he would otherwise have declined the claims against the foreign defendants on forum non conveniens grounds.
The Revenue Rule
The English common law Revenue Rule holds that English courts have no jurisdiction to entertain an action which seeks in substance to enforce directly or indirectly a penal, revenue or other public law of a foreign State.
The authorities relied upon by Terra advanced three propositions concerning the application of the Revenue Rule: (i) jurisdiction over a claim brought by a foreign government to enforce a domestic public law claim must be declined; (ii) the rule is concerned with the substance of the right pursued, not the form of the action or nature of the claimant; however (iii) if tax recovery by the foreign state is only incidental to a wider claim, the court should not decline jurisdiction to hear the case. It was Terra’s case that the Claimants’ claims were in their substance an attempt to enforce Kazakh revenue law claims, and that these were not merely incidental to the enforcement of other purely private rights.
The Claimants argued that the Revenue Rule was not at issue, since: (i) TNG sought recovery of misappropriated funds to satisfy liabilities arising prior to the tax obligations now proven as debts upon bankruptcy; (ii) Article 4 of the Brussels Recast Regulation assigned jurisdiction to the courts of Gibraltar since Terra is a Gibraltar company, precluding consideration of the Revenue Rule; and (iii) alongside the two Kazakh tax authorities, there were two non-revenue creditors, who were likely to be joined by further creditors in future, so that the revenue portion of the action was rendered incidental. Alternatively, the Claimants argued that application of the Revenue Rule was discretionary, and subject to policy considerations and that on the facts, the court should exercise its discretion to override the rule in view of the use of Terra to commit frauds.
In deciding to decline jurisdiction because of the Revenue Rule, Yeats J considered the House of Lords’ judgment in Williams & Humbert Ltd v. W & H Trade Marks (Jersey) Ltd [1986] AC 368, a case in which Spain had acquired certain Spanish companies pursuant to compulsory acquisition decrees. Those companies subsequently caused related companies to bring claims in England. The House of Lords held that the Revenue Rule did not apply because the actions brought already lay with the claimant companies prior to the compulsory acquisition decrees, as such, they could not constitute an indirect attempt to enforce the underlying Spanish decrees.
Yeats J distinguished Williams & Humbert on the basis of Lord Mackay’s concurring judgment in that case, which emphasised that an “essential feature” of the Revenue Rule is that there remain “unsatisfied claims” of the public nature identified by the Revenue Rule: in Williams & Humbert, the Kingdom of Spain’s public law claims had been satisfied by the acquisition (and the remaining claims of the acquired companies were private claims as a result), whereas the Kazakh tax authorities’ claims remained unsatisfied in the instant case, so that the Claimants were, in substance, seeking indirect satisfaction, through the Gibraltar courts, of unsatisfied Kazakh tax debts.
Yeats J also distinguished Revenue and Customs Commissioners v Sunico ApS & anor (Case C-49/12) [2014] QB 391 on the facts: a foreign tax authority could pursue a tax fraud claim; the action being for fraud not revenue was not contrary to the Revenue Rule. Yeats J noted that the Claimants did not assert fraud in this case.
When determining an issue about jurisdiction, Yeats J observed, the applicable test had to be satisfied as at the date when the proceedings were commenced (Goldman Sachs International v Novo Banco SA & ors [2018] UKSC 34, paragraph 9). At the date when proceedings were commenced in the instant case, the tax creditors’ claims represented 99.5% of the claims in TNG’s liquidation. As such, the revenue portion of what was admittedly a mixed claim, was by no measure “incidental”.
Yeats J distinguished Government of Iran v The Barakat Galleries Ltd [2007] EWCA Civ 1374 straightforwardly on its facts: the Court of Appeal had disapplied the Revenue Rule in that case in favour of a narrow “positive reason of policy” in the context of the State’s efforts to recover antiquities which formed a part of its national heritage. No analogy, Yeats J concluded, could be made here.
The wider context
Different jurisdictions have treated the Award in markedly different ways. In 2017, before the bankruptcy of TNG, the Commercial Court in London found a “sufficient prima facie case that the Award was obtained by fraud”. Efforts to enforce the Award in England and Wales were then discontinued. Meanwhile, the Amsterdam District Court has gone further, finding that the Investors had committed procedural fraud in the underlying arbitration, while the Swedish courts have found “no obstacle to enforcement” in the form of procedural fraud. Time will tell whether the outcomes of this stream of litigation will have any effect on the pursuit of TNG’s claims.
As Mr Justice Yeats himself noted, an appeal is “highly likely” in view of the wider litigation surrounding the failed investment venture. Such an appeal would be heard by the Gibraltar Court of Appeal. Any further appeal would be to the Judicial Committee of the Privy Council in London. Such successive appeals could afford an opportunity to examine unresolved questions surrounding the Revenue Rule including, for example, whether the Revenue Rule is a matter of delimiting the scope of the court’s jurisdiction, or of conditioning its exercise.