EHRM, 31-07-2014, nr. 14902/04

The applicant company took the view that the violations found by the Court in the principal judgment had resulted in considerable pecuniary losses. More specifically, the company would have survived had it not been for the violation of Article 1 of Protocol No. 1 in respect of the enforcement proceedings, that is, had it not been required to sell its main production subsidiary OAO Yuganskneftegaz, and had it been given ninety days to repay each debt and been permitted to sell less valuable assets.

With reference to an expert report, the applicant company considered that the violation of Article 1 of Protocol No. 1 on account of the domestic authorities' failure in the enforcement proceedings to strike a fair balance between the legitimate aim of these proceedings and the measures employed had led to the direct loss of EUR 37,981,000,000, representing the expert's assessment of the applicant company's value on 19 December 2004. The applicant company did not advance any claim for interest payments in connection with this sum.

The applicant company submitted that the causal link between the violations found and its loss of the stated value had been established. However, it conceded that the assumptions and conclusions in the expert report which valued its loss at the above-stated amount had differed to a certain extent from the Court's conclusions in its principal judgment.

With regard to the issue of the appropriate method of distributing the award, the applicant company asserted that, given that it had been liquidated in 2007 and in view of the Court's flexible practice in respect of the payment of awards under Article 41 of the Convention, the amount should be paid to the Yukos International Foundation. This entity was created in the Netherlands by the applicant company with a view to distributing ‘after [the] payment of the creditors … any funds received and to be received by it through a scheme to shareholders of Yukos Oil Company, in accordance with the applicable law and the principles of reasonableness and fairness’.

The Government asked the Court to reject the applicant company's claim in full. They argued that no injured party remained in this case and that there was no need to award compensation, since, among other things, no financial loss arose from any violations found by the Court. In this latter respect, they took the view that the sale of OAO Yuganskneftegaz would have been necessary even if the State had used a more flexible approach to enforcement, as suggested by the Court in the principal judgment. The outcome of the enforcement proceedings would not have been different even had the enforcement fee been reduced and had the authorities carried out a full and reasoned assessment of the consequences of enforcement.

In respect of the violation of Article 1 of Protocol No. 1 with regard to the enforcement proceedings, the Government was of the view that at the relevant time the applicant company had simply been unable to pay its debts. The company's position was to deny the existence of any tax liabilities and to refuse payment. In such circumstances, even a reasoned review of all enforcement options would not have led to the applicant company being granted more time. The Government commented in detail on the relevant factors highlighted by the Court in the principal judgment and attached an expert report by the head counsel of the Russian bailiffs' service addressing these questions. The Government concluded that the outcome of the enforcement proceedings would have remained essentially the same.

The Government specifically disagreed with the working assumptions used by the expert report submitted by the applicant company. In their view, the report had mistakenly assumed increased oil production, in spite of the need to sell assets and to cut spending on investment; the report made no reduction to reflect the hasty circumstances of the sale of the applicant company's assets, and it also allowed the company excessively long time-limits for payment, unrelated to anything in domestic law or practice. The Government submitted their own expert report suggesting that the applicant company was worthless at the relevant time on account of the fraudulent nature of its tax management and the related legal risks. More generally, with reference to the case of McCann and Others v. the United Kingdom (27 September 1995, Series A no. 324), the Government suggested that, given the fraudulent nature, scale and seriousness of the domestic case against the applicant company, any pecuniary award would be inappropriate in the circumstances.

As regards the question of the possible recipient of a payment under Article 41 of the Convention, the Government pointed out that the applicant company no longer existed and that the entity referred to by the applicant company could not be a proper recipient, in that the Court had no jurisdiction to delegate to a third party the power to grant just satisfaction. They also pointed out that the beneficiaries of the Yukos International Foundation were anonymous, that there was a risk of double compensation because some of the applicant company's shareholders were pursuing legal proceedings in other venues, and that there was no guarantee that the interests of all shareholders would be reflected in the distribution of awards by this entity, rather than the interests of merely some of them, who were likely to be the ‘least deserving’.

In this latter respect, the Government took the view that the possible payment of any award under Article 41 of the Convention, either directly or indirectly, to certain shareholders and managers who at the relevant time had instigated tax fraud by the applicant company and benefited from dividends paid out of tax fraud would not be just, fair and equitable. In the Government's view, the risk of possible abuse in the distribution of funds was real. They referred to an example of how one of the surviving entities created by the applicant company, which was registered in the Netherlands and similar in nature to the Yukos International Foundation, had paid out money to an affiliate of the former majority shareholder rather than distributing it to all of the shareholders.

As to the damage allegedly resulting from the Court's invalidation of the penalties, the Government suggested that this should not be compensated, since at the time of the applicant company's liquidation there remained a huge unpaid debt, including unpaid taxes. Even if the impugned penalties were to have been returned to the applicant company at the relevant time, the sums would then have had to be paid back to the State in order to cover the applicant company's debts of around USD 8 billion.

At the outset the Court would point out that in its principal judgment it found a violation of Article 6 of the Convention on account of the haste with which the domestic courts had conducted the 2000 Tax Assessment proceedings against the applicant company, both at first instance and on appeal. The Court cannot speculate as to what the outcome of these proceedings might have been had the violation of the Convention not occurred (see, for example, Jalloh v. Germany [GC], no. 54810/00, § 128, ECHR 2006-IX, and Martinie v. France [GC], no. 58675/00, § 59, ECHR 2006-VI).

It finds that there is insufficient proof of a causal link between the violation found and the pecuniary damage allegedly sustained by the applicant company. There is therefore no ground for an award in this respect.

The Court observes that in the principal judgment it concluded that the penalties in the 2000 Tax Assessment and certain of the penalties in the 2001 Tax Assessment were unlawful and in breach of Article 1 of Protocol No. 1. The amounts in question, RUB 19,185,272,697 (approximately 543,623,045 euros) in respect of the year 2000, and RUB 19,556,570,413 (approximately 569,898,525 euros) in respect of the year 2001, were effectively paid by the applicant company during the enforcement proceedings and thus represented a clear pecuniary loss, which, in the Court's view, should be compensated under Article 41 of the Convention.

Despite the Government's objections, the Court sees no good reasons to depart from the principle of restitutio in integrum, firmly established in its case-law, in assessing the amount of pecuniary compensation in the present case. In its principal judgment it found a violation of Article 1 of Protocol No. 1 concerning the imposition of the penalties for the year 2000 and in part for the year 2001. The Court ruled that the penalties were unlawful as such, and did not represent an irregularity of a merely procedural nature (see, by contrast, Former King of Greece and Others v. Greece [GC] (just satisfaction), no. 25701/94, §§ 78–79, 28 November 2002; and Beyeler v. Italy (just satisfaction) [GC], no. 33202/96, § 20, 28 May 2002).

The Court considers that the figure of RUB 38,741,843,110, representing the amount of penalties for the year 2000 and one half of the penalties for the year 2001 (see paragraph 20 above), was effectively paid by the applicant company on 12 November 2007 at the latest (see paragraph 303 of the principal judgment). This sum equalled EUR 1,078,246,919 at the conversion rate on that date.

In addition, the Court also recalls that the applicant company was compelled to pay the 7% enforcement fee in respect of the mentioned unlawful penalties. The Court decides that since it has declared the original penalties unlawful, the payment of the 7% enforcement fee in respect of these penalties was unlawful as well.

The Court notes in this connection that the applicant company was required to pay the enforcement fee of RUB 1,342,969,088.79 (approximately EUR 37,353,983) in respect of the penalties for the year 2000 and the enforcement fee of RUB 1,368,959,928.91 (approximately EUR 36,636,218) in respect of one half of the penalties for the year 2001, both sums having been effectively paid by the applicant company on 12 November 2007 at the latest (see paragraph 303 of the principal judgment).

These sums represented clear pecuniary losses sustained by the applicant company, in breach of Article 1 of Protocol No. 1. They should thus be compensated under Article 41 of the Convention. The amount of RUB 2,711,929,017.7, consisting of RUB 1,342,969,088.79 for the year 2000 and RUB 1,368,959,928.91 for the year 2001, equalled EUR 75,477,284 at the conversion rate on that date.

Taking into account the inflation rate of 12.62% for the euro between that date and the present time, the Court assesses the amount of pecuniary damage to the applicant company resulting from the violation of Article 1 of Protocol No. 1 on account of the retroactive imposition of the penalties (see paragraph 22 above) and the payment of the enforcement fee on these unlawful penalties (see paragraph 25 above) for the years 2000 and 2001 at EUR 1,299,324,198.

The Court refers to its finding in the principal judgment that the domestic authorities failed to strike a fair balance between the legitimate aim of the enforcement proceedings in respect of the applicant company and the measures employed, by being inflexible regarding the pace of the proceedings, obliging the company to pay excessive fees and failing to give explicit account of all of the relevant factors. The above considerations led the Court to conclude that there had been a violation of Article 1 of Protocol No. 1 on account of the enforcement proceedings in respect of the applicant company.

In this respect, the Court notes that the working assumptions used by the applicant company in its assessment of the prospects of the applicant company's survival and its value in the aftermath of the events remain at least in part speculative (see, for example, Credit and Industrial Bank v. the Czech Republic, no. 29010/95, § 88, ECHR 2003-XI (extracts)). In its principal judgment the Court did not conclude, as alleged by the applicant company, that the applicant company would have survived the enforcement proceedings had it not been for the aforementioned shortcomings in these proceedings. Therefore, the Court cannot accept the applicant company's claim in full (see, for example, Goddi v. Italy, 9 April 1984, § 35, Series A no. 76; Tre Traktörer AB v. Sweden, 7 July 1989, § 66, Series A no. 159; Beaumartin v. France, 24 November 1994, § 44, Series A no. 296-B; Kingsley v. the United Kingdom [GC], no. 35605/97, § 43, ECHR 2002-IV; Ezeh and Connors v. the United Kingdom [GC], nos. 39665/98 and 40086/98, §§ 141 and 143, ECHR 2003-X and Martinie v. France [GC], cited above, § 59).

Even if it cannot be said that the above-cited defects alone caused the applicant company's liquidation, they nevertheless seriously contributed to it, directly resulting in pecuniary damage satisfying the causality criteria of Article 41 of the Convention.

In this respect, the Court recalls that in paragraph 655 of the principal judgment it has clearly stated that the above-mentioned defects very seriously contributed to the applicant company's demise, having identified:

The 7% enforcement fee (levied on unpaid taxes, interests and penalties) in respect of the applicant company amounted to:

The enforcement fee for the tax liability for the years 2000, 2001, 2002 and 2003 totalled RUB 44,904,711,402.82 (approximately EUR 1,252,725,582). As indicated above, this lead the Court to conclude that in the circumstances of the case the resulting sum was ‘completely out of proportion to the amount of the enforcement expenses which could have possibly been expected to be borne or had actually been borne by the bailiffs' (see paragraph 655 in the principal judgment).

Making a reasonable assessment of the enforcement fee and having regard to the parties' submissions in this respect, the Court accepts the Government's indication of an appropriate rate of 4%, which they made in their submissions of 30 March 2013. The Court accordingly decides that in order to satisfy the requirements of proportionality the enforcement fee should have been reduced to 4%.

In order to calculate the amount of the applicant company's pecuniary loss in this connection, the Court deducts the amount of RUB 2,711,929,017.7 (EUR 75,477,284) representing the 7% enforcement fee paid by the applicant company on the unlawful portion of the penalties for the years 2000 and 2001 (see paragraph 25 above), from the entire amount of the enforcement fee of RUB 44,904,711,402.82 (approximately EUR 1,252,725,582) mentioned in paragraph 31 to arrive at the figure of RUB 42,192,782,385.12 (approximately EUR 1,177,070,056).

It then follows that the applicant company sustained a clear pecuniary loss of RUB 18,082,621,022, representing the difference between RUB 42,192,782,385.12 (see paragraph 33 above) and the amount of that fee calculated at a 4% rate (RUB 24,110,161,362). The Court observes that the enforcement fee was effectively paid by the applicant company on 12 November 2007 at the latest (see paragraph 303 of the principal judgment). The stated amount equalled EUR 503,268,013 at the conversion rate on that date.

Taking into account the inflation rate of 12.62% for the euro between that date and the present time, the Court assesses the amount of pecuniary damage to the applicant company resulting from the violation of Article 1 of Protocol No. 1 on account of the manner in which the authorities conducted the enforcement proceedings at EUR 566,780,436.

The Court has concluded that the applicant company sustained pecuniary damage as a result of the violations of Article 1 of Protocol No. 1 on account of the retroactive imposition of the penalties for the years 2000 and 2001 and the payment of the 7% enforcement fee on these penalties (see subpart (b) in paragraphs 20–26 above) and the disproportionate character of the enforcement proceedings (see subpart (c) in paragraphs 27–35 above). It has rejected the remainder of the applicant company's claim under this head as unsubstantiated. The overall amount of pecuniary damage, including compensation for inflationary losses, sustained by the applicant company in the present case thus amounts to EUR 1,866,104,634 (see paragraphs 26 and 35 above).

With regard to the appropriate method of distribution of this award, the Court does not accept the applicant company's suggestion that payment be made to the Yukos International Foundation, as the case file contains no evidence confirming who exactly in such a circumstance would benefit from the award in this case.

Regard being had to the fact that the applicant company ceased to exist (compare to Stankov and the United Macedonian Organisation Ilinden v. Bulgaria, nos. 29221/95 and 29225/95, § 121, ECHR 2001-IX; and Capital Bank AD v. Bulgaria, no. 49429/99, § 80, ECHR 2005-XII (extracts)), the Court decides that the aforementioned amount should be paid by the respondent Government to the applicant company's shareholders and their legal successors and heirs, as the case may be, in proportion to their nominal participation in the company's stock (see, mutatis mutandis, Holy Synod of the Bulgarian Orthodox Church (Metropolitan Inokentiy) and Others v. Bulgaria (just satisfaction), nos. 412/03 and 35677/04, § 39, 16 September 2010; Sophia Andreou v. Turkey (just satisfaction), no. 18360/91, §§ 33–38, 22 June 2010; and Lordos and Others v. Turkey (just satisfaction), no. 15973/90, §§ 61–70, 10 January 2012). In order to facilitate the Government's task, the Court refers to the list of the applicant company's shareholders, as they stood at the time of the company's liquidation, which is held by ZAO VTB Registrator, the company which had held and ran the register of the applicant company.

Further, given the nature of the violation found, the Court does not consider relevant the Government's references to the allegedly fraudulent conduct of the applicant company's management and some of its shareholders. The applicant company has already been held liable for the actions described in the various tax and enforcement proceedings and the Court sees no reasons to reduce the amount of award to take account of conduct for which the applicant company has already been punished.

With regard to the Government's reference to the applicant company's allegedly unmet liabilities, amounting to over USD 8 billion at the time of its liquidation, the Court takes the view that this argument is similar to the applicant company's evaluation of the consequences of the violation of Article 1 of Protocol No. 1 in respect of the enforcement proceedings (see paragraph 28 above) and remains speculative (see, mutatis mutandis, S.A. Dangeville v. France, no. 36677/97, § 70, ECHR 2002-III).

In this respect, the Court would note that it is clear from the course of the enforcement and liquidation proceedings that the domestic authorities chose not to seek repayment of the entirety of the applicant company's debt by, for instance, granting the applicant company more time. Rather, they decided to precipitate the proceedings by auctioning the applicant company's main production unit and liquidating it, notwithstanding the risk of being subsequently unable to recover some of the company's liabilities. The existence and scale of the allegedly unmet liabilities referred to by the Government resulted at least in part from the method used by the domestic authorities to recover the applicant company's tax liability.

Moreover, the fact remains that any liabilities that the applicant company may have had in respect of its creditors were either met or extinguished within the framework of the enforcement and liquidation proceedings in November 2007, and there is nothing in the case file or the parties' submissions to suggest that under domestic law the applicant company or its shareholders remain liable for any payments in favour of any of its creditors resulting from the above-mentioned enforcement or liquidation proceedings. In view of the above, the Court rejects the Government's argument as unfounded.

In so far as the respondent Government referred to various parallel proceedings allegedly brought by some of the applicant company's shareholders in other international fora, the Court notes that there have been two final arbitral awards in cases brought against the Russian Federation by a group of the applicant company's minority shareholders under bilateral investment treaties. These awards were made on 12 September 2010 and 20 July 2012 respectively by the Arbitration Institute of the Stockholm Chamber of Commerce. There is also a pending set of arbitration proceedings brought by the applicant company's majority shareholders (see paragraphs 519–526 of the principal judgment), in which no final award has been adopted so far.

As regards the former two cases, the Court would note that the case file contains no information regarding the enforcement of these awards. In such circumstances, the Court does not find it necessary to take this information into account in the context of the present judgment and at this stage of the proceedings. The Government's reference to the pending case is thus irrelevant.

Simultaneously with the determination of the case before the courts in respect of the applicant company's tax liability for the year 2000, the parties also took part in various enforcement proceedings.

On 29 October 2004 the Ministry produced an audit report in respect of the applicant company's activities for the year 2002. The report was received by the company on 1 November 2004.

On 16 November 2004 the Ministry took a decision to levy further tax liabilities, this time in respect of the year 2002 (‘the 2002 Tax Assessment’). The applicant company was to pay RUB 90,286,552,485 (approximately EUR 2,425,825,387) in taxes, RUB 31,485,110,355.58 (approximately EUR 845,944,140) in default interest and RUB 72,040,907,796 (approximately EUR 1,935,600,133) in penalties.

The decision established the use of the same tax-evasion scheme (in respect of profit tax, VAT, corporate property tax and motorway users' tax) as in the decisions concerning the years 2000 and 2001. It mentioned that the company had carried out its activities through OOO Ratmir, OOO Alta-Treid, ZAO Yukos-M, OOO Yu-Mordoviya, OOO Ratibor, OOO Petroleum treyding, OOO Evoyl, OOO Fargoyl, most of which had also been used by the applicant company in previous years. The entities in question, acting in breach of Article 575 of the Civil Code, which prohibits grants and gifts between independently functioning commercial entities, had transferred the entirety of their profits unilaterally to a fund owned and controlled by the applicant company. The decision mentioned that the transfers had been wrongly reflected in the applicant company's financial accounting and that the company had failed to explain the origin of these funds and had failed to take these sums into account for tax purposes. Accordingly, the applicant company had failed to pay taxes in respect of these amounts.

The decision referred to several other mistakes in the applicant company's tax declarations. In particular, the tax in respect of the company's securities transactions was wrongly calculated, there were many general mistakes in the company's financial accounting, and there were some mistakes in the company's request for reimbursement of the VAT on export operations (e.g. on one occasion the company failed to submit the required sales contract; it also mentioned one contract but received the money on the basis of a different contract; on some occasions the company failed to submit documents proving customs clearance, indicated wrongly calculated sums, and made multiple mistakes in VAT export documents). There were further multiple mistakes in tax deductions in respect of internal VAT.

The decision also established that the applicant company had used sham entities to lower its group taxes, that the entities and the company's subsidiaries had entered into transactions with reduced prices, that on some occasions the company had declared the extracted oil as ‘hydrocarbon liquid’ in order to lower the applicable price even further, that there were no cash transactions between the entities and subsidiaries and that the company's own promissory notes and mutual offsetting had been used instead and that the whole set-up, which had no economic purpose other than tax evasion, had resulted in massive tax evasion by the applicant company. The decision also noted that use of tax concessions in the Republic of Mordoviya and the Evenk Autonomous District by the sham entities had been unlawful, because they had failed to qualify for the exemptions and also because they had been sham companies. The decision was detailed in respect of the composition and all the activities of the sham entities: the Ministry analysed the entirety of their activities month by month.

The applicant company had until 17 November 2004 to meet the debts voluntarily.

On 28 October 2004 the Tax Ministry commenced a tax inspection in respect of the year 2003, which resulted in an audit report that was dated 19 November 2004 and served on the applicant company on the same date.

On the basis of the report, by a decision of 6 December 2004 the Ministry levied tax liabilities for the year 2003 (‘the 2003 Tax Assessment’), consisting of RUB 86,228,187,852 (approximately EUR 2,327,114,103) in taxes, RUB 15,235,930,657.66 (approximately EUR 411,185,136) in default interest and RUB 68,939,326,976.40 (approximately EUR 1,860,524,778) in penalties.

The decision established that the company was guilty of having evaded taxes (in particular, VAT, profit tax and advertising tax) by using the same arrangement as in previous years. The decision mentioned the following entities registered either in the Republic of Mordoviya or the Evenk Autonomous District: OOO Yu-Mordoviya, ZAO Yukos-M, OOO Alta-Treyd, OOO Ratmir, OOO Energotreyd, OOO Makro-Treyd, OOO Fargoyl, and OOO Evoyl. It was alleged that the entities were sham and that they had made unilateral transfers to the applicant company, in breach of Article 575 of the Civil Code, that the applicant company had failed to reflect the transferred amounts as its profits, to account for them and to pay taxes in this connection and that the company had used lowered prices to avoid the payment of taxes. The decision contained a detailed contract-by-contract analysis of the sham entities' transactions.

The decision also mentioned that some of the applicant company's expenses were unjustifiably deducted from the company's taxable income, that the company failed to account for some of its operations with promissory notes, that there were some mistakes in calculation of the VAT owed by the company and that the company had evaded payment of advertising tax in Moscow.

The applicant company had one day to comply with the decision, that is, until 7 December 2004.

On 17 September 2004 the valuation commissioned by the bailiffs and the Ministry of Justice from Dresdner Kleinwort Wasserstein, the investment branch of Dresdner Bank AG (working in Russia as ZAO Dresdner bank), for the purposes of the enforcement proceedings, estimated that 100% of shares in OAO Yuganskneftegas were worth between USD 15.7 and 18.3 billion (between EUR 15.2 and 17.7 billion), excluding the pending and probable tax liabilities of this entity.

The report evaluated 100% of the price of OAO Yuganskneftegaz as a separate entity and, having deduced its corresponding obligations, calculated the cost of its shares, on the basis of which it would be possible to calculate the price of one share in OAO Yuganskneftegaz.

It was specifically mentioned in the report that the valuation was not an opinion concerning the attainable price in the event of the sale of OAO Yuganskneftegaz or any kind of recommendation concerning the starting bid of the auction in the event of the sale of Yuganskneftegaz by the Ministry of Justice or any other State institution, or any recommendation concerning particular actions to be undertaken by the Ministry of Justice with a view to levying the judicially determined or estimated amount of the applicant company's tax debt.

Among the basic risks affecting the price of OAO Yuganskneftegaz, the report mentioned the tax claims, the validity of oil extraction licences, future oil prices, export quotas etc. The report also mentioned that the price of OAO Yuganskneftegaz as a part of the applicant company could be substantially different from the price of OAO Yuganskneftegaz as a separate entity. The report also mentioned various valuations of OAO Yuganskneftegaz made by third parties, including investment institutions and banks, and ranging from USD 9 to 22 billion (between EUR 7.4 to 18.1 billion). It also mentioned that, because of the size of OAO Yuganskneftegaz, not many buyers would be financially capable of acquiring it.

The valuation (between USD 15.7 and 18.3 billion or EUR 15.2 and 17.7 billion) did not take account of already pending and probable tax claims against OAO Yuganskneftegaz. If and when lodged, these claims would ‘substantially influence the assessment’ of the equity of OAO Yuganskneftegaz. The claims already announced (as on that date) were USD 951.3 million.

In carrying out the valuation, the report used the following three methods: the method of discounted cash flows, a method based on the analysis of comparable transactions, and a method based on the analysis of comparable publicly-held companies.

The report also specifically noted that:

A copy of the valuation report was served on the applicant company on 13 October 2004.

It does not appear that the applicant company contested the report's valuations report before the courts.

On 21 October 2004 the bailiffs confirmed to the Ministry that they had collected 79,584,690,127 RUB (approximately EUR 2,183,447,331).

On 4 November 2004 the applicant company responded to the valuation report. It disagreed with the decision to evaluate and sell OAO Yuganskneftegaz, and would have preferred to sell its other assets first. The applicant company informed the bailiffs that it had already honoured a major part of the debt (apparently referring to its tax liability for the year 2000 only) and that the remaining sum was USD 2.5 billion (around EUR 2 billion). The company claimed that it would be more reasonable to lift the seizure and let it dispose of its minor assets in order to honour the remaining debt.

As regards OAO Yuganskneftegas, the company referred to independent valuations by JP Morgan PLC, valuing the subsidiary at ‘no less than USD 14 billion (some EUR 11 billion)’ and ‘between USD 16.1 billion (EUR 12.6 billion) and USD 22.1 billion (EUR 17.378 billion), including tax liabilities’ respectively.

The letter mentioned that the Ministry had brought tax claims against OAO Yuganskneftegaz totalling USD 2.903 billion.

On 18 November 2004 the bailiffs noted that the applicant company's debt to the Ministry on that date was RUB 204,902,386,620 (approximately EUR 5,506,781,584 or USD 7,147,250,717). Having referred to sections 4, 46 (6), 54 (2) and 88 of the Enforcement Proceedings Act, the bailiffs decided to sell 76.79 % of the shares in OAO Yuganskneftegas at an auction which would take place on 19 December 2004. The published minimum bidding price for 76.79 % of the shares in OAO Yuganskneftegas was RUB 246,753,447,303.18 (approximately USD 8.65 billion or EUR 6.63 billion).

The sale was entrusted to the Russian Fund of Federal Property (‘the Property Fund’), a specialised State Institution in charge of organising sales of federal property and the property of those who had debts towards the State.

On the same date, the Property Fund issued a regulation setting out the parameters and rules that would govern the auction, including the number of shares to be sold (43 ordinary shares representing 76.79% of the capital of OAO Yuganskneftegaz), the starting price (RUB 248.6 billion or some USD 8.85 billion), the date and place of the auction (19 December 2004), the eligibility requirements for bidders (the auction was open to all perspective bidders, including foreign individuals and legal entities), which included a cash deposit of RUB 49.4 billion (USD 1.7 billion, or 20% of the starting price), to be paid no later than the day before the auction.

The decision of 18 November 2004 was challenged in court on 26 November 2004.

It appears that on 3 December 2004 the City Court dismissed the appeal against the decision of 18 November 2004.

On 21 January and 3 May 2005 that judgment was upheld on appeal and in cassation respectively.

The applicant company argued that the valuation report had failed to give a market valuation of the asset and that the decision of 18 November 2004 failed to mention a specific price for OAO Yuganskneftegaz. In response, the courts noted that 43 ordinary and 13 privileged shares in OAO Yuganskneftegaz had been seized by the bailiffs in satisfaction of the applicant company's liability, that the shares had been valued by ZAO Dresdner Bank and that the applicant company had been informed of all of the bailiffs' actions in the course of the enforcement proceedings. They also noted that the seizure of shares in OAO Yuganskneftegaz had previously been declared lawful, that the applicant company had been properly notified of all of the steps taken by the bailiffs in the course of the enforcement proceedings and could bring court proceedings against them, that the valuation by ZAO Dresdner Bank had not been contested by the applicant in accordance with the special procedure provided for by the legislation in force, and that the bailiffs had properly indicated the amount of the applicant company's debt and requested the Fund to sell the amount of shares necessary to satisfy the debt.

In the meantime, on 19 November 2004, the Russian Gazette, an official Government newspaper, published an announcement about the sale of 76.79% of shares in OAO Yuganskneftegaz at a public auction organised by the Property Fund. The only two conditions for participating in the auction were to file an application between 19 November and 18 December 2004 and to make a deposit payment.

On 10 December 2004 OOO Gazpromneft, ZAO Intercom and OAO First Venture Company filed applications with the Federal Antimonopoly Service and thus were expected to bid at the auction.

The media reported that OAO Gazprom, a parent company of OOO Gazpromneft, had begun negotiating a financing arrangement with a consortium of international banks to finance its bid at the auction. It was also reported that a number of non-Russian companies, such as ENI, Chevron Texaco, China National Petroleum Corporation and E.ON, had expressed interest in participating in the auction.

On 17 December 2004 the bailiffs noted that the applicant company's consolidated debt on that date, regard being had also to the 2001 Tax Assessment, was RUB 344,222,156,424.22 (EUR 9,210,844,560.93, or USD 12,365,545,256.86).

On 19 December 2004 the Property Fund auctioned 76.79% of the shares in OAO Yuganskneftegaz. It appears that media reporters were able to attend the auction.

There were two participants in the auction, OOO Baykalfinansgrup and OOO Gazpromneft. OOO Baykalfinansgrup, the only bidder in the auction, made two bids, first of USD 8.65 billion and then of RUB 260,753,447,303.18 (USD 9.4 billion or EUR 7.05 billion). It appears that whilst taking part in the auction OOO Gazpromneft was prevented from bidding by the injunction of 16 December 2004 (see paragraph 253 above).

On 21 December 2004 the Ministry of Justice issued a report accepting that the Property Fund had properly carried out the services due under the contract of 18 November 2004.

On 21 December 2004 the Property Fund publicly reported the sale of the shares in OAO Yuganskneftegaz.

On 31 December 2004 the bailiffs issued a resolution confirming the results of the auction. The resolution stated that OOO Baykalfinansgrup had won the auction for 43 shares in OAO Yuganskneftegaz (76.79% of its stock) for RUB 260,753,447,303.18 (approximately EUR 6,896,341,940 or USD 9,396,960,842). By the time that resolution was issued, the money had already been transferred to the bailiffs.

According to press reports of 31 December 2004, OAO Rosneft, a State-owned oil company, acquired OOO Baykalfinansgrup and thus took control of OAO Yuganskneftegas.

In its consolidated financial statements 2003–2005, dated 15 May 2005,OAO Rosneft declared:

It appears that on 26 May 2005 the applicant company filed an action in the City Court against the Property Fund, OOO Baykalfinansgrup, OAO Rosneft, OOO Gazpromneft, OAO Gazprom and the Ministry of Justice, seeking to annul the auctioning of 43 shares in OAO Yuganskneftegas and the deed of sale. It also claimed damages in excess of RUB 324 billion.

The action was examined and dismissed by the City Court on 28 February 2007. The court decided that both the Ministry of Justice and the Property had acted within their statutory powers, that the auction procedure had been fully complied with and that the applicant company's allegation about the auction participants acting in concert had been unsupported by any evidence.

The judgment was upheld by the Appeal Court on 30 May and by the Circuit Court on 12 October 2007.

On 27 January 2005 the applicant company also initiated parallel proceedings against OAO Rosneft, OOO Baykalfinansgrup, Deutsche Bank AG, Deutsche Bank AG London, Deutsche Bank Luxembourg S.A., Deutsche Bank Trust Company Americas and the Russian Federation before the U.S. Bankruptcy Court for violation of the automatic stay.

The applicant company voluntarily withdrew the entire proceedings on 28 March 2005, after its bankruptcy petition was dismissed by the U.S. Bankruptcy Court.

Under Article 57 of the Constitution of Russia, everyone is liable to pay taxes and duties established by law.

Article 44 of the Tax Code of 31 July 1998 no. 146-FZ (as in force at the relevant time) states that an obligation to pay a tax or a duty arises, alters or ceases in accordance with that Code and other legislative acts on taxes and fees.

Articles 45 and 80 of the Tax Code provide that, as a general rule, taxpayers must comply with their obligation to pay a tax on their own initiative, and define a tax declaration as the written statement by taxpayers on their revenues and expenses, sources of revenue, tax benefits and the calculated sum of the tax, as well as other data related to calculation and payment of the tax.

Under Article 45, in the event of non-payment or incomplete payment of the tax in due time, the tax authorities may levy the tax liability directly from the taxpayer's bank account.

Article 11 (2) of the Tax Code defines a branch of an organisation as a geographically separate department, with stable employment posts.

Under Articles 82 and 87 of the Tax Code, the tax authorities may carry out documentary and on-site tax inspections of taxpayers. Such inspections may cover only the three calendar years of the taxpayer's activity directly preceding the year of inspection. In exceptional cases the authorities are allowed to carry out repeated on-site tax inspections. Such cases include, among other things, on-site inspections conducted by way of supervision of the activities of the tax authority that conducted the initial audit (Article 87 (3) of the Code).

Article 101 (4) 2 of the Tax Code states that the tax authority may use as evidence during its inspections documents earlier demanded by the authority from a taxpayer, documents submitted or obtained during documentary and on-site tax inspections of that taxpayer as well as other documents in the possession of the authority.

Under Article 100 (5) of the Tax Code a taxpayer has two months to file a detailed reply to the report drawn up by the tax authorities on the outcome of the tax inspection.

Under Article 81 of the Tax Code, a taxpayer may not be fined in respect of any errors if, prior to commencement of the on-site tax inspection for the relevant year, it files amended tax returns and voluntarily satisfies the related tax liabilities, including default interest.

By order no. BG-3-29/159 dated 2 April 2003 the Tax Ministry decided that the period for performance of the demand to pay tax addressed to a taxpayer may not exceed ten calendar days from the date of its receipt by the taxpayer.

The Government relied on the following cases as examples of typical terms given to taxpayers for voluntary payment of reassessed taxes and surcharges:

Article 38 of the Tax Code provides that objects of taxation may be operations involving the retailing of goods, works and services, property, profit, income, value of retailed goods, works and services or other objects having cost, quantitative or physical parameters on the existence of which the tax legislation bases the obligation to pay tax.

Article 39 of the Code defines retailing of goods, works and services as, inter alia, the transfer (including exchange of services, works and goods) in return for compensation of property rights in respect of goods and results of works from one person to another, as well as the rendering of services from one person to another in exchange for compensation.

Article 41 of the Code defines profits as economic gains in monetary form or in kind.

Section 5 (2) of RF Law no. 1759-1 of 18 October 1991 ‘On motorway funds in the Russian Federation’ provides for a 1% motorway users' tax from the turnover of the retail of goods, works and services, payable by all motorway users. Section 4 also makes subject to a 25% tax the turnover (excluding VAT) of companies trading in fuels and lubricants.

This tax was abolished from 1 January 2003.

Section 21 (‘Ch’) of RF Law no. 2118-1 of 27 December 1991 ‘On the foundations of the tax system’ imposes a tax of up to 1.5% for the maintenance of the housing stock and socio-economic facilities.

This tax was abolished with the entry into force of the Second Part of the Tax Code on 1 January 2001.

Section 21 (1) ‘z’ of RF Law no. 2118-1 of 27 December 1991 ‘On the foundations of the tax system’ imposed a tax in respect of the cost of advertisement services.

This tax was abolished from 1 January 2005.

Article 56 of the Tax Code defines a tax benefit as a full or partial exemption from the payment of taxes, granted by the tax legislation.

In letter no. 04/06/08, dated 21 October 1998, the Ministry of Finance noted, inter alia:

Under Article 83 (1) of the Tax Code, taxpayers which are legal entities are required to register with the tax authorities at their headquarters (location of their executive bodies), at the location of their branches and at the location of any real estate and places where vehicles belonging to them are registered.

Special registration rules applied in respect of large taxpayers, including the applicant company.

By Decree no. AП-3-10/399 of the Tax Ministry, dated 15 December 1999, such taxpayers are required to register at their main location, at the location of their branches and at the location of real estate and places where vehicles belonging to them are registered, and in certain specific tax offices (inter-district level or as specifically indicated by the Ministry).

Annex 3 to the Decree contains the form ‘On subsidiary and dependant companies and subsidiary enterprises’, to be filled in by the taxpayer. During registration the taxpayer is required to indicate all of its subsidiary and dependant companies.

In respect of domestic off-shore territories, according to commentators, this requirement means that in practice the taxpayer's executive body should always be physically located and functioning on the territory of the off-shore. If the taxpayer fails to comply with the requirement, the tax authorities could declare its registration void with the subsequent recovery of the entirety of the perceived tax benefits (see A.V. Bryzgalin, Practical Tax Encyclopaedia, Moscow, 2003–2006, Chapter 3 ‘Methodology of tax optimisation’).

Under Law no. 9-FZ of the Republic of Mordoviya of 9 March 1999 ‘On the conditions of efficient use of the socio-economic potential of the Republic of Mordoviya’, tax concessions are granted to taxpayers whose entities were established after the entry into force of that law and whose activities meet certain conditions, including but not limited to the following:

Section 1 of the Law states that ‘this Law establishes concessions with the objective of creating favourable conditions for attracting capital into the territory of the Republic of Mordoviya, strengthening the socio-economic potential of the Republic of Mordoviya, developing the securities market and creating new jobs through special arrangements for the taxation of organisations’.

Law no. 12-P-3 of the Republic of Kalmykiya of 12 March 1999 ‘On tax concessions for companies investing in the Republic of Kalmykiya’ provides tax concessions to those who meet the following criteria:

By a decision of 16 April 2002 (case no. F08-1134/2002-402) in the case of OOO Simpleks v. the Tax Ministry, the Federal Commercial Court of the North-Caucasian District quashed the decisions of lower courts and instructed them to investigate further whether the taxpayer had indeed complied with the conditions mentioned in the law, had acted in good faith in this respect and had indeed made any investments in the local economy.

By a decision dated 29 April 2002 (case no. F08-1368/2002-506A) in the case of OOO Impuls v. the Tax Ministry, the Federal Commercial Court of the North-Caucasian District quashed the decisions of lower courts and instructed them to investigate further whether the taxpayer had indeed complied with the conditions mentioned in the law, had acted in good faith in this respect and indeed made any investments in the local economy.

By a decision of 20 May 2002 (case no. F08-1678/2002-614A) in the case of OOO Sibirskaya transportnaya kompaniya (one of the sham entities belonging to the applicant company) v. the Tax Ministry, the Federal Commercial Court of the North-Caucasian District ruled as follows:

Accordingly, the court quashed the decisions of the lower courts and instructed them to investigate further whether the taxpayer had complied with the above-mentioned conditions and whether it had acted in good faith.

By a decision of 28 May 2002 (case no. F08-1793/2002) in the case of ZAO Telekom Zapad Komplekt v. the Tax Ministry, the Federal Commercial Court of the North-Caucasian District ruled that:

Accordingly, the court quashed the decisions of the lower courts and instructed them to investigate further whether the taxpayer had complied with the above-mentioned conditions and had acted in good faith.

By a decision of 4 June 2002 (case no. F08-1864/2002-697A) in the case of ZAO Promyshlennaya korporaciya Shar v. the Tax Ministry, the Federal Commercial Court of the North-Caucasian District quashed the decisions of the lower courts and instructed them to investigate further whether the taxpayer had indeed complied with the conditions mentioned in the law, had acted in good faith in this respect and had indeed made any investments in the local economy.

By a decision of 5 August 2002 (case no. F08-2762/2002-1009A) in the case of OOO Promet v. the Tax Ministry, the Federal Commercial Court of the North-Caucasian District quashed the decisions of the lower courts and instructed them to investigate further whether the taxpayer had indeed complied with the conditions mentioned in the law, had acted in good faith in this respect and had indeed made any investments in the local economy.

By a decision of 13 August 2002 (case no. F08-2892/2002-1051A) in the case of OOO TD Dion v. the Tax Ministry, the Federal Commercial Court of the North-Caucasian District quashed the decisions of the lower courts and instructed them to investigate further whether the taxpayer had indeed complied with the conditions mentioned in the law, had acted in good faith in this respect and had indeed made any investments in the local economy.

By a decision of 29 August 2002 (case no. F08-3158/2002-1140A) in the case of ZAO Stanford v. the Tax Ministry, the Federal Commercial Court of the North-Caucasian District quashed the decisions of the lower courts and instructed them to investigate further whether the taxpayer had indeed complied with the conditions mentioned in the law, had acted in good faith in this respect and had indeed made any investments in the local economy.

By a decision of 20 February 2003 (cases nos. F08-270/2003-91A and F08-1679/2002-622A) in a dispute between the Tax Ministry and OOO ‘Vostochnaya perestrakhovochnaya kompaniya’, the Federal Commercial Court of the North-Caucasian Circuit found as follows:

By a decision of 20 February 2003 (case no. F08-268/2003-98A) in the case of OOO Bazis Sekyuritis v. the Tax Ministry, the Federal Commercial Court of the North-Caucasian District quashed the decisions of the lower courts and instructed them to investigate further whether the taxpayer had indeed complied with the conditions mentioned in the law, had acted in good faith in this respect and had indeed made any investments in the local economy.

By a decision of 8 April 2003 (case no. F08-1013/2003-383A) in the case of OOO Gravite v. the Tax Ministry, the Federal Commercial Court of the North-Caucasian District quashed the decisions of the lower courts and instructed them to investigate further whether the taxpayer had indeed complied with the conditions mentioned in the law, had acted in good faith in this respect and had indeed made any investments in the local economy.

Under section 9 of Law no. 108 of the Evenk Autonomous District ‘On specific features of the tax system in the Evenk Autonomous District’ of 24 September 1998, substantially lower tax rates apply to local businesses whose activities meet certain conditions with regard to the special taxation procedure set out in section 8 of that Law.

Under Article 2 of Civil Code of 30 November 1994 no. 51-FZ (as in force at the relevant time), the legal status of parties involved in civil-law transactions, the grounds for the creation of ownership and other property rights and the order of exercising those rights are defined by the civil legislation, which also regulates contractual and other obligations.

The civil legislation regulates the relations between persons engaged in business activities or in those activities performed with their participation, on the assumption that business activity is an independent activity performed at one's own risk and aimed at systematically deriving a profit from the use of property, the sale of commodities, the performance of work or the rendering of services by those persons registered in this capacity in conformity with the legally-established procedure.

It is formally prohibited to make any unilateral property transfers (gifts, grants or gratuitous loans) between independent commercial legal entities (Articles 575 and 690 of the Civil Code). Unilateral property transfers are permitted by Article 251 (1) 11 of the Tax Code and not counted for the purposes of profit tax if they are made between associated entities, where one of them holds more than 50% of shares in the equity of the other entity.

Article 105 of the Civil Code provides that a subsidiary company is one controlled by another company, either through ownership of the subsidiary company's shares, by virtue of a contract or by any other means.

The controlling company is jointly responsible for debts incurred by the subsidiary company as a result of compliance with the controlling company's instructions. The controlling company may be held vicariously responsible for a debt of the subsidiary company in the event of the latter's insolvency.

Article 106 of the Code provides that a company is dependant when the other company owns over 20% of the first company's voting stock. A company which purchases over 20% of the voting shares in other companies is obliged to make this information public.

Similar rules are established in respect of limited liability companies (обществa с ограниченной ответственностью) by section 6 of Law no. 14-FZ on limited liability companies of 8 February 1998.

Articles 9 and 10 of the Civil Code provide that the parties involved in civil-law transactions are free to act contractually within the limits defined by law.

Article 10 (1 and 2) of the Code states specifically that parties involved in civil-law transactions are prohibited from abusing their rights. In such cases, the courts may deny legal protection in respect of the right which is being abused. Article 10 (3) establishes a refutable presumption of good faith and reasonableness of actions on the parties in civil-law transactions.

In its decision no. 24-P dated 12 October 1998, the Constitutional Court of Russia for the first time made use and interpreted the notion of ‘bad/good faith’ to assess the legal consequence of the conduct of taxpayers in its jurisprudence. In this case this was done to define the moment at which a taxpayer can be said to have discharged his or her constitutional obligation to pay taxes.

In its decision no. 138-O dated 25 July 2001, the Constitutional Court of Russia again confirmed that there existed a refutable presumption that the taxpayer was acting in good faith and that a finding that a taxpayer had acted in bad faith could have unfavourable legal consequences for the taxpayer. The case again concerned the definition of a moment at which a taxpayer can be said to have discharged his or her constitutional obligation to pay taxes.

The domestic commercial courts applied this approach in a number of cases concerning the eligibility of taxpayers to tax concessions in the Republic of Kalmykiya, such as decision no. F08-1134/2002-402 of 16 April 2002 of the Federal Commercial Court of the North Caucasian Circuit, decision no. F08-1864/2002-697A of 4 June 2002 of the Federal Commercial Court of the North Caucasian Circuit, decision no. F08-2762/2002-1009A of 5 August 2002 of the Federal Commercial Court of the North Caucasian Circuit, decision no. F08-2892/02-1015A of 12 August 2002 of the Federal Commercial Court of the North Caucasian Circuit, decision no. F08-3158/2002-1140A of 29 August 2002 of the Federal Commercial Court of the North Caucasian Circuit, decision no. F08-268/2003-98A of 20 February 2003 of the Federal Commercial Court of the North Caucasian Circuit, decision no. F08-1013/2003-383A of 8 April 2003 of the Federal Commercial Court of the North Caucasian Circuit.

In its decision no. 168-O of 8 April 2004 the Constitutional Court noted that it would be inadmissible for bad-faith taxpayers to manipulate the legal civil-law institutions to create and operate schemes for unlawful enrichment at the expense of the State budget. The case concerned the use of exchange notes in the sphere of VAT refunds.

Under Article 267 of the Code of Commercial Courts Procedure, an appeal court must examine an appeal lodged against the first-instance judgment within one month, starting from the date of its filing. This term includes any time necessary for case preparation and for reaching the appeal decision. By federal law no. 205-FZ dated 19 July 2009 the time-limit was increased to two months. By federal law no. 69-FZ dated 30 April 2010 the provision in question has been amended. The time-limit became extendable up to six months depending on the complexity of the case and the number of participants. The provision also made it clear that the time-limit started running on expiry of the time-limit for lodging an appeal.

Under Article 268 of the Code, an appeal court fully re-examines the case using the evidence contained in the case and any newly-presented additional evidence. In examining procedural motions by the parties, including requests to call and hear additional witnesses or adduce and examine additional pieces of evidence, the appeal court is not bound by previous refusals of the same motions by the first-instance court.

Under Articles 180, 271 and 318 of the Code, the first-instance judgment becomes enforceable on the date of the entry into force of the appeal decision confirming it. The enforcement takes place on the basis on a writ issued by the respective court.

In accordance with Article 286 of the Code, a cassation instance court, among other things, reviews the lower courts' decisions and verifies whether the conclusions of the lower courts in respect of both law and fact correspond to the circumstances of the case.

Article 283 of the Code provides for a possibility of applying for a stay of enforcement of the lower courts' decisions. The applicant must show that it would be impossible to reverse the effects of an immediate enforcement of the lower courts' decisions if the cassation appeal were successful.

By a decision dated 15 May 1997 in the case of the Tax Ministry against Commercial Bank Mechel-Bank and OAO Mechel (no. F09-162/97-AK), the Federal Commercial Court of the Ural Circuit quashed the decisions of lower courts in which they had upheld the lawfulness of a ‘kickback’ contract which had been concluded between the respondent bank and the respondent company. The Circuit Court ruled that the lower courts had failed to study and to take account of all of the circumstances relevant to the case at issue. In particular, the court noted the finding that the contract had been concluded specifically to avoid the payment of taxes. Accordingly, it reversed and invalidated the contract as unlawful, contrary to the legal order and morality, and ordered that the proceeds (RUB 1.5 bn) derived by the parties from the contract be seized in favour of the State.

In a decision of 9 December 1997 in case no. 5246/97, the Presidium of the Supreme Commercial Court of Russia invalidated a loan secured by a promissory note and a related pay-off agreement as imaginary and sham respectively. The court had regard to the terms of contracts concluded between the parties and the manner of their execution, in particular the fact that the loan had never been used by the borrower; it concluded that the transactions in question covered the sale of a promissory note and invalidated them as sham.

In a decision of 6 October 1998 in case no. 6202/97 the Presidium of the Supreme Commercial Court of Russia invalidated two contracts for the sale of securities and a related loan agreement as sham, having regard to the terms of contracts in question, the manner of their execution and the contractual prices. The court established that the sales contracts in fact covered the loan agreement secured by the pledge of securities and remitted the case for re-trial.

The Enforcement Proceedings Act (Law no. 119-FZ) of 21 July 1997 (as in force at the relevant time) establishes the procedure by which a creditor may enforce a court award against a presumably solvent legal entity debtor. According to Article 46 § 6 of the Act, execution was to be levied against the debtor's property ‘in such amount and such scope as is required to ensure the satisfaction of claims set out in the enforcement document’.

Russian legislation provides for a set of special procedures in respect of presumably insolvent legal entity debtors (see section O below).

Under section 9 (3) of the Enforcement Proceedings Act, on an application by the creditor, the bailiff institutes enforcement proceedings, fixes the time-limit for enforcement of the execution writ — which may not exceed five days from the date of institution of enforcement proceedings — and notifies the debtor accordingly.

Article 324 of the Commercial Procedure Code sets out a procedure whereby a court may alter the method and order of enforcement of a final court decision. Among other thing, it provides as follows:

At the same time, Articles 62, 64 (1) and (2) of the Tax Code specify that a respite or possibility of repaying in instalments concerns only the taxes, and not the interest surcharges and penalties, and may be granted by a court only for a period from one to six months from the original deadline for payment, may only be granted on specific grounds enumerated in the law and cannot be granted if there are tax proceedings pending against the applicant (Article 62 (1)).

The Enforcement Proceedings Act provides for three possibilities, namely:

With regard to (a), the bailiff takes the decision in the ‘appropriate circumstances’ either on an application by the debtor or of its own motion.

With regard to (b), the decision may only be taken in seven enumerated cases: if the bailiff applied to the court with a request to interpret the judicial act; on a request from a debtor who has been drafted to serve in the army; if the debtor is on a long-term mission; if the debtor is hospitalised and being treated; if the actions of the bailiff are being contested in court; if the debtor himself or his property is being searched for; if the debtor or creditor are on holiday and cannot be contacted.

As regards (c), the debtor, creditor or bailiff has the right to request the court to defer the execution of enforcement of a debt or arrange for payment in instalments if there are ‘circumstances impeding the enforcement actions’.

If the debtor does not comply within the specified time-limit, under section 9 (5) of the Enforcement Proceedings Act the bailiff, on an application by the creditor, has the right to make an inventory of the debtor's property and to seize it.

Under section 9 (5) of the Law on Enforcement Proceedings the bailiff is empowered to seize any of the debtor's assets to secure enforcement. In seizing the debtor's assets the bailiffs are obliged to follow the order of priority of arrest and sale set out in section 46 (2) of the Law on Enforcement, which provides:

At the same time, the Supreme Commercial Court specified in its Information Letter no. 6, dated 25 July 1996:

In its Resolution no. 11 of 9 December 2002 the Plenary Supreme Commercial Court ruled:

Section 46 (5) of the Enforcement Proceedings Act provides that, if a debtor lacks sufficient cash funds to satisfy the creditor's claims, the debt may be levied from the other forms of the debtor's property, unless the federal law states otherwise. The debtor has the right to indicate his preferred order of priority, but the final order is determined by the bailiff.

Section 51 of the Enforcement Proceedings Act establishes a one-month time-limit for the seizure of the debtor's property from the date on which the ruling on the institution of enforcement proceedings is served. The seizure is intended, inter alia, to secure the safety of the debtor's property and the creditor's claims, which shall be subject to a subsequent transfer to the creditor or to a subsequent sale. The seizure of securities is carried out in conformity with the procedure defined by the Government of the Russian Federation in Decree no. 934 ‘On the seizure of securities’, dated 12 August 1998.

Section 59 of the Enforcement Proceedings Act establishes the order of priority in the seizure and forced sale of a debtor's property in three stages. Firstly, the bailiff sells property which is not immediately involved in the debtor's production cycle (securities, cash on the debtor's deposit and other accounts, currency valuables, cars, office equipment, etc.); secondly, finished products (goods) and other material values not immediately involved in production and not intended to play an immediate part in it; and, thirdly, real-estate objects, as well as raw and other materials, machine-tools and equipment and other fixed assets, intended for immediate involvement in production.

In Ruling no. 4 ‘On certain questions arising out of seizure and enforcement actions in respect of corporate shares’, dated 3 March 1999, the Plenum of the Supreme Commercial Court decided that in respect of companies which had been privatised by the State as parts of bigger holding groups through the transfer of controlling blocks of shares, the production cycle of the respective production unit should be preserved as much as possible.

Section 81 of the Enforcement Proceedings Act penalises a debtor's failure to comply voluntarily with a writ of execution with a 7% enforcement fee. Under Section 77 of the Act the fee is a priority payment which should be made by the debtor even before it begins repaying the principal debt.

In ruling no. 13-P of 30 July 2001 the Constitutional Court of Russia described the enforcement fee as an administrative penal sanction having a fixed monetary expression, exacted by compulsion, formalised by the decision of an authorised official and levied in favour of the State. The Constitutional Court struck the above provision down as unconstitutional, in so far as it did not allow the debtor to excuse his failure to comply with the writ by reference to certain extraordinary, objectively inevitable circumstances and to other unforeseeable and insurmountable obstacles beyond the debtor's control.

The Government referred to over a dozen cases from across Russia which, they claimed, confirmed that that the 7% enforcement fee was levied by bailiffs as a matter of standard practice in the event of the debtor's failure to pay, routinely and without exceptions, even if the debtor was a State-owned entity or indeed a State body. Here are some examples: enforcement proceedings dated 19 January 2001 no. 6-26/2001, in respect of RUB 304,078,000, owed by a State-owned private-law entity GUP Tatvodokanal; enforcement proceedings dated 18 November 2005 no. 3068/62/2/2006 in respect of RUB 108,083,008.64, owed by the Ministry of Education of the town of Kazan; enforcement proceedings dated 18 December 2002 no. 2-12/2002 in respect of RUB 19,0311,000, owed by OAO Tatavtodor; enforcement proceedings dated 25 February 2004 no. 7-18/04 in respect of RUB 445,336,550.84, owed by OAO Vertolety-MI; enforcement proceedings dated 13 November 2001 no. 5-17/2001 in respect of RUB 917,787,000, owed by FKP Kazanskiy zavod tochnogo mashinostroeniya imeni M. I. Kalinina.

Section 77 of the Enforcement Proceedings Act provides that, in respect of the sums levied from the debtor, including the proceeds from the forced sale of the debtor's property, the bailiffs first recover enforcement fees and all related payments and the remainder is used in satisfaction of the creditors' claims.

If the proceeds from the forced sale(s) are insufficient to satisfy all creditors, the following order of priority applies (section 78 of the Enforcement Proceedings Act): tort claims, employment and labour-related claims, claims made on behalf of the Pension Fund and the Social Security Fund of Russia, claims made on behalf of the budgets of various territorial levels and finally all other claims.

Under section 90 of the Enforcement Proceedings Act, all actions by the bailiff in the course of enforcement proceedings can be appealed against within ten days from the date of proper notification of the action in question.

Any damage inflicted on the debtor as a result of the bailiff's omission is compensated in accordance with the applicable legislation.

Section 3 of the Insolvency (Bankruptcy) Act defines the state of bankruptcy of a legal entity as follows:

In accordance with section 4 of the Act, the obligations are, as a general rule, defined/recognised by the court on the date of examination of the bankruptcy petition.

Bankruptcy proceedings in respect of a legal entity may only be instituted by a court if the overall amount of debt claims exceeds RUB 100,000 (section 6 of the Act).

Under section 7 of the Act the debtor, the debtor's creditors in respect of pecuniary claims and State bodies competent to take part in bankruptcy proceedings in which the State is a creditor in respect of mandatory payments are entitled to bring a bankruptcy petition.

Whilst the executive body of the debtor has the right to file for bankruptcy in circumstances where it is obvious that the debtor would be unable to fulfil its obligation in due time (section 8 of the Act), it has a legal duty to do so if the forced seizure of the debtor's property in satisfaction of a claim would make the debtor's economic activity extremely difficult or impossible (section 9 of the Act). In this latter respect, the petition should be brought within one month from the date on which the respective relevant circumstances occurred.

Failure to abide by the above rules exposes the offender to civil liability action by virtue of section 10 of the Act and may also make the offender vicariously liable for any resulting damage.

The admissibility of the bankruptcy petition is examined by a single-judge bench (section 48 of the Act). Having declared the petition well-founded (admissible), the judge is to impose a supervision order in respect of the debtor (see below).

The merits of the bankruptcy petition should be examined by a court within seven months of the date of its filing (section 51 of the Act).

Having examined the merits of the bankruptcy petition, the court takes one of the following decisions (section 52 of the Act):

The following five procedures may be applicable in respect of the debtor in a bankruptcy case (section 27 of the Act):

A supervision order is defined as the first procedure applied to the debtor (see above). It consists of securing the debtor's property, analysing its financial condition, composing the list of creditors and carrying out the first assembly of creditors (section 2 of the Act). The decision to impose a supervision order is taken by a judge in accordance with section 9 of the Act. It can be appealed against to a higher court. In the decision, the judge should also appoint an interim receiver.

A financial improvement order is a bankruptcy procedure intended to re-establish the debtor's solvency and consisting in repayment of the debts in accordance with a debt repayment schedule (section 2 of the Act).

External management is a bankruptcy procedure intended to re-establish the debtor's solvency (section 2 of the Act).

Liquidation is a bankruptcy procedure applied in respect of a debtor who has been declared bankrupt. It is essentially the sale of the debtor's property by a court-appointed trustee in proportionate satisfaction of the creditors' claims (section 2 of the Act).

Friendly settlement is a bankruptcy procedure applicable at any stage of bankruptcy proceedings whereby the creditors and the debtor reach an agreement in respect of the debtor's liability (section 2 of the Act).

The automatic consequences of the decision to adopt a supervision order in respect of the debtor legal entity (section 63 of the Act) are, in particular, the following: all debts due after the date of the decision are recoverable only pursuant to a special procedure; enforcement of execution writs already issued, including any pecuniary claims (with the exception of those relating to payment of salaries and tort claims) against the debtor, is halted, and the seizure in respect of the debtor's property is lifted.

The law also introduces some restrictions in respect of operations with the debtor's shares and the actions of the debtor itself (section 64 of the Act). However, the debtor's management team remains in place, subject to limitations restricting their ability to dispose of the debtor's property above a certain value (more than 5% of the book costs of the debtor's property) or to indebt the debtor further by contracting loans, issuing guaranties or sureties, transferring debts to third parties or transferring the debtor's property for external management by a third party.

An interim receiver is appointed by a court in accordance with sections 45 and 65 of the Act. At this stage of proceedings, he or she has no management functions and is essentially responsible for securing the debtor's property, watching over the activities of the debtor's management, analysing the debtor's financial condition and identifying the debtor's creditors. The interim receiver is accountable to a court and is in charge of organising the first meeting of creditors.

For a period of thirty days from the date of publication of the supervision order notice, the creditors have the right to file their claims against the debtor (section 71 of the Act). The claims may be included in the list of creditors on the basis of the court's decision.

At least ten days prior to the date of termination of the supervision order, the interim receiver must organise the first meeting of creditors (section 72 of the Act). At the meeting, the creditors are competent, among other things, to decide either:

As regards the first instance proceedings, at the admissibility stage of proceedings before this Court the applicant company argued that the supporting material underlying the Tax Assessment for 2000 had first been provided to it as a result of the City Court's decision of 14 May 2004. It alleged that the disclosure did not occur until 17 May 2004, when the Ministry filed 24,000 pages of documents, and continued on 18 May 2004 with approximately 45,000 further pages and a further 2,000 pages late on 20 May 2004, i.e. on the eve of the first-instance hearing. The company conceded that its representatives had indeed been given access to all these materials, both prior to the hearings and during the trial, but submitted that the manner and time for such access had been so unsatisfactory that it was of no practical use. It also argued that it had been unable effectively to access the court's filed documents during the first-instance hearings except during the lunch breaks. Overall, the company insisted that it had had insufficient time to prepare its defence and familiarise itself with the evidence before the court and that it had not had an opportunity to take cognisance of and comment on all of the evidence adduced or observations filed, nor to express its views on every document in the file, contrary to Article 6. It referred to the Ruiz-Mateos v. Spain and Krčmář v. Czech Republic cases. In their post-admissibility observations the company submitted that the Ministry had had sufficient time to disclose the evidence, as the relevant documents had been in the possession of the Ministry and that the Ministry could have disclosed them at any point from 8 December 2003 (some six months before the beginning of the hearing). It further noted that the documents filed by the Ministry had been in complete disorder and had been stored in nineteen plastic crates (ten of them containing six thousand pages each and nine more containing some four thousand pages each) and simply could not be studied properly over such a short period. The documents were kept in a room measuring three to four square metres and containing two chairs, a desk and one window. A request for additional space had been turned down. The above-mentioned conditions were reflected in a record dated 18 May 2004, drawn up by the applicant company's counsel. The Ministry's representative had refused to sign it and stated that he disagreed with its contents. More generally, the applicant company criticised the Ministry for bringing an action against it before the expiry of the grace period and argued that the first instance proceedings had been unfair because its lawyers could not obtain from the Ministry answers to all the questions they wished to ask in the hearings and that it was under the impression that the first-instance court had pronounced judgment without having studied all the evidence.

As regards the appeal proceedings, the applicant company also insisted on the breach of Article 6. It submitted that the domestic courts had failed to address the question of whether the abridgement of time had affected its substantive right to a fair hearing and that, equally, it did not rely on Article 267 of the Code of Commercial Courts Procedure, referred to by the respondent Government. Also, the rule in Article 267 requiring an appeal to be determined within one month is not respected in practice by the Russian courts; failure to comply with this requirement, even for a whole year, has no consequences for the proceedings. There was, according to the applicant company, no evidence of any particular urgency in listing or resolving the appeal: neither the Ministry, nor the co-appellant, OOO ‘YUKOS’ Moscow, sought expedition when their appeals were lodged and the co-appellant did not oppose the applicant company's applications to adjourn the appeal hearing. In response to the Government's criticism suggesting that the company's appeal was misaddressed by the omission of part of the postal code from the envelope, the applicant stated that no evidence had been provided of any mistake in this respect and that, after all, the appeal had been received by the court and the tax authorities. In any event, the court had made no criticism of the company in relation to the exercise of this appeal. Overall, the abridgement of the appeal period was a serious interference with the company's right to prepare for the appeal hearings, which failed to cure but rather accentuated the unfairness of the first-instance proceedings, and no substantive reason has been offered as to why this acceleration was lawful, necessary or consistent with the requirements of a fair trial.

The applicant company submitted in respect of the complaint about the delay in the delivery of the appeal judgment that the delay meant that the decision had been immediately enforced against the company, rendering any further cassation appeal nugatory. Only an application for a stay of enforcement pending an appeal in cassation, coupled with a valid appeal in cassation, could have been effective against the enforcement. In the company's view, such a valid appeal was strictly dependent on filing of the reasons by the appeal court. The appeal decision had become subject to immediate forcible execution, the company had become liable for an additional surcharge of 7% of the total liability and the opportunity to exercise an effective appeal against these measures had been circumvented.

As regards the argument that the company had insufficient time for preparation of the defence, the Government referred in their admissibility observations to the domestic legislation, which established a two-month time-limit for the examination of the case at first instance (Article 134 of the Code of Commercial Courts Procedure). The applicant company had at least 37 days to prepare its defence from the date of the filing of the suit, which, in view of the above time-limit, had not been unreasonable. Furthermore, the applicant company first became aware of the Ministry's arguments on 29 December 2003, when the Ministry issued the report indicating the applicant company's large tax liability and by 12 January 2004 the company had also filed its objections to the report under Article 100 (5) of the Tax Code. Moreover, the principal arguments contained in these objections remained unchanged throughout the proceedings. It could not be said therefore that the applicant company was unprepared to state its case, since it was well aware of the Ministry's arguments five months prior to the beginning of the court proceedings. In addition, the Government pointed out that the applicant company's lawyers were given an opportunity to study the evidence both in court and at the Ministry's premises throughout May, June and July 2004. According to the documents submitted by the Government, counsel for the applicant company availed themselves of this opportunity at least on two occasions, on 18 and 19 May 2004 respectively. Lastly, the Government argued that the applicant company's arguments about insufficient time for the preparation of the case had been carefully examined and eventually dismissed by the domestic courts as unfounded. In their post-admissibility observations the Government also submitted that the proceedings before commercial courts in Russia were generally conducted without serious delays (referring, for instance, to the lack of any cases against Russia on account of length of proceedings before the commercial courts). They further argued that in its submissions the applicant company had asserted generalities and had never mentioned any specific documents to which they had not had proper access. The evidence in question had been documents which were well known to the applicant company, as the Ministry had requested these documents from it during the on-site inspection (the Government relied on Article 101 (2) 4 of the Tax Code in this respect) and that the documents had been itemised in a register dated 17 May 2004 no. 14-3-02/22-13-1 and had been copies of original documentation reflecting the relations between the applicant company and its sham entities. In addition, the Government argued that any number of the company's lawyers could have come to study the evidence and that the applicant company had apparently felt no need to do so, since it had been represented by eight lawyers in the first-instance proceedings and only two to four of them had studied the documents. Overall, the Government suggested that the dispute was more legal rather than factual, so that the crux of the applicant company's objections concerned the interpretation of the domestic law rather than controversy about the particular circumstances of the tax evasion. In addition, the Government argued that the appeal hearing constituted a de novo examination of the case and that by then the applicant company had had a perfectly adequate opportunity to review the documentary record. By asking to adjourn the proceedings the applicant merely intended to delay the delivery of the judgment.

As regards the appeal proceedings, in the Government's view they too were in compliance with Article 6. The applicant company had brought appeal proceedings against the first-instance judgment of 26 May 2004: the possibility of review on both points of fact and law had been expressly provided for by Russian law (Article 268 of the Code of Commercial Courts Procedure) and the company had used it. Under Article 267 of the Code of Commercial Courts Procedure, which requires an appeal court to examine the appeals by the parties within a month of the date on which they were filed, the Appeal Court had to examine the case within a month of 1 June 2004, which was the date on which one party to the case, OOO ‘YUKOS’ Moskva, first lodged an appeal brief, notwithstanding the fact that the applicant company lodged its appeal on 17 June 2004. The appeal hearings, which represented a full re-trial of the case within the meaning of Article 268 of the Code of Commercial Courts Procedure, started on 18 June and lasted eight days, that is, until 29 June 2004, which was in line with the above rule. In addition, the applicant company deliberately delayed the examination of the case by dispatching the appeal brief to an erroneous address. Lastly, the Government underlined that the appeal decision had not been final and had been appealed against by the applicant company both in cassation instance and by way of supervisory review. The Government submitted that the fact that the reasoned copy of the Appeal Court decision of 29 June 2004 had been produced on 9 July 2004 did not affect the fairness of the proceedings as, in any event, it was open to the applicant company to lodge its cassation appeal within a two-month time-limit from the date of delivery of the appeal decision on 29 June 2004, even in the absence of the reasoned copy of the decision. The applicant company had lodged its cassation appeal on 6 July 2004 in the absence of the reasoned copy of the appeal decision. The cassation appeal was accepted for consideration and on 17 September 2004 its full version was examined and dismissed by the Circuit Court.

Turning to the applicant company's complaint that in the proceedings before the Moscow City Court the action in respect of the Tax Assessment 2000 and the request to attach the company's assets as a security for the claim was brought by the Ministry within the grace period (see paragraphs 25 and 26), the Court observes that this argument was examined by the Circuit Court, which dismissed it as unfounded and recognised the Ministry's action as lawful in this respect (see paragraph 72). The Court recalls the the Ministry's action was lodged under the rule which made it unnecessary to wait until the end of the grace period if there was evidence that the dispute was insoluble and, regard being had to the circumstances of the case, finds no indication of arbitrariness or unfairness within the meaning of Article 6 of the Convention in this connection.

The Court notes that it is common ground between the parties that during the first-instance proceedings the applicant company did not have access to the documents in the court file, other than the report of 29 December 2003, the decision of 14 April 2004 and their annexes, until 17 May 2004 when the Ministry invited the company's lawyers to study the documents at its premises (see paragraphs 41–45). It is also undisputed that the hearings in the case commenced on 21 May 2004, which is four working days later, and the evidence at issue amounted to at least 43,000 pages (see paragraphs 44 and 46). It is also not in dispute that on a few occasions the applicant company requested to adjourn the hearings referring to, among other things, their wish to study the evidence in the case, and that these requests were turned down by the trial court as unfounded (see paragraph 46).

The Court further notes that according to the applicant company this period was manifestly short, whilst the Government argued with reference to the sequence of the events in the proceedings and the applicant company's conduct that it had no real need to study these documents since the documents came from the company itself and it was entirely familiar with them. The Government also argued that the appeal hearing constituted a de novo examination of the case and that by then the applicant company had had a perfectly adequate opportunity to familiarise itself with the evidence at issue.

The Court reiterates that the principle of equality of arms is one feature of the wider concept of a fair trial, which also includes the fundamental right that criminal proceedings should be adversarial. The right to an adversarial trial means, in a criminal case, that both prosecution and defence must be given the opportunity to have knowledge of and comment on the observations filed and the evidence adduced by the other party. Various ways are conceivable in which national law may meet this requirement. However, whatever method is chosen, it should ensure that the other party will be aware that observations have been filed and will get a real opportunity to comment on them (see Brandstetter v. Austria, 28 August 1991, §§ 66 and 67, Series A no. 211; Ruiz-Mateos v. Spain, 23 June 1993, § 67, Series A no. 262; mutatis mutandis, Milatová and Others v. the Czech Republic, no. 61811/00, § 65, ECHR 2005-V and, a fortiori, Krčmář and Others v. the Czech Republic, no. 35376/97, §§ 41–45, 3 March 2000). Furthermore, the Court reiterates that Article 6 § 3 (b) guarantees ‘adequate time and facilities for the preparation of his defence’ and therefore implies that the substantive defence activity on the accused's behalf may comprise everything which is ‘necessary’ to prepare the trial. The accused must have the opportunity to organise his defence in an appropriate way and without restriction as to the possibility to put all relevant defence arguments before the trial court and thus to influence the outcome of the proceedings (see Can v. Austria, no. 9300/81, § 53, Commission's report of 12 July 1984, Series A no. 96, and Moiseyev v. Russia, no. 62936/00, § 220, 9 October 2008). The facilities which should be enjoyed by everyone charged with a criminal offence include the opportunity to acquaint himself, for the purposes of preparing his defence, with the results of investigations carried out throughout the proceedings (see C.G.P. v. the Netherlands (dec.), no. 29835/96, 15 January 1997, and Galstyan v. Armenia, no. 26986/03, § 84, 15 November 2007).

Turning to the case at hand, the Court observes that the Ministry's claims to the applicant company in respect of the year 2000 were based on the audit report of 29 December 2003, which became available to the applicant company on the same date and was later used in the decision of 14 April 2004, served on the applicant on 15 April 2004. It is true that these two documents were very detailed, and contained the attachments to substantiate the Ministry's position, and that the applicant company had on a few occasions opportunity to contest them. The fact remains, however, that the object of the trial court's examination during the hearings of 21 to 26 May 2004 was neither the audit report of 29 December 2003 and the decision of 14 April 2004 as such, nor the copies of the documents allegedly already in possession of the applicant company, but rather the Ministry's court claims based on the above-mentioned two documents and the additional body of evidence filed by the Ministry and comprising at least 43,000 pages. It is clear to the Court that in order to provide the applicant company with an adversarial trial and ‘adequate time and facilities for the preparation of [its] defence’ the applicant company should have been given an adequate opportunity to study the entirety of these documents and, more generally, to prepare for the hearings of the merits of the case on reasonable terms.

Having regard to the parties' arguments and the circumstances of the case, the Court is of the view that the trial court failed to reach this objective, as the mere four days during which the applicant company could have access to the case materials were insufficient for the applicant company to prepare properly, no matter the number of lawyers in its defence team or the amount of other resources which the applicant company would have been able to commit during its preparations. As regards the Government's reference to the applicant company's conduct during the proceedings and its argument that the company had no real need to study that evidence, the Court finds that it was incumbent on the trial court in the situation at hand to ensure that the applicant company had a sufficiently long period of time during which it could study such a voluminous case file and prepare for the trial hearings and it was up to the applicant company to use this time as it wished. As regards the Government's argument that the trial court was simply doing its best to comply with the two-month time-limit set out in Article 215 of the Code of Commercial Court Procedure for examination of cases of this category, the Court is of the view that even though it is no doubt important to conduct proceedings at good speed, this should not be done at the expense of the procedural rights of one of the parties, especially given the relatively short overall duration of the proceedings for a case of such magnitude and complexity.

Overall, the Court is of the view that the applicant company did not have sufficient time to study the case file before the first instance hearings.

The Court takes note of the Government's argument that any possible defects in the fairness of the proceedings at first instance have been remedied on appeal or in the cassation instance. Since this argument is too closely related to the applicant company's complaint about the early beginning of the appeal hearings in the 2000 Tax Assessment case, the Court will examine them together below.

As regards the applicant company's allegations that its lawyers could not obtain answers from the Ministry to all the questions they wished to ask in the hearings before the court and that the trial court abruptly interrupted the pleadings of the applicant company's lawyer, the Court finds that these complaints are vague and unspecific and there is nothing in the company's arguments to suggest that the conduct restrictions imposed by the first-instance or appeal court on the company's counsel during the hearings were arbitrary or adversely affected the fairness of the proceedings as a whole. The Court also finds unsubstantiated the applicant company's allegation that the Moscow City Court had given its judgment without having studied the evidence.

The Court observes that under Articles 257 and 259 of the Code of Commercial Court Procedure a party has thirty days to file its appeal (see paragraph 422 above). It further notes that the full text of the first-instance judgment of 26 May 2004 became available to the parties on 28 May 2004 and that, despite the applicant company's requests for adjournment, the appeal hearing in the case commenced on 18 and lasted until 29 June 2004 (see paragraphs 51, 57 and 58).

The Court finds that the beginning of the appeal proceedings on 18 June 2004, that is, twenty-one days after the full text of the first-instance judgment on 28 May 2004 had become available, restricted the applicant company's ability to advance its arguments and, more generally, to prepare for the appeal hearings by shortening the statutory time-limit by nine days. Given the number of the participants, the complexity and magnitude of the case as well as the previous restrictions on the applicant company's ability to study the case at first instance, the Court finds that the applicant company did not have ‘adequate time and facilities for the preparation of [its] defence’ within the meaning of Article 6 § 3 (b) on account of the restricted time for preparation of the appeal hearing. It also finds that the appeal court failed to acknowledge, let alone to remedy the shortcomings committed by the first-instance court as regards the applicant company's restricted access to the case file.

In so far as the Government relied on Article 267 of the Code of Commercial Court Procedure to justify the promptness in question, the Court would again reiterate that the legitimate goal of conducting proceedings at good speed should not have been achieved at the expense of the procedural rights of one of the parties, especially given the lack of any indication of unjustified delays in the proceedings which lasted at the first two instances for only 3 months and 15 days. In any event, the Court is not persuaded by the interpretation of the text of the provision in question suggested by the Government. It would take note of the fact that recently the domestic authorities themselves have found it necessary to modify and explain the provision in question by amending it (see paragraphs 422 and 423). In its present day version the time-limit in question lasts two months rather than one, and starts running only after the expiry of the time-limit for bringing appeals, and not simultaneously to it, as suggested by the Government in its submissions. In addition, the appeal court now has the discretion to increase the term up to six months, depending on the number of the participants and the complexity of the case.

Lastly, in so far as the respondent Government argued that the subsequent examination of the case at the cassation instance had remedied these shortcomings, the Court observes that the cassation hearing took place on 17 September 2004, four months after the disclosure of the evidence and about three months after the appeal hearing which took place between 18 and 29 June 2004. Despite the fact that the company may have had enough time to prepare for the cassation hearing, the cassation court, as a review court, had restricted competence in relation to the assessment of evidence already made by the first-instance and appeal courts (see paragraph 426) and, on the facts, it failed to recognize any shortcomings in the judgments of the lower courts (see paragraph 71).

Overall, the Court finds that the early beginning of the appeal hearing impeded the applicant company's ability to prepare and present properly its case on appeal.

In so far as the applicant company also complained about the alleged delay in providing the reasons for the Appeal Court's judgment in the proceedings in respect of the 2000 Tax Assessment, the Court would note that the applicant company did not complain about the proceedings in cassation as such but rather claimed that, in its situation, effective access to the cassation court was impossible without a stay of enforcement of the appeal decision of 29 June 2004. In this respect, the Court observes that the immediate enforcement of the appeal decision did not prevent the company from lodging its cassation appeal and whilst Article 6 provides an applicant with the right of access to court, it does not guarantee, as such, the right to an automatic stay of enforcement of an unfavourable court decision. The Court would underline that the applicant company in the present case had access to courts of two levels of jurisdiction before any enforcement measures were taken and that the enforcement of the appeal decision of 29 June 2004 did not make it impossible for the applicant company to exercise its right to appeal in cassation, or to pursue further proceedings by way of supervisory review or before the Constitutional Court. The applicant company lodged its cassation appeal and additional submissions on the basis of the reasoned copy of the appeal decision of 29 June 2004 on 7 July 2004 (see paragraph 67). The appeal was accepted for consideration, and on 17 September 2004 its full version was examined and dismissed by the Circuit Court (see paragraph 70). Not only the cassation appeal, but also the request to stay the enforcement of the appeal decision of 29 June 2004 were examined by the domestic courts at two instances and eventually dismissed as unfounded (see paragraphs 127–129).

Overall, the Court concludes that there is no indication of unfairness within the meaning of Article 6 on account of the alleged restrictions on the applicant company's access to the cassation instance.

Having regard to the above, the Court finds that the applicant company's trial did not comply with the procedural requirements of Article 6 of the Convention for the following reasons: the applicant company did not have sufficient time to study the case file at first instance, and the early beginning of the hearings by the appeal court unjustifiably restricted the company's ability to present its case on appeal. The Court finds that the overall effect of these difficulties, taken as a whole, so restricted the rights of the defence that the principle of a fair trial, as set out in Article 6, was contravened. There has therefore been a violation of Article 6 § 1 of the Convention, taken in conjunction with Article 6 § 3 (b).

The applicant company complained that the enforcement proceedings in its case had been unlawful, disproportionate and arbitrary. In particular, it argued that the authorities ought to have allowed the company to settle the debt and that it had been wrong to sell off its main production unit at auction with such speed. The company complained that the courts ought to have intervened and corrected the assessment of this matter by the bailiffs. The authorities should have first considered and accepted its offers of shares in OAO Sibneft, and/or allowed the company to make deferred payments over a prolonged period. As regards such deferred payments, the company submitted that the domestic law and practice gave priority to such a solution and that OAO Rosneft was able to obtain such a deferral in respect of the tax debts of OAO Yuganskneftegaz following the auction of 19 December 2004. The company argued that it could have repaid the debt, entirely or in part, had it not been for the attachment imposed by the court. It further criticised the authorities' failure to act during the twenty-two months following the auctioning of OAO Yuganskneftegaz, as well as the imposition of an unlawful and disproportionate enforcement fee.

The applicant company contended that the seizure had been disproportionate in that the authorities had ordered the applicant company to pay and, at the same time, had frozen the company's assets, which were worth considerably more than the company's then liability. The authorities refused to use the company's equity in the Sibneft company or other realistic means of settling the debt. According to the applicant company, the domestic authorities should have accepted those other realistic means of settlement (letter of 5 July 2004, letter of 9 August 2004, letter of 4 November 2004, letter of 23 March 2006) because they were required to do so by precedent in the practice of the commercial courts. The period of merely a couple of days granted to the applicant company for payment was absurdly short.

The applicant company was also of the view that the sale of OAO Yuganskneftegaz had been unlawful, disproportionate and had resulted in gross undervaluing by means of a clearly controlled auction with the unlawful participation of a sham bidder, OOO Baykalfinansgrup. It disagreed with the decision to sell OAO Yuganskneftegaz, arguing that under the domestic legislation OAO Yuganskneftegaz should have been the last item to be auctioned, and that the auction had been incapable of generating a reasonably good price because of the limited number of candidates, the widespread perception of the need for political support to acquire the item in question and insufficient time for preparation. The applicant company was also dissatisfied with the decision to sell only the voting shares of OAO Yuganskneftegaz, as opposed to all of the shares. The company argued that even though the authorities put no open obstacles in the path of potential buyers, there had been practical obstacles, such as the need for the buyers to comply with internal corporate procedures and to request anti-competition clearance.

More generally, the applicant company viewed the auction as a sham, because OAO Gazprom, OAO Rosneft (both State-owned companies with considerable involvement of State officials in their day-to-day management), the organisers of the auction and the bailiffs were acting in concert. It also relied on interviews by the then President of Russia and argued that the State banks had financed the acquisition and that the State had failed to apply anti-monopoly laws in connection with the auction. The company argued that its actions in the US bankruptcy court had had no effect on the outcome of the auction of OAO Yuganskneftegaz because neither OAO Rosneft nor OOO Baykalfinansgrup had applied for participation before the company filed for bankruptcy in the U.S.

The applicant company argued that the above circumstances showed that the proceedings against it, taken as a whole, were abusive in that the State clearly wanted to destroy the company and to take control of its assets.

As regards its alleged failure to exhaust domestic remedies, the applicant company considered that exhaustion had been unnecessary in view of the lack of prospects of success. The domestic courts consistently rejected the company's attempts to contest the actions of the bailiffs, so other attempts would have been futile. In any event, the company had not contested the valuation report in respect of OAO Yuganskneftegaz, since it was not so materially inaccurate as to be realistically challenged in litigation. Furthermore, the company submitted that it did challenge the entire process by which the voting shares in OAO Yuganskneftegaz were sold to a state-owned company, OAO Rosneft.

The Government submitted that the enforcement proceedings in respect of the applicant company had been lawful and proportionate.

It argued that the company had failed properly to exhaust domestic remedies in respect of this part of the application. In particular, its complaints about the seizure of property pending the enforcement proceedings, the alleged failure of the bailiffs to grant the company access to the case in the enforcement proceedings, the alleged inaction of the bailiffs in respect of the Sibneft's shares, the order to pay a 7% enforcement fee and the circumstances of valuation and sale of OAO Yuganskneftegaz were inadmissible on account of a failure to exhaust domestic remedies.

The Government pointed out that, in the course of the enforcement proceedings, there had been no restrictions on the company's production cycle or the sale of petroleum and mineral oils and that the applicant company had remained fully operational. In view of the State's wide margin of appreciation in the fiscal sphere and the applicant company's abusive conduct, illustrated by its attempts to hinder enforcement action by hiding the register of the shareholders of its three largest subsidiary companies, the Government were of the view that the fair balance between the private and public interests had been struck.

The Government further submitted that the procedure for compulsory recovery of arrears of mandatory tax payments had been used in respect of the applicant company, that such tax payments were recovered by way of charging the company's cash flows on bank accounts, that in the case of insufficient or non-existent funds, the recovery of tax was carried out using the taxpayer's assets and that the whole procedure was described in detail in the domestic legislation and had been followed by the authorities. In the circumstances, the measures represented the control of the use of property and were in full compliance with the Convention.

As regards the seizure of property, the Government referred to the Gasus Dosier and AGOSI cases and considered that, having regard to relevant factors, such as the enormous amount of arrears, the bad-faith conduct of the applicant company and the need for an expedient and efficient recovery of tax to the State budget, the measure in question was in compliance with the requirements of Article 1 of Protocol No. 1. The Government submitted that both the seizure and freezing orders were usual practice, both domestically and internationally, and their use was especially appropriate in the present case because of the unprecedented amounts of the tax debts, the unrepentant and defiant attitude of the applicant company, claims that the authorities' actions were a ‘malicious tax racket’ and the applicant company's history, namely its management and core shareholders moving corporate assets into new shell entities and sometimes into foreign tax havens. These measures were merely precautionary in character.

In respect of the April injunction, the Government disagreed with the applicant company's claim that it could have repaid the debt but for the seizure of its assets. The injunction did not cover either cash or cash revenues and the applicant company did subsequently repay a portion of its debt using the cash in the frozen account. The applicant company could have had the injunction lifted had it provided adequate counter-security, which it failed to do, or liquidated some of its foreign assets not covered by the injunction. The Government maintained that instead of selling its foreign assets to meet its tax debts the applicant company simply stripped them away, which in itself proved that the company's complaint about the injunction was unsubstantiated. As regards the freezing orders, the Government submitted that they had been issued by the bailiffs pursuant to court writs dated 30 June 2004, which froze the company's accounts in Russian banks as of the date of issue of the respective freezing orders. The company could still dispose of cash added to its frozen accounts after 30 June 2004 and could use its non-seized accounts abroad. The funds in these accounts had been far lower than the company's then liabilities. The Government further noted that as of 14 July 2004 the applicant company had still to pay 96.5% of its then liability and that the company's voluntary payment only commenced on 14 July 2004, apparently as a response to the seizure of the shares of OAO Yuganskneftegaz. The very fact that the payments had been made through the frozen accounts demonstrated that the company's allegations about the effects of the cash freezing orders were untrue.

As regards the proposals for respite and payment spread, the applicant company first made such a request on 16 July 2004 by sending a letter to the Ministry of Finance. The Government pointed out that the Ministry of Finance had not been the proper authority to grant these measures as only a commercial court could and that the law set out clear rules regarding the conditions that should have been satisfied so that the request could be granted, i.e. the request should have been made one to six months before the original payment deadline and on specific grounds only, such as the risk of bankruptcy. In addition, the law did not allow for respite and payment spread if there were pending tax proceedings against the taxpayer at issue. The applicant not only failed to substantiate its request with reference to the criteria set out in law, but it was also clear that such a request was bound to fail because of the pending tax proceedings against the applicant company.

The Government relied on the applicable domestic law and cases to demonstrate that asking a guilty taxpayer to pay within one or two days had been standard and lawful practice followed in all cases. They claimed that this period was sufficient, as taxpayers usually learned about tax claims — with a specific indication of the sums to be paid — in the Ministry's audit reports, which were usually served from several weeks to a few months in advance. Thus, in the present case the applicant company had first learned of the Ministry's claims for the years 2000–2003 109, 66, 19 and 18 days in advance. More generally, in such cases the taxpayer usually knew well in advance the sums that had been underpaid (typically during tax evasion), so it cannot claim that it was unprepared. In addition, very similar practices existed internationally.

As to the choice of OAO Yuganskneftegaz as the first item to be auctioned in satisfaction of the company's liabilities, the Government pointed out that the offers made by the applicant company had been unacceptable. The first three offers, made on 22 April, 2 July and 13–14 July 2004, all involved various portions of shares of OAO Sibneft, allegedly owned by the applicant company. All three offers were rejected, not only because the company's ownership of these shares had been contested in various unrelated proceedings by third persons, but also because the offers had been made in violation of injunctions issued by the courts in the above-mentioned unrelated proceedings. In fact, the sale of shares that did belong to the applicant company (some 20%) would have been insufficient to cover the company's then debt, even in part, let alone satisfy the Ministry's upcoming claims for the years 2001–2003. It was a minority stake of uncertain value and any such value was in any event insufficient to satisfy the company's tax arrears. As regards the fourth offer, dated 9 August 2004, it involved 20% of OAO Sibneft and a farrago of shares in fifteen companies (some of them subsidiaries, some of them minority stakes and all of uncertain liquidity). In any event, this offer was ‘too little and too late’ for the Government, since preparation for the auctioning of OAO Yuganskneftegaz had been under way. The above-mentioned ‘shopping list’ did not offer any guarantee of a ‘good chance of fetching a price sufficient to discharge much of [the applicant's] rapidly increasing tax liabilities’ and in addition involved a high risk of third-party claims to the property in question in each case.

The Government maintained that the choice of OAO Yuganskneftegaz was lawful under Russian law, aimed at securing the payment of taxes and had been effected in full compliance with the provisions of the Federal Enforcement Proceedings Act. Under section 54 (2) of the Enforcement Proceedings Act, the sale of the applicant company's property was made by a specialised organisation pursuant to the terms of commission and the relevant legislation. On 18 November 2004 the bailiffs decided to sell 43 shares (76.8%) of OAO Yuganskneftegaz at auction. The Government noted that OAO Yuganskneftegaz was itself the debtor in mandatory payments to the budget totalling RUB 102.09 billion, so that the above arrears inevitably affected the price of the auctioned shares, as defined by the valuation institution and the results of the auction. The date of the auction and invitation to participate in the open auction were published in the mass media in due time. The auction itself was open, both with regard to its participants and to the form of submissions of price bids. Bids were received between 19 November and 18 December 2004. On 19 December 2004 the open auction took place. The winner of the auction was recognised as OOO Baykalfinancegrup, which offered RUB 260,753,447,303.18 for the shares in question. The auction itself was public. The mass media representatives provided extensive media coverage. The results were published in the mass media and broadcast. With regard to the proportionality of the sale, the sum of 260.5 billion roubles generated as a result of the sale did not, however, cover the arrears of OAO Yukos entirely. The Government also underlined that the subsequent bankruptcy was not caused by the sale of OAO Yuganskneftegaz, but had been initiated by a consortium of foreign banks and that the representatives of the applicant company had allegedly acknowledged that the company had been in good financial condition even despite the sale of OAO Yuganksneftegaz. In sum, the Government considered that there had been no breach of the Convention.

The applicant company submitted a number of grievances about these proceedings. In particular, the applicant company complained that the enforcement of the tax liability had been deliberately orchestrated with a view to preventing the applicant company from repaying its debts. In this connection the company maintained that the seizure of its assets pending litigation had prevented it from repaying the debt. It was furthermore dissatisfied that it had been ordered to pay a 7% enforcement fee in respect of the entirety of its debt, that the time for voluntary compliance with the Tax Assessments 2000–2003 had been too short and that the sale of the company's main production unit OAO Yuganskneftegaz had been unlawful, arbitrary and generally disproportionate.

Before turning to the substance of these complaints, the Court reiterates that in its decision on admissibility it joined to the merits the question of exhaustion of domestic remedies. Thus, the Court needs to determine whether the applicant complied with the requirement to exhaust domestic remedies in respect of this part of the application, as required by Article 35 § 1 of the Convention, which, in its relevant parts, provides:

The Court reiterates that the rule of exhaustion of domestic remedies under Article 35 § 1 of the Convention obliges applicants to use first the remedies which are available and sufficient in the domestic legal system to enable them to obtain redress for the breaches alleged. The existence of the remedies must be sufficiently certain both in theory and in practice, failing which they will lack the requisite accessibility and effectiveness. Article 35 § 1 also requires that complaints intended to be brought subsequently before the Court should have been made to the appropriate domestic body, at least in substance and in compliance with the formal requirements and time-limits laid down in domestic law and, further, that any procedural means that might prevent a breach of the Convention should have been used. However, there is no obligation to have recourse to remedies which are inadequate or ineffective (see, for example, Aksoy, 18 December 1996, §§ 51–52, Reports 1996-VI; Akdivar and Others v. Turkey, 16 September 1996, §§ 65 67, Reports 1996-IV; and, more recently, Cennet Ayhan and Mehmet Salih Ayhan v. Turkey, no. 41964/98, § 64, 27 June 2006).

The Court has emphasised that the application of the rule of exhaustion of domestic remedies must make due allowance for the fact that it is being applied in the context of machinery for the protection of human rights that the Contracting States have agreed to set up. Accordingly, it has recognised that Article 35 § 1 must be applied with some degree of flexibility and without excessive formalism. It has further recognised that the rule of exhaustion is neither absolute nor capable of being applied automatically; for the purposes of reviewing whether it has been observed, it is essential to have regard to the circumstances of the individual case. This means, in particular, that the Court must take realistic account not only of the existence of formal remedies in the legal system of the Contracting State concerned but also of the general context in which they operate, as well as the particular circumstances of the applicant. It must then examine whether, in all the circumstances of the case, the applicant did everything that could reasonably be expected of him or her to exhaust domestic remedies (see Akdivar and Others, cited above, § 69; Aksoy, cited above, §§ 53–54; and Tanrıkulu v. Turkey [GC], no. 23763/94, § 82, ECHR 1999-IV).

The Court reiterates that at the admissibility stage of the proceedings the Government claimed that the applicant company had failed to exhaust domestic remedies in respect of the attachment and seizure of its assets pending the enforcement proceedings, the alleged failure by the bailiffs to grant the company access to the case in the enforcement proceedings, the bailiffs' alleged inaction in respect of the Sibneft shares, the orders to pay a 7% enforcement fee and the circumstances of the valuation and sale of OAO Yuganskneftegaz.

Having examined the case file and the parties' submissions, the Court finds that in the part concerning the attachment and seizure of the assets the applicant company properly exhausted the available domestic remedies by raising its grievances before the competent domestic courts. The attachment order of 15 April 2004 was reviewed and upheld by the Appeal Court on 2 July 2004 (see paragraph 92) and was also examined and confirmed by the City Court in its decision of 23 April 2004 in the context of the examination of the company's request of 22 April 2004 (see paragraphs 96–97), and by the City Court and the Appeal Court on 23 April and 2 July 2004 respectively in the context of examination of the company's request for an injunction against the attachment (see paragraphs 101 and 102). The seizure order of 1 July 2004 was reviewed at first instance on 17 September 2004 and in cassation on 2 February 2005 (see paragraphs 116–120). The seizure of OAO Yuganskneftegaz on 14 July 2004 was reviewed by the courts at four instances, on 6, 9 August, 25 October and 17 December 2004 respectively (see paragraphs 137–146). As regards the seizure orders of 14 July 2004 concerning OAO Tomskneft-VNK and OAO Samaraneftegaz, the City Court upheld them by respective judgments of 13 August and 2 September 2004, whilst the Circuit Court confirmed this conclusion by the respective decisions of 5 November 2004 and 18 January 2005 (see paragraphs 147–155).

Admittedly, the applicant company did not complain about the attachment order of 15 April 2004 by way of cassation and omitted the appeal procedure when contesting the seizure of its subsidiaries on 1 July 2004 and the seizure order of 14 July 2004 concerning OAO Tomskneft-VNK and OAO Samaraneftegaz. The Court would note, however, that given the circumstances of the applicant company's tax case, its overall situation at the relevant time, the applicable domestic law and the courts' responses to the arguments put forward by the applicant company in those proceedings, it is clear that both the attachment order of 15 April 2004 and the subsequent seizure orders of 1 and 14 July 2004 have been properly examined and confirmed by the domestic courts at various levels of jurisdictions and it does not appear that the applicant company's complaints in this connection had any additional prospects of success, had the company not omitted the above-mentioned judicial instances.

As regards the complaints about a 7% enforcement fee, the Court observes that the applicant company was ordered to pay this fee for the years 2000–2003. The company's challenge to this fee was examined and dismissed by the courts at three instances only in respect of the year 2000 (see paragraphs 130–134), whilst its complaints about the payment of the fee for the year 2001 were examined only at first instance and in cassation (see paragraphs 177–187). Also, it is not entirely clear whether the applicant company brought court proceedings in respect of the entire amount of the fee for the year 2002 (see paragraphs 200–204) and whether it brought any proceedings against such an order for the year 2003 (see paragraph 221). The Court again finds that, given the similarity of the orders for payment of enforcement fees for the years 2000–2003 and in view of other relevant circumstances such as the applicable domestic law and the courts' answers to the company's arguments in respect of the fee for the year 2000, there is nothing in the Government's submissions to suggest that the applicant company's complaints in this connection would have had any prospects of success had the applicant company appealed against them.

As regards the alleged failure by the bailiffs to grant the company access to the case in the enforcement proceedings and the bailiffs' alleged inaction in respect of the Sibneft shares, the Court notes that the above-mentioned grievances are entirely subsumed by the complaint concerning the method of enforcement of the tax debt and in particular the choice of OAO Yuganskneftegaz as the first asset to be sold in satisfaction of the tax claims. In this connection, the Court would note that the applicant company clearly exhausted the available domestic remedies as regards the seizure and the subsequent measures leading to the eventual sale of OAO Yuganskneftegaz (see paragraphs 137–146), and it is also clear that the relevant domestic law specifically disallowed the courts to rearrange or otherwise postpone the repayment of the debt (see paragraphs 471–477) if there were, as in the case at hand, pending tax proceedings against the debtor. Thus, the applicant company could not have been expected to bring separate court proceedings in this connection. Overall, it is clear to the Court that the applicant company used all the remedies that it could reasonably be expected to use in connection with this part of the application.

Thus, the Court finds that the applicant company has complied with the requirement to exhaust domestic remedies in respect of this part of the application and dismisses the Government's preliminary objection accordingly.

Turning to the substance of the applicant company's complaints, the Court notes that in April 2004, simultaneously with the Tax Assessment proceedings, the domestic authorities initiated enforcement proceedings aimed at securing their tax claims and later recovering the sums awarded by the courts as a result of the examination of these claims. They attached the company's assets located in Russia and later partly froze the company's domestic bank accounts and seized the shares of the applicant company's Russian subsidiaries. On 20 July 2004 it was decided to auction off the company's principal production subsidiary OAO Yuganskneftegaz, in satisfaction of the company's tax liability, which at the time amounted to RUB 106.182 billion (some EUR 3.005 billion). As a result of the proceedings with regard to the Tax Assessments 2001 and 2002, the company's debt to the tax authorities further increased and by the time the auction of OAO Yuganskneftegaz took place in December 2004 the company already owed the tax authorities some RUB 431.259 billion (some EUR 11.061 billion). In addition to the payments resulting from the Tax Assessments 2000–2003, the company was also required to pay the bailiffs a 7% enforcement fee on the overall amount of the debt.

The Court notes that the authorities used a variety of measures in connection with the enforcement of the debt, such as the attachment and freezing orders, the seizure orders, the orders to pay enforcement fees and the compulsory auction procedure. Though each of these measures could be seen as a separate instance of interference with the applicant company's rights under Article 1 of Protocol No. 1, their common and ultimate goal was to force the company to meet its tax liabilities. Accordingly, the appropriate way to analyse this part of the application is to examine the enforcement proceedings in their entirety as one continuous event. The Court further notes that the enforcement measures in question fall to be analysed under the third rule of Article 1 of Protocol No. 1, which allows the member States to control the use of property in accordance with the general interest, by enforcing ‘such laws as [they] deem necessary to secure the payment of taxes or other contributions or penalties’. It follows that the Court's task is to determine whether the State authorities complied with the Convention requirement of lawfulness and, if so, whether they struck a fair balance between the legitimate state interest in enforcing the tax debt in question and the protection of the applicant company's rights set forth in Article 1 of Protocol No. 1.

As regards the lawfulness of the measures in question, the Court has no reason to doubt that throughout the proceedings the actions of various authorities had a lawful basis and that the legal provisions in question were sufficiently precise and clear to meet the Convention standards concerning the quality of law. The attachment, freezing and seizure orders were reviewed by the domestic courts and found to have been lawful. Likewise, the 7% enforcement fee was upheld by the domestic courts and cannot be said to have been selective, given the domestic case-law cited by the Government. As regards the decisions leading to the forced sale of OAO Yuganskneftegaz at auction and the auction process itself, the Court notes that they too were reviewed and upheld by the domestic courts as lawful (see paragraphs 263 and 265) and there is nothing in the case file or the parties' submissions to cast doubt on these conclusions. The only question that remains is whether the enforcement measures were proportionate to the legitimate aim pursued.

In this connection the Court would reiterate that its task is to determine whether a fair balance was struck between the demands of the general interest of the public and the requirements of the protection of the individual's fundamental rights. It finds it natural that in the tax sphere the Contracting States should enjoy a wide margin of appreciation in order to implement their policies. Nevertheless, the Court cannot fail to exercise its power of review and must determine whether the requisite balance was maintained in a manner consonant with the applicant company's right to ‘the peaceful enjoyment of [its] possessions’, within the meaning of the first sentence of Article 1 of Protocol No. 1.

At the outset the Court notes the background to this case and, in particular, the fact that the applicant company was one of the largest taxpayers in Russia and that it had been suspected and subsequently found guilty of running a tax evasion scheme, committed consecutively in 2000–2003. From the parties' submissions and the case file it seems clear that the applicant company had no cash funds in its domestic accounts to pay its tax debts immediately, and in view of the nature and scale of the debt it was unlikely that any third party would agree to assist the company with a loan or some form of security. Regard being had to the scale of the tax evasion, the sums involved for the years 2000–2003, the fact under domestic law that they were payable almost at once after the production of the respective execution writ (see paragraph 471), and even taking into account the Court's previous findings in respect of the fines for the years 2000 and 2001, it was questionable whether at the time when the authorities decided to seize and auction OAO Yuganskneftegaz the company was at all solvent within the meaning of section 3 of the Insolvency (Bankruptcy) Act, which generally expected the solvent debtor to repay its debts ‘within three months of the date on which compliance should have occurred’ (see paragraph 496).

In view of the above considerations, the Court finds that the crux of the applicant company's case did not lay in the attachment of its assets and cash as such, but rather and essentially in the speed with which the authorities demanded the company to pay, in the decision which had chosen the company's main production unit, OAO Yuganskneftegaz, as the item to be compulsorily auctioned in the first instance, and in the speed with which the auction had been carried out.

Given the paramount importance of the measures taken by the authorities to the applicant company's future, and notwithstanding the Government's wide margin of appreciation in this field, the Court is of the view that the authorities were obliged to take careful and explicit account of all relevant factors in the enforcement process. Such factors were to include, among other things, the character and the amount of the existing debt as well as of the pending and probable claims against the applicant company, the nature of the company's business and the relative weight of the company in the domestic economy, the company's current and probable economic situation and the assessment of its capacity to survive the enforcement proceedings. Furthermore, the economic and social implications of various enforcement options on the company and the various categories of stakeholders, the attitude of the company's management and owners and the actual conduct of the applicant company during the enforcement proceedings, including the merits of the offers that the applicant company may have made in connection with the enforcement were to be properly considered.

The Court notes that the authorities examined and made findings in respect of some of these factors (see, for instance, the findings in respect of the offers of shares in OAO Sibneft in paragraph 124 or the findings in respect of request for payment spread in paragraph 157), but it is clear that at no point in the enforcement proceedings did they make an explicit assessment in respect of all of them. In particular, neither the seizure order of 14 July 2004, which set in motion the process of auctioning OAO Yuganskneftegaz (see paragraph 137), nor any of the subsequent decisions, including the judicial decisions in the context of the company's complaints against the actions of the bailiffs (see paragraphs 137–158), mentioned or discussed in any detail possible alternative methods of enforcement and the consequences that they might have on the future of the company.

The Court finds this aspect of the enforcement proceedings of utmost importance when striking a balance between the interests concerned, given that the sums that were already owed by the company in July 2004 made it rather obvious that the choice of OAO Yuganskneftegaz as the first item to be auctioned in satisfaction of the company's liability was capable of dealing a fatal blow to its ability to survive the tax claims and to continue its existence.

The Court accepts that the bailiffs were bound to follow the applicable domestic legislation which might limit the variety of options in the enforcement procedure. Nonetheless, the Court is of the view that, notwithstanding these constraints, the bailiffs still had a decisive freedom of choice, the exercise of which could either keep the company afloat or eventually lead to its demise. Although the Court, in principle, does not find the choice of OAO Yuganskneftegaz entirely unreasonable, especially in view of the overall amount of the tax-related debt and the pending as well as probable claims against the company, it is of the view that before definitively selecting for sale the asset that was the company's only hope of survival, the authorities should have given very serious consideration to other options, especially those that could mitigate the damage to the applicant company's structure. This was particularly so since all of the company's domestic assets had been attached by previous court orders (see paragraph 27), and were readily available, the company itself did not seem to have objected to their sale (see paragraph 159) and there had been virtually no risk of the company seriously opposing these actions.

The Court further notes one other factor which seriously affected the company's situation in the enforcement proceedings. The applicant company was subjected to a 7% enforcement fee in connection with the entire amount of its tax-related liability, which constituted an additional hefty sum of over RUB 43 billion (EUR 1.16 billion), the payment of which could not be suspended or rescheduled (see paragraphs 484–486). This was a flat-rate fee which the authorities apparently refused to reduce, and these sums had to be paid even before the company could begin repaying the main body of the debt (see paragraph 484). The fee was by its nature unrelated to the actual amount of the enforcement expenses borne by the bailiffs. Whilst the Court may accept that there is nothing wrong as a matter of principle with requiring a debtor to pay for the expenses relating to the enforcement of a debt or to threaten a debtor with a sanction to incite his or her voluntary compliance with enforcement writs, in the circumstances of the case the resulting sum was completely out of proportion to the amount of the enforcement expenses which could have possibly been expected to be borne or had actually been borne by the bailiffs. Because of its rigid application, instead of inciting voluntary compliance, it contributed very seriously to the applicant company's demise.

Lastly, the Court would again emphasise that the authorities were unyieldingly inflexible as to the pace of the enforcement proceedings, acting very swiftly and constantly refusing to concede to the applicant company's demands for additional time. Admittedly, this rigidity may have resulted at least in part from the relevant requirements of the domestic law (see paragraphs 471, 481 and 489). Nevertheless, the Court finds that in the circumstances of the case such lack of flexibility had a negative overall effect on the conduct of the enforcement proceedings against the applicant company.

On the whole, given the pace of the enforcement proceedings, the obligation to pay the full enforcement fee and the authorities' failure to take proper account of the consequences of their actions, the Court finds that the domestic authorities failed to strike a fair balance between the legitimate aims sought and the measures employed.

To sum up, the Court concludes that there has been a violation of the applicant company's rights under Article 1 of Protocol No. 1 on account of the State's failure to strike a fair balance between the aims sought and the measures employed in the enforcement proceedings against the applicant company.

The applicant company argued that the circumstances of the tax assessment and enforcement proceedings as well as the allegedly ‘political’ motivation behind the prosecution of Mr M. Khodorkovskiy and other owners and senior officials of the applicant company showed that the proceedings against it, taken as a whole, were abusive in that the State clearly wanted to destroy the company and to take control of its assets.

The Government disagreed, having maintained that tax assessment and subsequent enforcement proceedings had been lawful and regular and that the applicant company's demise was the direct result of its carrying out over many years a gigantic tax fraud.

The Court reiterates that Article 18 of the Convention does not have an autonomous role. This provision can only be applied in conjunction with the Convention provisions protecting substantive rights. It also follows from the terms of Article 18 that a violation can only arise where the right or freedom concerned is subject to restrictions permitted under the Convention (see, for example, Gusinskiy v. Russia, no. 70276/01, § 73, ECHR 2004-IV). The Court further notes that in order to hold a member State liable under this provision an applicant should be able to furnish the Court with an incontrovertible and direct proof in support of his or her allegations.

The Court would observe that in its previous analysis under Article 6 of the Convention and Article 1 of Protocol No. 1 it has already addressed the applicant company's points about the nature of its debt to the authorities, and in particular the merits of the 2000–2003 Tax Assessments proceedings. Despite the fact that it found a violation of Article 6 of the Convention on account of the speed with which the courts had conducted the proceedings in the 2000 Tax Assessment case and a violation of Article 1 of Protocol No. 1 on account of the interference by the Constitutional Court with the outcome of the 2000 Tax Assessment case in the part relating to penalties, the Court rejected the applicant company's claims that the company's debt had been recognised as a result of an unforeseeable, unlawful and arbitrary interpretation of the domestic law (see paragraphs 605 and 616). The Court also recognised the right of the State to enforce, as such, the court judgments, but reached conclusions concerning the handling of the enforcement proceedings by the domestic authorities which lead to the finding of a violation of Article 1 of Protocol No. 1. In view of these findings, the Court will proceed on the assumption that the company's debt in the enforcement proceedings resulted from legitimate actions by the respondent Government to counter the company's tax evasion and the burden of proof would accordingly rest on the applicant company to substantiate its allegations.

Regard being had to the case file and the parties' submissions, including the applicant company's references to the allegedly political motivation behind the prosecution of the applicant company and its owners and officials, the Court finds that it is true that the case attracted massive public attention and that comments of different sorts were made by various bodies and individuals in this connection. The fact remains, however, that those statements were made within their respective context and that as such they are of little evidentiary value for the purposes of Article 18 of the Convention. Apart from the findings already made earlier, the Court finds no indication of any further issues or defects in the proceedings against the applicant company which would enable it conclude that there has been a breach of Article 18 of the Convention on account of the applicant company's claim that the State had misused those proceedings with a view to destroying the company and taking control of its assets.

To sum up, the Court finds that there has been no violation of Article 18 of the Convention, taken in conjunction with Article 1 of Protocol No. 1, on account of the alleged disguised expropriation of the company's property and the alleged intentional destruction of the company itself.