It’s no secret that most large business assets are owned by companies with complex corporate structures, which makes it difficult to prove the connection between the asset and the ultimate beneficiary. This problem is particularly relevant for assets owned by sanctioned oligarchs in Ukraine.
The practice of the High Anti-Corruption Court of Ukraine (HACC) in confiscating these assets in connection with the application of sanctions clearly shows that since 2014, the Russian owners have been actively concealing the fact of ownership of Ukrainian assets.
The methods included transferring assets to non-resident companies, transferring such assets to nominee owners, distributing and reducing their shares, and using business partners that were not subject to sanctions as a cover.
However, the main obstacle to the recovery of such assets is, at first glance, quite simple cases where the Ukrainian asset is fully owned by a non-resident company, part of which (sometimes a very small part) is owned by a person subject to sanctions.
Since the jurisdiction of Ukrainian courts is limited to the territory of the state, they do not have the authority to seize shares, for example, 9% of the interest owned by a sanctioned person in a company registered, for example, in Belize. Similarly, the court cannot confiscate the entire asset located in Ukraine, as the remaining 91% is owned and controlled by non-sanctioned persons.
This problem is vividly illustrated by the decision of the High Anti-Corruption Court of Ukraine (HACC) in case No. 991/8725/23 dated January 23, 2024. n it, the HACC imposed a sanction in the form of forfeiture (confiscation) of assets belonging to Russian oligarch Eduard Khudainatov
Regarding the identity of the defendant and the grounds for imposing sanctions.
Khudainatov is best known to the public as the owner of the 140-meter yacht Scheherazade, worth approximately $700 million, which is considered to be Vladimir Putin’s personal yacht. Previously, he worked for a long time as President and Deputy President of Rosneft, and following his departure founded his own corporate group, Independent Oil and Gas Company (IOG), which produces significant volumes of oil and oil products in Russia.
IOG acts as a key instrument for redistributing financial flows from Rosneft to private interests. Due to his proximity to Putin and his ties to the state-owned oil and gas sector in Russia, Khudainatov has been under Ukrainian sanctions since 2022, according to the decision of the National Security and Defense Council (based on Paragraphs a and b of Clause 2 of Part 1 of Article 5-1 of the Law of Ukraine “On Sanctions”)[1].
On October 4 last year, the Ministry of Justice of Ukraine filed a lawsuit with the High Anti-Corruption Court seeking to recover his assets in Ukraine. On January 23 this year, the HACC found that IOG, owned by Khudainatov, had paid taxes to the Russian Federation in the amount of UAH 4,502,373,506 during the three quarters of 2022 and 2023, which is 112 times higher than the threshold set by Article 5-1 of the Law for imposing sanctions.
In addition, the Court found that the companies controlled by Khudainatov supplied paramilitary, law enforcement and security agencies of the Russian Federation with fuel and lubricants worth more than RUB 1.5 billion, thereby contributing to the aggression against Ukraine.
As a result, the HACC partially granted the claim and ruled to confiscate 100% of the share in the authorized capital of the LLC Naftova Companya Alliance-Ukraina in favor of the state, in the amount of UAH 447,604,842.76.
Although the Court had no doubts as to the grounds for imposing this sanction on Khudainatov and the ownership of the property in question, the comments made by the Court in considering those parts of the claim of the Ministry of Justice that were dismissed are particularly interesting and important.
Regarding the assets of SHELL
One of the assets sought to be confiscated by the Ministry of Justice was Alliance Holding LLC, which owns a network of 132 gas stations in Ukraine operating under the SHELL brand. Representatives of the government requested the Court to rule on the recovery in favor of the state of a 49% share in the authorized capital of Alliance Holding LLC, which is 100% owned by the Dutch company Cicerone Holding BV.
During the consideration of this part of the case, the HACC established that Eduard Khudainatov, through a chain of other companies, owns 100% of the shares of the Maltese company Todwick, which, in turn, owns 49% of the shares of Cicerone Holding BV. Shell Overseas Investments B.V. owns the remaining 51% of the shares[2].
In 2022, there were events that further affected the size of shares of SHELL and the defendant. Due to the full-scale aggression of the Russian Federation, Alliance Holding LLC faced a critical cash shortage. Shell Overseas Investments B.V. received permission through a court in Amsterdam to adopt certain decisions without the consent of another shareholder, Todwick Khudainatov.
Subsequently, Shell Overseas Investments B.V., on the basis of an agreement with Cicerone Holding B.V., contributed additional funds to the latter’s authorized capital in exchange for additional shares. As a result, Todwick’s share decreased from 49% to 2.56%.
In its lawsuit in this part, the Ministry of Justice sought to recover a 2.56% share in the authorized capital of Alliance Holding LLC for the benefit of the state. However, it is not the amount of property to be recovered that is interesting, but the approach to the recovery procedure.
Regarding the existing mechanisms for the recovery of shares in non-resident companies in favor of the state.
Although the Ministry of Justice sought to recover a 2.56% share in the authorized capital of Alliance Holding LLC, the Russian oligarch did not own this share in the Ukrainian company, but in the Dutch company Cicerone Holding BV.
However, the recovery of a share proportional to the oligarch’s share in the parent company would not fully solve the problem of his ownership in Ukraine.
Even if only 2.56% of the authorized capital of Alliance Holding LLC were confiscated, Cicerone Holding BV would still own 97.44% of the company. Thus, through the Dutch company, the oligarch would have retained most of his property, while a bona fide third party, Shell Overseas Investments B.V., would have suffered losses.
This is the exact position taken by the HACC in dismissing the claim of the Ministry of Justice in this part. The Court rightly noted that “granting the claim in this part, without an available mechanism of compensation, will lead to Shell having to defend its rights in litigation against Ukraine, which the company is likely to win, which will lead to an additional burden on the budget and excessive burdening of a bona fide owner to protect its rights”.
However, the filing of such a lawsuit by the state gave the HACC reason to draw important conclusions about this situation.
Prospects for resolving the problem.
In its decision, the HACC panel of judges noted that:
“It would have been possible to grant the claim against Alliance Holding LLC if the law provided for compensation of third parties for the loss of property rights.
In particular, one of such mechanisms would be a legislative possibility for a court to recover 100% ownership of a Ukrainian asset and, under certain conditions, to recognize the ownership of third parties in proportion to their share in a foreign jurisdiction.”
Essentially, the Court proposed a project to improve the mechanism of recovery in favor of the state, which would make it possible in this and other similar cases to completely seize the property of sanctioned persons without violating the rights of third parties.
For this purpose, it is necessary to authorize the HACC to seize Ukrainian assets and, by the same decision, to return the share in such assets to third (non-sanctioned) parties or award compensation in their favor.
The position of the HACC and the vision set out in the decision largely overlap with the vision of compensation mechanisms of the Dnistrianskyi Center experts, set out in particular in the analytical report “Confiscation of Russian Assets: Experience of Ukraine and Allies (January – September 2023)”.
In the circumstances of this case, if the HACC had such powers, it could have recovered 100% of the authorized capital of Alliance Holding LLC in favor of the state and in the same decision recognized the ownership of a share of 97.44% of the authorized capital of Alliance Holding LLC in favor of Shell Overseas Investments B.V., bypassing Cicerone Holding BV. Thus, the Russian oligarch would lose an asset in Ukraine, and the ownership of Shell Overseas Investments B.V. would only slightly change the structure (see the diagram below).
Undoubtedly, the application of such a mechanism in practice will give rise to new challenges. For example, the entity from which the property was seized (in this case, Cicerone Holding BV) will formally have the right to claim compensation for the losses incurred. However, such issues can be resolved by creating appropriate legislative safeguards and a careful approach of the court to analyzing the circumstances of each case.
As a result, this mechanism would allow for the targeted seizure of all assets of sanctioned persons, regardless of which country their share of ownership is hidden in, and would adhere to the principle of fairness to bona fide third-party owners.
[1] “assistance to armed aggression against Ukraine, occupation/annexation of the territory, which according to the Constitution of Ukraine is a part of Ukraine, in particular, by supplying other means and instruments of armed aggression against Ukraine” and “financing or logistical support of the activities of the aggressor state related to armed aggression against Ukraine or occupation/annexation of its territories, in particular, by paying taxes and fees to the state budget of the aggressor state, if the total amount of such payments (except for customs) for the last four consecutive tax (reporting) quarters exceeds the equivalent of UAH 40 million for a legal entity, determined at the weighted average official exchange rate of the National Bank of Ukraine for the same period.”
[2] More specifically, Cicerone is the sole founder of Bogstone Holding B.V. (the Netherlands). These companies are the founders of Alliance Holding LLC: “Cicerone – 99.9999% (authorized capital of UAH 552,726,929.15) and Bogstone Holding B.V. – 0.0001% (authorized capital of UAH 570.85). For the sake of simplifying the analysis, the share of Bogstone Holding B.V. will not be taken into account.
Published: Dnistrianskyi Centre, February 2024
Author: Markiyan Bem, Partner at Nazar Kulchytskyy & Partners