Neutral Citation Number: [2005] EWHC 1321 (Ch)
Case No: HC 05 C0 12 19
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 24 June 2005

Before :

THE HON. MR. JUSTICE EVANS-LOMBE
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Between :

	BNP PARIBAS S.A. & ors	Claimants	
	
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	YUKOS OIL COMPANY	Defendant	

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Michael Briggs QC / David Alexander (instructed by Clifford Chance) for the Claimants
John Brisby QC / Peter Griffiths (instructed by Reid Minty LLP) for the Defendant

Hearing date: 17th June 2005
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Judgment

The Hon. Mr. Justice Evans-Lombe : 

1.	On Friday 17th June 2005 as applications judge I had to deal with an application to adjourn proceedings under CPR 24 for summary judgment in a claim for monies lent by a syndicate of 13 banks (“the Banks”) against the defendant Yukos Oil Company (“Yukos”) amounting to $472,787,663.10.  Amongst the Banks Société Générale S.A. acted as Coordinating Bank and Facility Agent.  I will refer to that bank as “the Facility Agent”.  Yukos is an open joint stock oil company organised under the laws of the Russian Federation (“Russia”).  Yukos is one of a group of companies carrying on a business, primarily in Russia, but with operations and interests outside Russia, for the production and sale of crude oil and refined oil products.
2.	The application to adjourn was made on the first hearing of the proceedings for summary judgment.  At the commencement of the hearing it was accepted on behalf of Yukos that as matters stood and without further evidence filed on behalf of Yukos, the Banks were entitled to judgment.  The hearing was thus primarily concerned with an inquiry as to whether, if the proceedings were adjourned, Yukos would be able to deploy a defence to the claim which had a real prospect of success within CPR 24.2(a)(ii).  In the result I concluded that Yukos would not be able to do so.  I declined to adjourn the proceedings and gave summary judgment for the Banks.  Because this position was reached late in the afternoon and there were further matters in the applications list I said I would give my reasons for arriving at such conclusion later.  These are those reasons.
3.	The sum claimed by the Banks was advanced pursuant to a loan agreement (“the Loan Agreement”) dated the 23rd September 2003.
4.	As set out at paragraph 7 of the particulars of claim, by clause 15 of the Loan Agreement, Yukos represented and warranted, among other things, as follows:-
“(1)	That no member of the Core Group had taken any corporate action, nor had any other steps been taken or legal proceedings been started or (to the best of its knowledge and belief) threatened against any member of the Core Group, for or which might result in any Insolvency Proceedings (subject to one specified exception) or Russian Bankruptcy Proceedings (as defined in clause 1.1): Clause 15.18; 
(2)	That no litigation arbitration action or administrative proceedings of or before any court, arbitral tribunal or agency (including, but not limited to, investigation proceedings) had been started or (to the best of its knowledge and belief) threatened against it where this had a Material Adverse Effect or if adversely determined would or might reasonably be expected to have a Material Adverts Effect: Clause 15.20; and
(3)	That since the date at which the original Financial Statements (as defined in clause 1.1) were started to be prepared, there had been no change in the business condition (financial or otherwise), prospects or operations of any member of the group which had or might have a Material Adverse Effect: Clause 15.22.”
5.	Two of the three definitions of “Core Group” contained in clause 1.1 are as follows:-
“Core Group means each of:
(a)	Borrower [Yukos] (including in its capacity as the Exporter), Energotrade and the Core Production Subsidiaries;
(b)	Each other member of the Group that owns (5)% or more of the assets of the Group….”
6.	“Group” is defined as follows:-
“Group means, at any time, each of the Borrower and each entity at that time included in the consolidated US GAAP financial statements of the Borrower (including at all times Energotrade, the Core Productions subsidiaries, the Trader and the Trader’s Agent).”
7.	“Material Adverse Effect” is defined as:-
“… in the opinion of an Instructing Group [the Banks] a Material Adverse Effect on:
(a)	The business, condition or production or export capacity of the Group taken as a whole;
(b)	The ability of any of the Offtakers, the Borrower (including in its capacity as the Exporter), Energotrade, the Trader and the Trader’s Agent to perform its obligations under any of the Finance Documents; or
(c)	The legality, validity or enforceability of any of the Finance Documents or the rights or remedies of any of the Finance Parties under any of the Finance Documents.”
8.	As set out at paragraph 10 of the particulars of claim, clause 19 of the Loan Agreement set out the various circumstances constituting Event of Default upon the declaration of which the whole of the amount outstanding under the Loan Agreement would become repayable.  These included the following:
(1)	If Yukos fail to pay any sum due from it under the Loan Agreement (with certain exceptions which provided for payment in any event within 30 days): Clause 19.1.
(2)	If Yukos fail to perform or comply with any obligation under the Finance Documents: Clause 19.3.
(3)	If any representation or statement made or deemed to be made in any Finance Document or in any notice or other document signed by an Authorised Signatory and in each case delivered by the relevant person pursuant to the Finance Documents or in connection therewith was or proved to be incorrect or misleading in any material respect when made or deemed to be made: Clause 19.4;
(4)	If any member of the Core Group was unable, or admitted its inability, to pay its debts or suspended making payment on any of its debts and/or if the value of the assets of any member of the Core Group was less than the amount of its liabilities (taking into account its contingent and prospective liabilities): Clause 19.6;
(5)	If any corporate action or any other steps were taken or legal proceedings started or threatened against any member of the Core Group for or which might (in the reasonable opinion of an Instructing Group) reasonably be expected to result in any Insolvency Proceedings (subject to one specified exception) or any Russian Bankruptcy Proceedings (as defined in Clause 1.1): Clause 19.7;
(6)	If, at anytime, any of the Transaction Security (as defined in Clause 1.1) became subject to any prior ranking or pari passu ranking Encumbrance: Clause 19.25; and
(7)	If any event or circumstance occurred which (in the reasonable opinion of an Instructing Group) had or might reasonably be expected to have a Material Adverse Effect: Clause 19.27.
9.	By Clause 38 of the Loan Agreement the law governing that agreement was made English law.  Clause 39 contained provisions for arbitration but which could be displaced if the Facility Agent, before the appointment of an arbitrator, by notice to the parties required the dispute to be referred to a court.  Clause 40.1 conferred on English courts exclusive jurisdiction to settle such disputes.
10.	Between paragraphs 18 and 63 of the particulars of claim there is set out a summary of the background facts leading up to the claim.  I do not understand that summary to be challenged as inaccurate and for the sake of brevity I will not set it out in this judgment but will here set out a summary of the most important events as described in that summary. 
11.	On the 20th October 2003 the Russian Ministry of Natural Resources (“the MNR”) set up a special commission to inquire into Russian oil companies.  On the 25th October Mr Khodorkovsky, the Chief Executive officer of Yukos was arrested and on the 3rd November resigned from Yukos.  On the 6th November the MNR announced that it was considering revoking Yukos’ licences for the exploitation of Russian oil reserves.  On the 18th December Standard and Poor’s downgraded Yukos’ credit rating.  On the 29th December the Russian Tax Ministry fixed Yukos’ tax liability for the year 2000 at $3.3Bn.  On the 14th April 2004 the Tax Ministry claimed that tax from Yukos.  On the 15th April the Moscow Arbitrazh Court made an order freezing the assets of Yukos.  On the 22nd April Standard and Poor’s further downgraded Yukos’ credit rating.  On the 23rd April the Facility Agent gave notice in writing to Yukos that it considered that a potential Event of Default had occurred in relation to clauses 19.4 (with particular reference to clauses 15.20 and 15.22) and 19.27 of the Loan Agreement.  On the 27th May Yukos issued a press release saying that it anticipated that claims for tax would be made in respect of the years subsequent to the year 2000 referring to the possible bankruptcy of Yukos as a result. As set out at paragraphs 47 and 48 of the particulars of claim:-
“47.	On 8 June 2004, the Facility Agent sent a letter by fax to Yukos stating, among other things as follows:
“As indicated in our letter to you of 28 May, the Lenders are extremely concerned about the implications of recent developments relating to the $3.3 bn tax claim and the Sibneft share purchase ... and the resultant deterioration in the financial condition and prospects of the Group.
The Lenders therefore request [Yukos] to explain why the Lenders should not consider such recent developments to amount to a material and adverse change in the position of [Yukos].  Additionally, the Lenders wish to understand [Yukos]'s plans for resolving matters if [Yukos] does not succeed with its appeal of the recent court decision on the $3.3 billion tax claim, and/or further claims or proceedings are brought against [Yukos] for other years, as anticipated by [Yukos] in its press release.”
48.	On 17 June 2004, Yukos sent a letter by fax to the Facility Agent in which, among other things, Yukos:
(1)	stated that it appreciated that the Lenders were extremely concerned about the recent developments relating to the tax claim and the Sibneft share purchase; and
(2)	acknowledged that the matters highlighted in the Facility Agent's letter could, “if adversely determined and in a worse case scenario”, have a serious impact on Yukos.”
12.	On the 29th June 2004 the Moscow Arbitrazh court gave judgment against Yukos for the tax due for the year 2000.  On the 1st July a process of execution of that judgment started.  On the 2nd July 2004 by letter of that date the Facility Agent declared an Event of Default in the following terms:-
“Event of Default
We write to you in our capacity as Facility Agent under the above loan agreement (the “Loan Agreement”). Terms defined in the Loan Agreement shall, unless otherwise defined in this letter, have the same meanings in this letter, and the principles of construction set out in the Loan Agreement shall have effect as if set out in this letter.
The Lenders have determined, by unanimous vote, that an Event of Default has occurred under Clause 19.27 (Material Adverse Change) of the Loan Agreement.
We hereby give you notice, at the instruction of an Instructing Group, that an Event of Default has occurred under Clause 19.27 (Material Adverse Change) of the Loan Agreement.
The Lenders also consider an Event of Default to have occurred under the following Clauses of the Loan Agreement (without limitation):
1.	Clause 19.3 (Other Obligations) (with further reference to 18.5 (Negative Pledge) of the Loan Agreement, and to Clause 9.3 (Negative Pledge) of each of the Exporter Pledge of Rights to Rouble Accounts and the Exporter Pledge of Rights to Dollar Accounts);
2,	Clause 19.4 (Misrepresentation) (with further reference to Clause 15.18 (No Insolvency Proceedings), Clause 15.20 (No Material Proceedings) and Clause 15.22 (No Material Adverse Change));
3.	Clause 19.6 (Insolvency);
4.	Clause 19.7 (Insolvency Proceedings); and
5.	Clause 19.25 (Transaction Security).
We write on the instructions of an Instructing Group to notify you, pursuant to Clause 19.28 (Acceleration and Cancellation) of the Loan Agreement, that, on the basis of the above Events of Default, both Loans shall hereafter be due and payable on demand of the Facility Agent.”
13.	Yukos’ response is contained in the letter of the 5th July signed by Mr Bruce Misamore, its chief financial officer which contested that an event of default occurred in the following terms:-
“However, please note that we do not as a matter of technical analysis agree that Events of Default have occurred as outlined in the Default Notice. Adopting the numbering used in the Default Notice:
1.	Clause 19.3 (Other obligations) (referring to the various negative pledge clauses): the negative pledge clauses are not intended to cover a situation in which the assets of a company are frozen, but rather, to cover a situation in which a Group member voluntarily creates a security over its assets or allows such security to subsist. In our view, a freeze over the assets of the Borrower does not fall within the scope of the definition of “Encumbrance”, each limb of which assumes some form of agreement or consent on the part of the entity granting or permitting that Encumbrance. Further, even if an Encumbrance were currently in existence over the relevant assets, no member of the Group has created it, granted it or permitted it to subsist. On the contrary, the Borrower is doing everything in its power to resist and remove the current freeze over its assets.
2.	Clause 19.4 (Misrepresentation): at the time of the most recent repetition of the representations, there had not in our view been any steps taken or proceedings commenced or threatened against the Borrower or the Core Group which would amount to Insolvency Proceedings, or which would fall within the scope of Clause 15.20 (No Material Proceedings). In relation to clause 15.22 (Material Adverse Change), we do not accept that a material adverse change has occurred to date, and certainly do not accept that such a change had occurred at the time of repetition of the representation. We refer you to our previous correspondence and to paragraph 6 below in relation to this.
3.	Clause 19.6 (Insolvency): we do not consider that any of the limbs of this clause currently apply to the Borrower. In particular, we do not believe the Borrower to be unable to pay its debts. The tax judgment against the Borrower is still subject to appeal, and is not therefore a valid debt. Further, should the Borrower be allowed to access its assets, those assets are more than sufficient to pay the full amount of the tax judgment.
4.	Clause 19.7 (Insolvency Proceedings): again, we do not agree that any legal proceedings have been started or threatened that might reasonably be expected to result in any Insolvency Proceedings or Russian Bankruptcy Proceedings. The current tax claim proceedings remain subject to appeal, and, as outlined in our previous correspondence, our position is that the tax claim is legally without merit and that we have legitimate expectations (assuming that the law is correctly applied) of being successful in our appeals.
5.	Clause 19.25 (Transaction Security): could you please explain the way in which you consider this clause to have been breached.
6.	Clause 19.27 (Material Adverse Change): we do not agree that a Material Adverse Effect has occurred, The first limb of the definition of Material Adverse Effect relates to the Group taken as a whole. While we acknowledge that (as pointed out in your letter of 28 June) events having a serious impact on the Borrower may also have a serious impact on the Group, the fact remains that the current tax claim and asset freeze relates solely to the Borrower. As outlined in our previous correspondence, rather than having been adversely affected, the Group's business and financial condition are currently improving due to high oil prices.
The second limb of “Material Adverse Effect” relates to the ability of the Borrower to perform its obligations under the Finance Documents. Again, as discussed in our previous correspondence, the current difficulties of the Borrower are related only to the tax claim, against which we will continue to appeal and which appeals we can reasonably expect as a matter of law to win.
We accept that you have formed a view in relation to the above matters, but wish to note that we do not agree with that view.”
14.	On the 25th February 2005 Yukos filed for Chapter XI Bankruptcy in the USA which was later dismissed.  On the same day the Facility Agent, relying on the notice of default of the 2nd July 2004, demanded from Yukos $525.8M later reduced by set off to $472.7M.  On the 31st March Yukos made its first default under the Loan Agreement, defaulting in payment of a monthly instalment of interest.  On the 26th April the Facility Agent gave a notice pursuant to Clause 39 and 41 referring the Bank’s claim for adjudication in this court.  On the 29th April Yukos made a further default in payment of an instalment of interest.  On the 10th May, without prejudice to the notice of default of the 2nd July and the subsequent demand for payment, the Facility Agent made a further demand for the same amount but under Clause 19.1 of the Loan Agreement namely failure to pay an amount becoming due under that agreement.
15.	Mr Brisby on behalf of Yukos submitted that Yukos had an arguable defence based on the principle found in the case of Stirling v Maitland (1864).5 B&S. 840 that the court will not permit a claimant to benefit from the result of its own wrongful act.  He submitted that the notice of default of the 2nd July 2004 was wrongful because the Events of Default alleged in it had not actually taken place.  He submitted that his instructing solicitors who had only been instructed since the 25th May 2005 would be able to file evidence demonstrating that the effect of the 2nd July notice of default undermined Yukos’ financial standing so that it was unable to raise the money with which, inter alia, to pay the instalment of interest, default in payment of which produced an incontestable Event of Default under clause 19.1.  He submitted that that evidence would show that Yukos had assets outside Russia free from the Russian court’s freezing order which could have been, and which still could be, exploited to raise money with which to make payments under the Loan Agreement as they became due.
16.	It is apparent therefore that two questions are fundamental to the proposed defence.  The first question is whether the Events of Default alleged in the 2nd July 2004 letter from the Facility Agent to Yukos actually took place.  The second question is whether, even if it is established that they did not and that in the result the 2nd July notice of default was ineffective as a basis for the demand for payment of the 25th February 2005, on the authorities that fact does not preclude the Banks from relying on Yukos’ admitted default in payment under clause 19.1 by failing to pay the instalments of interest on due date.
17.	Mr Brisby’s contentions on the first question involve a detailed analysis of the provisions of the Loan Agreement and, in particular, on the effect of the definition of “Material Adverse Effect” in clause 1.1.  In particular he draws attention to the requirement of sub-clause (a) of the definition that the adverse effect of any event must be shown to have had effect on the “capacity of the Group” that is, the totality of the commercial operation involving other companies whose capacity, inter alia, to make payment his intended evidence may show was not materially affected.  In consequence he submits the opinion of the Banks will be shown to have been unreasonable.
18.	Mr Brisby’s submissions overlooked the presence of sub-paragraph (b) in the definition of “Material Adverse Effect” which specifically singles out “the Borrower” that is Yukos, as a separate entity in respect of which an “Instructing Group” could form the view that events had had “a Material Adverse Effect on its ability … to perform its obligations under any of the Finance Documents”.   The Loan Agreement is one of the documents comprised in the definition of “Finance Documents”.  
19.	It seems to me that there can be no reasonable prospect that Yukos are, or will become, in a position to demonstrate that a resolution by the Banks to declare that events or circumstances had occurred which had or might reasonably be expected to have a Material Adverse Effect on the ability of Yukos to perform its obligations under the Loan Agreement, on the information available to them on the 2nd July, was unreasonable in the circumstances where its assets had been frozen by order of a court on the 15th April, on the 29th June it had suffered judgement in the sum of $3.3Bn for tax due in 2000 with the prospect of imminent proceedings to enforce tax claims in similar amounts for subsequent years which prospect had caused Yukos to issue a press release speaking of a resulting threat of insolvency.
20.	It is accepted that it is sufficient for the Banks’ purposes that they are able to make good one of the grounds on which the notice of the 2nd July 2004 was based.  Mr Briggs made alternative submissions in support of demonstrating that an event of default had occurred under clause 19.4 of the Loan Agreement namely in respect of continuing representations under clause 15.35.  In the light of my above conclusion and for the sake of brevity I need go no further than to say that his submissions seem to me to have merit.
21.	I turn to consider the second question on the basis that my conclusion of the first question is wrong.  In Shindler v Northern Raincoat Co Ltd [1960] 1 WLR 1038, a decision of Mr Justice Diplock, the headnote describing the factual background of the case reads as follows:-
“The plaintiff sold the share capital of the defendant company to L Co for £25,000 and it was agreed that the defendant company would enter into a ten year service agreement to employ the plaintiff as managing director at £3,000 plus commission and expenses, which agreement was executed on April 8th 1958.  In August 1958 L Co having offered the plaintiff alternative employment to which he appeared agreeable, sold the share capital in the defendant company to M Co, who did not wish to retain the plaintiff’s services.  No concluded agreement as to the plaintiff’s employment by L Co was ever reached and the plaintiff refused all subsequent offers of employment by them.  At an extraordinary meeting of the defendant company … the plaintiff was removed from office as a director.  L Co made further offers to employ the plaintiff … which he refused.  The plaintiff claimed damages against the defendant company for wrongful dismissal;
Held 
(1) 	That although article 68 of table A of Sch. 1 was incorporated into the articles of the defendant company, nevertheless there was an implied term in the plaintiff’s agreement that the defendant company would do nothing of its own motion to put an end to the state of circumstances which had enabled the plaintiff to continue as managing director and, accordingly, the defendant company was in breach of its contract with the plaintiff.”
22.	Mr Justice Diplock having referred to the House of Lords decision in Southern Foundries v Shirlaw [1940] AC 701 and to the disagreement amongst their Lordships in that case said this, at the top of page 103 :-
“It does however seem to me that all five of their Lordships in the Southern Foundries case were agreed upon one principle of law which is vital to the defendant’s contention in this case.  That principle of law is that laid down in the case of Stirling v Maitland where Cockburn LJ said: “if a party enters into an arrangement which can only take effect by the continuance of a certain existing set of circumstances, there is an implied engagement on his part that he shall do nothing of his own motion to put an end to that state of circumstances under which alone the engagement can be operative.”
Applying that respectable principle to this case, there is an implied engagement on the part of the company that it will do nothing of its own motion to put an end to the state of circumstances which enables the plaintiff to continue as managing director:  “that is to say an undertaking that it will not revoke his appointment as a director and will not resolve that his tenure of office be determined.”
23.	It is apparent from the judgment of Mr Justice Diplock who had conducted a review of the authorities that he construed the words “implied engagement” used by Lord Justice Cockburn in the contractual sense, that is an implied term of an agreement, as did the writer of the headnote to the report of the case.  It follows, it seems to me, and contrary to the submissions of Mr Brisby, that in order to succeed with its proposed defence in the absence of any appropriate express term, Yukos must show that there is to be implied into the terms of the Loan Agreement a term that the Banks will not give notice of an alleged event of default in circumstances where their resolution to do so is unreasonable or otherwise does not properly arise under the provisions of clause 19.  In Concord Trust v Law Debenture Trust Corporation PLC [2005] 1 WLR 1591 the House of Lords concluded that a term requiring that a lender do not make an invalid demand under a loan agreement is not, without more, to be implied into such an agreement because such term is not necessary for its business efficacy, see per Lord Scott at paragraph 30 et seq.
24.	In the present case there is no express provision in the Loan Agreement making the issue of a notice of Event of Default, which turns out not to be justified under the terms of the Loan Agreement, a breach of contract.  It has not been contended that there are any circumstances in the present case as a result of which, exceptionally, such a term is in fact to be implied.  In my judgment it follows that, if my conclusion on the first issue is wrong, the banks were entitled to succeed on the second issue.
25.	Shindlers case was not cited to me by either side and had I not decided the matter on the first issue I would, in the normal way, have given the parties an opportunity to address me on the effect of that case. But, in the circumstances, I have not thought it necessary to do so.