Recovering from a Sovereign Debtor

Getting Blood from a Stone?

In June, a decade-long legal saga involving controversial Moldovan tycoons, the Kazakh sovereign wealth fund, one of the largest oilfields in the world and allegations of fraud saw yet another twist. In a battle between a private investor and a sovereign state, The Court of Appeal in the Hague, the Netherlands, sided with Kazakhstan and lifted a freeze on shares worth billions of US dollars.

Background

This complex matter began more than 20 years ago. Around the turn of the millennium, entities controlled by Moldovan magnate Anatolie Stati acquired subsoil use rights to two oil blocks in Kazakhstan. Investor-companies included Stati’s Ascom Group, the largest oil and natural gas producer in Moldova.

In July 2010, the Kazakh government cancelled the underlying subsoil use contracts and transferred the oil blocks “into the temporary possession and use” of KazMunaiGas, the national oil company. Anatolie, his son Gabriel and affiliated entities filed for arbitration against Kazakhstan at the Stockholm Chamber of Commerce (SCC). In December 2013, the SCC awarded them over USD 500 million in damages, interest and costs.

When Kazakhstan refused to pay, the Statis started enforcement across multiple jurisdictions, including Sweden, the USA and the UK. In 2017, the Amsterdam District Court granted the Statis a freezing order over shares reportedly worth USD 5.2 billion held by the Kazakh sovereign wealth fund, Samruk Kazyna (Samruk), in KMG Kashagan B.V. KMG Kashagan is a Dutch entity that owns the Kazakh share of the Kashagan oilfield in the Caspian Sea, one of the largest in the world.

The Hague Court of Appeal Decision

Kazakhstan appealed all the way to the Dutch Supreme Court, which found for the state and remitted the case back to the Hague Court of Appeal. On 14 July 2022, the appellate court held that shares in KMG Kashagan were in fact property of the Kazakh state, being used for “public” i.e. non-commercial purpose and were, therefore, immune from enforcement.

Recovery experts will note several aspects of the decision. First, the ease with which the Court of Appeal held that the shares were the property of the state of Kazakhstan despite being legally owned by Samruk. The Court of Appeal ignored Samruk’s separate legal personality by adopting an expansive interpretation of “property” to hold that KMG Kashagan shares were the property of Kazakhstan because they were under “its possession or control” through Samruk.

Second, when deciding whether KMG Kashagan shares could benefit from sovereign immunity, the court reiterated that the burden was always on the award creditor to adduce enough information: “the creditor will therefore always have to provide information enabling it to be established that the goods are being used or intended by the foreign state for purposes other than public use [to show that immunity does not apply].”

In this instance, the Statis “did not provide sufficient data” to establish that the shares “were intended for purposes other than public purposes.” Therefore, the shares were immune from execution and the Statis could not look to them to satisfy their award.

Some might also disagree with the court’s reasoning that shares in a company which is engaged in a purely commercial operation to extract and sell oil for profit were held for a public or non-commercial purpose. But the court ruled that it was not only the immediate, but also the ultimate purpose that was relevant, noting that “the objective of Samruk is […] to contribute to the economic development of Kazakhstan”. Arguably, this wide definition of purpose would render any enforcement action against any sovereign wealth fund impossible.

Analysis

The “commercial use [of state assets]” exception to sovereign immunity is part of customary international law (as reflected in United Nations Convention on Jurisdictional Immunities of States and Their Property (2004)). Hence, the question of what purpose foreign assets of a nation state are used or intended to be used for comes up time and again. 

While it is unclear what information the Statis submitted to the Hague Court of Appeal, the court’s approach underscores the importance of doing one’s homework and gathering sufficient information about state assets, how they are held and their use in order to maximise one’s chances. A successful (so far) example of demonstrating commercial purpose is the attachment of funds owed by the International Air Transport Association (IATA) to the Airports Authority of India (AAI) in Quebec, Canada, earlier this year by the holders of a $1.5bn ICC award against the Republic of India. IATA was collecting funds on behalf of AAI and Air India from international ticket sales and route navigation charges.

Award creditors face an uphill battle in obtaining redress against sovereign debtors, who are well resourced and have “rules of the game” written in their favour (think sovereign immunity). Often, creditors of nation states also face hostile judges. A former First President of the French Cour de Cassation, France’s top civil court, once said that judges “should be responsible people […] and do whatever they can to protect their government from the serious difficulties that may arise from a refusal to release a foreign State’s property from attachment”.

To level the playing field, such creditors require, among other things, a creative pressure strategy. It should take into account helpful jurisdictional idiosyncrasies and advanced discovery techniques. Above all, it must look beyond the debtor state’s assets to include trade flows, international sources of income and even proceeds of corruption by local elites hidden in enforcement-friendly jurisdictions.