Yugraneft to Live In Spite of Sibneft

Britain’s Sibir Energy has won a victory against Sibneft in the battle to control Yugraneft. A court ruled on Wednesday that external administration had been lawfully introduced and that there was no need to liquidate the company.

Sibir Energy is seeking to restore its 50-percent stake in the Sibneft Yugra joint venture, established in 2000 on a fifty-fifty basis with Sibneft. Sibir Energy invested 99.34 percent of its subsidiary’s (Yugraneft) shares in the joint venture. Yugraneft owns licenses for three oilfields in the Khanty-Mansiysk Autonomous Area with reserves of 180 million tons.

Sibneft undertook responsibility of investing in the oilfields’ development. It turned out in April 2004 that Sibir Energy’s stake in Sibneft Yugra had been diluted to 0.98 percent as a result of additional share issues in 2002-2003. Only in June 2004 did Sibneft’s management admit publicly that the company had increased its stake in Sibneft Yugra to 99 percent.

Yugraneft is in reality a dummy corporation that is burdened with debt (Sibneft issued loans to Yugraneft to support the oilfields’ development under loan agreements with licenses transferred to Sibneft Yugra), and Sibneft has attempted to liquidate the company through bankruptcy proceedings. According to Sibir Energy, Sibneft, which is controlled by Roman Abramovich, had been trying to “cover its tracks.”

“A bona fide creditor would not require liquidation of a company practically without any property in order to meet creditor claims,” says Dimitry Afanasiev, Sibir’s legal counsel and a partner at EPAM.

Henry Cameron, CEO of Sibir Energy, is even more critical of the current situation: “Sibneft is trying to escape responsibility for the unlawful dilution of Yugraneft’s stake in Sibneft Yugra, seeking liquidation of the company instead of letting the external administrator conduct financial restructuring.”

In turn, Sibir Energy initiated bankruptcy proceedings at Yugraneft. In April 2005 external administration was introduced at Yugraneft. Sibneft has already disputed the introduction of external administration in court on June 23.

A source close to Sibneft said that by initiating bankruptcy proceedings Sibir Energy was certain that it was Yugraneft’s main creditor and was seeking to be the first-priority creditor after the end of the bankruptcy proceedings. However, Sibneft has already accumulated 65 percent of Yugraneft’s debt.

The Federal Court of Arbitration ruled on Wednesday that the external administration at Yugraneft was introduced lawfully and that there were no grounds to initiate liquidation proceedings (in other words the sale of property and liquidation of the company).

Sibneft is not intending to lay down its arms. According to company sources, Sibneft is planning to go on with the fight, taking into consideration the court’s current ruling. “We are conducting work to replace the current external administrator. He must not infringe on the interests of Sibneft in his actions. We believe that the present external administrator does not meet these requirements,” a Sibneft official said.

Valery Tutykhin, a partner at John Tiner & Partners, believes that the current court’s ruling is an important victory for Sibir Energy in its fight to restore it assets.

“The liquidation of a legal entity is a general way of depriving the competitor of the possibility of having his assets returned when we talk about corporate wars, and Sibneft is obviously after that by insisting on liquidation proceedings,” says Tutykhin.

“The intermediate link is generally liquidated to avoid restitution or restoration of the assets, as the company cannot take part in the legal proceedings if it has been liquidated. For example, you cannot file a lawsuit against it. Annulling liquidation is a very complicated procedure, and a few in Russia have managed to accomplish this,” he adds. Tutykhin is certain that Sibir Energy has given itself the opportunity for further legal proceedings to seek the return of its stake. When there is still a legal entity, it can file a lawsuit, act as a defendant in a case, return assets, cancel contracts or dispute the issue of shares. That means Sibneft has not reached the point-of-no-return, Tutykhin said.