The English Court of Appeal has recently ruled in the case of Servis-Terminal LLC v Valeriy Ernestovich Drelle that a foreign judgment which has not been subject of recognition proceedings in England and Wales cannot be a basis for presenting a bankruptcy petition under the Insolvency Act 1986.
This landmark decision fundamentally alters the earlier position of the lower court which had ruled that although a foreign judgment had not been the subject of recognition proceedings in England and Wales, that did not prevent it from being the basis of a bankruptcy petition.
Background
In May 2019, the Arbitrazh Court of Yaroslavl Oblast in Russia gave judgement in favour of Servis-Terminal LLC against Mr Drelle for failing to act in good faith which had led eventually to the bankruptcy of that company. The Russian Court made an award against Mr Drelle for damages in the sum of RUB 2 billion. Mr Drelle’s appeal against this decision was unsuccessful.
Subsequently, Mr Drelle, became resident in London and Servis-Terminal LLC served a statutory demand on him pursuant to 268(1)(a) of the Insolvency Act 1986for the RUB 2 billion based on the judgment of the Russian Court. Following Mr Drelle’s failure to satisfy the demand, Servis-Terminal LLC filed a bankruptcy petition against him based on the unsatisfied judgement debt. The judge hearing the petition in the ICC granted a bankruptcy order against Mr Drelle on the ground that the judgment debt was not subject to a genuine and substantial dispute.
Mr Drelle appealed to the High Court and contended that the judgment – having not been subject to recognition proceedings – could not be a valid ground for a bankruptcy petition. Richards J disagreed with Mr Drelle’s contention and held the absence of recognition proceedings did not prevent the judgment of the Russian Court from being a basis for the petition.
On further appeal to the Court of Appeal, Mr Drelle advanced four grounds of appeal but the Court , considered only one of those grounds in reversing the decision of Richards J, being whether the judgement was capable of providing the basis for a bankruptcy petition unless and until it was recognised.
Judgment of the Court of Appeal
Lord Justice Newey handed down the Court’s leading judgment. His approach to the fundamental issue raised in the appeal was holistic and pragmatic, analysing the position of a foreign judgment (and sums arising thereon) in England. Having referred to Rules 45 – 46 and 53 – 55 of Dicey, Morris & Collins on the Conflict of Laws (16th Edition) and the Civil Jurisdiction and Judgments Act 1982, he restated the law to the effect that a foreign judgment has no direct operation in England. He then proceeded to consider the effect of the provision of the Foreign Judgments (Reciprocal Enforcement) Act 1933, and relevant case law including the 1939 decision in Re a Judgment Debtor which addressed obligations to pay (if any) arising from a foreign judgment.
Section 6 of the 1933 Act provides:
“No proceedings for the recovery of a sum payable under a foreign judgment… other than proceedings by way of registration of the judgment, shall be entertained by any court in the United Kingdom.”
On the strength of this provision, Newey LJ held that “a foreign judgment may be relied on in English proceedings otherwise than for the purpose of its enforcement” and that such judgment which is final and conclusive on the merits in favour of a defendant can only be used as a defence to a claim in England for the same matter.
Newey LJ maintained the stance that a petition brought pursuant to sections 267 and 268 of the 1986 Act is an enforcement mechanism. As such, it cannot be presented in respect of a foreign judgment which has not been the subject of a recognition proceedings. He went further to state that “while an unrecognised foreign judgment may be determinative for certain purposes” (e.g. as a defence to a claim), it cannot be used as a “sword” or as a basis of a bankruptcy petition. In short, it does not constitute a “debt” for the purposes of the 1986 Act without first being subject of recognition proceedings and accordingly the Court of Appeal dismissed the petition.
Snowden LJ summarised the point saying:
“…the same way as a person who relies upon a foreign judgment cannot invoke the individual enforcement mechanisms of the English court for his own benefit unless and until he obtains an English judgment, or registers the foreign judgment or has some other basis under a statute or treaty that permits its enforcement, so also such a person should not be able to invoke the collective enforcement mechanisms of bankruptcy or winding up proceedings in the English court unless and until he obtains an English judgment, or registers the judgment or has some other basis under a statute or treaty permitting such enforcement of the foreign judgment.”
Comment
This decision reinforces the principles of state sovereignty and contributes to the English jurisprudence on the enforcement of foreign judgment debts in respect of bankruptcy petitions. Unless and until a foreign judgment is recognised by the English court or where a statute or treaty permits the enforcement of such a judgment, no bankruptcy petition can be brought in respect of that foreign judgment.
Foreign judgment creditors should consider whether it is necessary or appropriate to bring proceedings in the UK for the recognition of a foreign judgment or registration of the same. Further, it is important for creditors to investigate whether the debtor has sufficient assets within the jurisdiction before commencing any recognition proceedings to avoid a pyrrhic victory and incurring unnecessary costs.
If you require advice relating to enforcement of judgments and insolvency, please contact Elborne Mitchell’s commercial litigation and insolvency team.
Oluwaseun Tijani
Solicitor at Elborne Mitchell LLP
