The High Court has handed down an important decision confirming that an unrecognised foreign judgment can be used to form the basis of a bankruptcy petition.
In rejecting the bankrupt’s appeal, the court confirmed that a debt arising pursuant to such a judgment is capable of constituting a “debt” for the purposes of section 267 Insolvency Act 1986 (the Act), despite the fact that the underlying judgment had not been the subject of recognition proceedings in England.
Facts
Mr Drelle was a Russian national living in the UK who had formally been the shareholder and CEO of Servis Terminal LLC (ST), a company based in the Russian Federation. ST obtained a Russian judgment against Mr Drelle for RUB2bn (approximately £22m) (the Judgment) following some fairly complex and interlinked litigation in the Russian courts relating to, among other things, an alleged breach of Mr Drelle’s duties owed to ST while he was a director.
The Judgment was not eligible for registration under the Foreign Judgments (Reciprocal Enforcement) Act 1933 (the 1933 Act): ST took no steps to seek to register it, and neither did it take any steps pursuant to Part 7 of the Civil Procedure Rules to bring proceedings to obtain recognition of the Judgment before the English courts. ST issued and served a statutory demand on Mr Drelle in England based upon the sums owed by him pursuant to the Judgment and subsequently petitioned for his bankruptcy when this was not satisfied.
Bankruptcy order
ST’s position was that the Judgment was sufficient to constitute a debt for the purposes of section 267 of the Act and could therefore be used to form the basis of a bankruptcy petition against Mr Drelle in England. At first instance, Insolvency and Companies Court Judge Burton agreed with this position and consequently made a bankruptcy order (the Order) against Mr Drelle in March 2023.
Appeal
Mr Drelle appealed against the Order on a number of bases. These included asserting that the judge had incorrectly held that the sum owed by him pursuant to the Judgment was capable of constituting a “debt” for the purposes of section 267(2)(b) of the Act where this had not been the subject of registration under the 1933 Act or separate recognition proceedings in the English courts.
Section 267 Insolvency Act 1986
Section 267 sets out the grounds for a creditor’s bankruptcy petition. Section 267(2)(b) specifically provides that:
“…a creditor’s petition may be presented to the court in respect of a debt or debts only if, at the time the petition is presented, the debt, or each of the debts, is for a liquidated sum payable to the petitioning creditor, or one or more of the petitioning creditors, either immediately or at some certain, future time, and is unsecured…”
There was no suggestion that Mr Drelle was able to satisfy the amount due under the Judgment (or had any reasonable prospect of doing so). The Judgment was a final and conclusive determination of the Russian courts and was for an unsecured and liquidated sum well in excess of the bankruptcy threshold (currently £5,000).
However, Mr Drelle argued that by using the Judgment as the basis of the bankruptcy petition against him, ST was effectively seeking to directly enforce a foreign judgment in England. As the Judgment was not capable of registration under the 1933 Act, Mr Drelle asserted that it would need to be the subject of recognition proceedings in the English courts before it could be used as a “sword”; in short, to establish the debt for the purposes of “enforcement” (as Mr Drelle saw it) through the issue of bankruptcy proceedings against him.
Decision
Rejecting Mr Drelle’s appeal, the High Court upheld the Order. In doing so, it confirmed that ST’s present inability to take steps to enforce its claim for a liquidated sum in England pursuant to the Judgment – by virtue of the fact that it had not sought recognition of the same from the English courts – was not an obstacle preventing the sum owed by Mr Drelle (under the Judgment) from constituting a “debt” for the purposes of section 267 of the Act.
Considering the decision in Bishopsgate Investment Management Limited and Maxwell (1993), the court confirmed that it was not necessary for a final judgment of an English court to be obtained in order for a sum owing to constitute a “debt”. By way of example, the court considered that a trade debt was perfectly capable of founding a bankruptcy petition in circumstances where the trade creditor had not obtained judgment on that debt; otherwise outside of bankruptcy proceedings, a judgment is required to enforce a debt (for example, by way of seizure over a debtor’s assets or applying for a charging order).
Parliament had very clearly legislated for the basis upon which certain claims may be used to found a bankruptcy petition for the purposes of section 267 of the Act – this was by reference to the concept of a “debt” and not to the specific nature of any related foreign judgments. The court also rejected Mr Drelle’s argument that the issue of bankruptcy proceedings by reference to the Judgment amounted to “enforcement” of the underlying foreign judgment in England (which, as noted above, would first require recognition proceedings to be brought).
Comment
Tim Carter, co-head of the restructuring and insolvency team at Stevens & Bolton LLP comments that:
"The court’s decision in this case at least provides some clarity around when an unrecognised foreign judgment may be used to found a bankruptcy petition. Logically, it seems likely that the same reasoning would apply in relation to a winding up petition, although the court did not specifically address this.
The court however declined to address the apparent inconsistency that would exist if a creditor had a foreign judgment which is “registrable” under the 1933 Act i.e. must it be registered to found a bankruptcy petition? This apparent lacuna might yet have to come back before the courts for determination on another day."
Tim Carter
Louise Corcoran