UK Supreme Court provides streamlined enforcement option for international creditors

Summary

In a recent decision, the Supreme Court held that a creditor holding an unrecognised and unregistrable foreign judgment (for a liquidated sum) may found a bankruptcy petition on it under section 267 of the Insolvency Act 1986 (the “IA 1986”), without first obtaining recognition of that judgment in the UK courts.¹ The appeal was brought by the holder of a judgment debt awarded by a Russian court, and turned on whether such a foreign judgment could constitute a “debt” for the purposes of section 267, notwithstanding that it had never been the subject of recognition proceedings and fell outside any statutory registration regime.

The Facts

In 2019 the Arbitrazh Court of Yaroslavl Region in Russia gave a RUB 2 billion judgment in favour of Servis-Terminal LLC (“ST”) against Mr Drelle, ST’s former Director General (the “Russian Judgment”). Mr Drelle had caused ST to advance a loan of RUB 2 billion to Fort-Steiton LLC, a Russian company, the loan was secured by a personal guarantee from Fort-Steiton’s owner, the chairman and majority shareholder of the Russian Credit Bank, which subsequently collapsed. ST alleged in the Russian proceedings that Mr Drelle had acted unreasonably and in bad faith in causing ST to enter into the loan. The Russian Court had agreed.

Mr Drelle subsequently settled in London. ST served a statutory demand on Mr Drelle in England on 9 October 2020 requiring that he pay the Russian Judgment and then presented a bankruptcy petition under the IA 1986 on 13 October 2020² when he failed to do so. The Russian Judgment had not been the subject of recognition proceedings in the UK (it was unrecognised) nor, being a judgment of the Russian Courts, did it fall within any statutory registration regime (it was unregistrable).

Insolvency and Companies Court Judge Burton found, in a judgment handed down on 9 March 2023, that the Russian Judgment debt was not disputed on bona fide and substantial grounds, and made a bankruptcy order on 31 March 2023. Richards J dismissed Mr Drelle’s appeal in the High Court, but the Court of Appeal allowed his further appeal, holding that a bankruptcy petition could not be presented on the basis of an unrecognised foreign judgment.

The Court of Appeal found, relying on Dicey, Morris & Collins, The Conflict of Laws (16th ed) (“Dicey”) that a foreign judgment has no “direct operation” in England, and presenting a bankruptcy petition on it uses the judgment offensively as a “sword”, which requires prior recognition. The Court of Appeal further reasoned by analogy with the revenue rule, which prevents a foreign tax being treated as a “debt” because it is an exercise of sovereign power, and concluded that an unrecognised foreign judgment is also a foreign exercise of sovereign power and therefore should not be treated as a “debt” for these purposes. Finally, the Court of Appeal noted that a bankruptcy petition cannot be founded on a registrable but unregistered judgment, and accordingly it would be anomalous for a holder of an unrecognised judgment to be better off than a holder of an unregistered one. ST appealed to the Supreme Court.

The Decision

The Supreme Court unanimously allowed the appeal. It determined two³ key issues, whether:

1. an unrecognised and unregistrable foreign judgment for a debt could take effect at common law; and
2. such a foreign judgment could give rise to a “debt” under section 267 of the IA 1986.

On the first issue, the Supreme Court found that, in circumstances in which it is not disputed that a judgment has been given by a court of competent jurisdiction, and is not impeachable, a foreign judgment gives rise to an immediate obligation at common law on the foreign judgment debtor to pay the relevant sum, and this obligation does not depend upon recognition of the foreign judgment (the “obligation principle”). This is a well-established principle affirmed in a line of authority starting with Russell v Smyth⁴ in 1842 and endorsed since by the Court of Appeal and House of Lords.

The Court also held that the statement in Rule 45 of Dicey, namely that a foreign judgment has no “direct operation” in England, means only that it cannot be enforced by execution; it does not undermine the obligation principle, i.e. that the debtor is obliged to pay it. The Court also rejected the Court of Appeal’s revenue rule analogy as a false one, since that rule concerns a sovereign asserting a public right rather than a private creditor enforcing a private debt.

On the second issue, the Supreme Court, in analysing section 267 of the IA 1986, could find no good reason for the restriction of the meaning of “debt” to anything narrower than its general common law meaning, being “a legal obligation owed by one person to pay a sum of money to another person”.⁵ The Russian Judgment fell within that definition.

Taken together, these findings meant the Russian Judgment gave rise to a “debt” within the meaning of section 267 notwithstanding the absence of recognition proceedings. The Supreme Court therefore confirmed that such judgments can found a bankruptcy petition without the need for prior recognition proceedings.⁶

Analysis

This decision means that the holder of a foreign court judgment which is unrecognised and unregistrable in England may use that judgment debt as the basis of a bankruptcy petition. This gives creditors the possibility of commencing insolvency proceedings against a debtor within weeks without the need to first incur the costs of lengthy and time-consuming recognition proceedings. This presents a real opportunity for creditors and a real risk for debtors, who could find themselves facing a bankruptcy petition with very little warning. Accordingly, it is important to pay close attention to any ongoing foreign court proceedings or judgments.

This decision only applies to judgments falling outside of the UK’s statutory recognition schemes. Those schemes apply to a number of commonwealth countries, the members of the EU (excluding Denmark), and a number of other bilaterally negotiated parties. However, a number of important and commercially active jurisdictions, including Brazil, China, Russia and the United States of America, fall outside of these schemes. Accordingly, creditors and debtors alike should give careful thought to unpaid judgments arising in these jurisdictions and how they may be used in light of this decision.

It remains to be seen whether the principle established in this decision will extend to winding-up petitions presented against companies; however, it seems likely that it will, given the similarity between the relevant procedures. Indeed, the Supreme Court noted that the modern bankruptcy scheme took its lead from the pre-existing winding-up provisions, and section 123 of the IA 1986 defines inability to pay debts in materially similar terms. Accordingly, parties should give careful consideration to how their position would be impacted if this decision did apply to corporate insolvency.

The bankruptcy route will not be available where there is a bona fide dispute regarding the foreign judgment, and a formal insolvency process will not be the right approach for all creditors: it is likely to take considerable time for a distribution to be made and assets will be distributed among all creditors pari passu, which may result in only a partial recovery from an insolvent debtor, depending on the order of priorities. Nonetheless, in the right case this decision adds a powerful weapon to a creditor’s arsenal that merits consideration.