Julie Hunter, a Partner in the commercial department at Stephensons, looks at the recent case of Drelle v Servis-Terminal LLC [2024] EWHC 521 (Ch) and whether a foreign judgment debt sufficient grounds for bringing a bankruptcy petition in England and Wales

How can you bring a bankruptcy petition in England and Wales?

In order to present a bankruptcy petition in England and Wales, the creditor (the person owed money) must satisfy the court that the debtor (the person who owes money) appears to be unable to pay a debt or has no reasonable prospect of paying it.

Section 267 (2) (c) of the Insolvency Act 1986 provides that that criteria will be met if either the creditor has served a statutory demand on the debtor, requiring them to pay or compound the debt to their satisfaction, and that the demand has not been set aside; or that execution or other process issued for the debt has been returned unsatisfied in whole or part (section 268 (1) (b) Insolvency Act 1986).

Typically, but not necessarily, the statutory demand is based on an unpaid Judgment of the court.

What if the judgment is of a foreign court?

Where the judgment is one made by a court in England and Wales, no issues arise but the position differs when the judgment was issued by a foreign court.

Section 6 of the Foreign Judgments (Reciprocal Enforcement) Act 1933 (FJ(RE) Act 1933) provides that no proceedings for the recovery of a sum payable under a foreign judgment, being a judgment to which this Part of this Act applies, other than proceedings by way of registration of the judgment, shall be entertained by any court in the United Kingdom.

The effect of that section 6 is that where a creditor holds a foreign judgment which subject to the 1933 Act, he must first apply for the judgment to be recognised by the English court before he can take any steps to enforce it.

But what if the foreign judgment is not subject to the 1933 Act? This was considered in the recent decision in Drelle v Servis-Terminal LLC [2024] EWHC 521 (Ch).

Drelle v Servis-Terminal LLC [2024] EWHC 521 (Ch)

The facts

Mr Valeriy Drelle is a Russian national now living in England. Servis- Terminal LLC (ST) had obtained judgment against him in proceedings before the Russian court for RUB 2 billion (approximately £22 million) which was unsatisfied. It presented a bankruptcy petition against Mr Drelle which he disputed on the grounds that the debt upon which the Petition was founded was subject to a genuine and substantial dispute.

He asserted that Gazprom Neft (“GPN”), ST’s largest creditor, which funded the proceedings and is aligned with and ultimately owned by the Russian State, was able to influence the judiciary in the Russian Proceedings such that the judges in those proceedings were partial. He claimed that there were a number of substantive and procedural errors in the Russian Proceedings leading to an irresistible inference that they arose from a miscarriage of justice as a result of GPN and state interests infecting them.

The debt arose from proceedings against Mr Drelle brought by the liquidator of ST, for recovery of monies lost by ST during the time Mr Drelle was a director of that company. The liquidator alleged breach of his duties as a director, for authorising a loan made by ST which was not repaid. The Russian court found he had unreasonably imposed upon ST in the form of lending with insufficient assurance and security that the debt could and would be repaid.

Mr Drelle had unsuccessfully appealed against the first instance decision and then failed in three further appeals, ultimately at the Russian Supreme Court.

The judgment was not one to which the (FJ(RE) Act 1933) applied, because there is no treaty between the UK and Russia relating to the reciprocal enforcements of judgments.

The arguments

In the proceedings before the English Bankruptcy Court Mr Drelle maintained that the debt was disputed on the grounds the Russian Courts had not acted with impartiality, and their decisions arose from a miscarriage of justice and state interests.

Whilst the courts of England and Wales usually treat a judgment as inviolate or unimpeachable, the bankruptcy court may go behind a judgment debt where it appears that:

1. there is no true underlying debt (for example, because judgment was obtained by default or a compelling defence was not raised or competently argued).
2. where the judgment debt was obtained as a result of fraud, collusion or pursuant to a miscarriage of justice.

Where the judgment is one made by a foreign court, the principles set out in Dicey, Morris & Collins on the Conflict of Laws (Dicey) regarding recognition of a foreign judgment will be applied. Rule 48 from Dicey provides for a foreign judgment to be treated as similarly inviolate, unless it can be impeached under Rules 50 to 52 on grounds of fraud, being contrary to public policy or opposed to natural justice.

Both parties agreed that the court should not make a bankruptcy order if there was a genuine and substantial dispute i.e. if there was a realistic, not fanciful, prospect of success carrying some degree of conviction (not merely arguable).

Mr Drelle argued that to avoid the dispute before the Bankruptcy Court, prior to presenting its petition, ST should have applied for recognition of the judgment. That would have provided the Court hearing the bankruptcy petition with assurance that the debt arose in proceedings which the courts of England and Wales can safely enforce, was not reducible on the facts of the case and would not unfairly prejudice Mr Drelle’s other creditors.          

Mr Drelle’s submissions were that there are two tracks, each with their own distinct test:

• Recognition of a foreign judgment via Civil Procedure Rules Part 7 proceedings, where the principles set out in Dicey fall to be considered, and bankruptcy proceedings. Mr Drelle said that as there is no treaty between the United Kingdom and the Russian Federation, ST could have issued Part 7 proceedings for recognition of the Judgment at common law and applied for summary judgment. In such proceedings the court would have had the benefit of pleadings, disclosure and an opportunity to cross-examine the expert witnesses in Russian law.    
• He argued that if the court were to permit the petition to proceed in this case, the creditor would obtain “recognition by the back door” and the burden would unfairly shift to him to demonstrate, without pleadings and live evidence, not just that the debt is disputed on bona fide and substantial grounds, but that the judgment giving rise to the debt should be impugned on the basis of fraud, collusion or miscarriage of justice. As such, the Bankruptcy Court’s jurisdiction would be no wider than it is in any other court.

The English court said it did not need to determine whether the Russian judgments should be impeached, as would be the case in Part 7 recognition proceedings. Rather it must determine whether there is a bona fide dispute on substantial grounds that the Russian judgments may be impeached. If so, the underlying debt cannot be treated as sufficiently certain to found a bankruptcy petition and the petition must be dismissed.

The Bankruptcy Court said the question was whether Mr Drelle’s complaints and allegations of miscarriage of justice gave rise to a genuine dispute such that the judgment should be impeached. It considered all the judgments of the Russian appeal courts and found that those courts had provided reasoned judgments upholding the first instance judgment, both in relation to the procedural approach to the case and the application of the substantive law.

The outcome

The Court found that there was no substantive dispute on the basis the Russian courts were tainted by political interference or bias. Consequently, the debtor did not meet the threshold test.

The debt claimed in the petition was not subject to a genuine and substantial dispute, so the court could make a bankruptcy order.

Summary

The findings of fact in this case are not remarkable. It is the decision of the court on the legal and procedural point that is of interest.

The court found that for the purposes of a statutory demand and section 267(2) of the IA 1986, an unsatisfied judgment of a foreign court may constitute a debt even though the foreign judgment is not registrable under the (FJ (RE) A 1933) and is sufficient ground for bankruptcy petition.

This decision does, however, create an anomaly, since had the judgment been made by a foreign court which was subject to the provisions of section 6, and so capable of registration under the FJ(RE)A 1933, then the creditor would have been required to have the judgment recognised before presenting a bankruptcy petition.

About the author

Julie Hunter is a Partner in the commercial department at Stephensons. She is highly experienced in litigation and dispute resolution matters covering all aspects of commercial litigation, including invoice and asset finance, secured finance, commercial contracts disputes and general litigation.

See also

Place an insolvency notice

What you need to know about statutory demands

Find out more

Insolvency Act 1986 (Legislation)

Foreign Judgments (Reciprocal Enforcement) Act 1933 (Legislation)

Civil Procedure Rules (Ministry of Justice)

Images

Getty Images

Publication date

17 December 2024

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.