Supreme Court confirms foreign judgments can support bankruptcy petitions in England

The Supreme Court has confirmed that an unrecognised foreign judgment can be relied upon to support a bankruptcy petition in England and Wales.

In Servis-Terminal LLC v Drelle, the court considered whether a creditor could present a bankruptcy petition based on a foreign judgment that had not been recognised by the English courts and was not capable of registration under any statutory enforcement regime.

The decision will be welcomed by insolvency practitioners and overseas creditors, as it confirms that an unrecognised foreign judgment debt may, in appropriate circumstances, form the basis of bankruptcy proceedings in England.

The background

Servis-Terminal LLC (ST), a Russian company in bankruptcy, obtained a judgment in Russia against its former Director General, Mr Valeriy Drelle, for approximately RUB 2 billion (over £18 million).

After the judgment had been upheld by the Russian appeal courts, ST served a statutory demand on Mr Drelle in England and subsequently presented a bankruptcy petition based on the judgment debt.

Mr Drelle challenged the petition. Among other arguments, he contended that the Russian judgment could not constitute a petition debt because it had not been recognised by the English courts.

The issue before the Supreme Court

The key question was whether an unrecognised foreign judgment gives rise to a “debt” for the purposes of section 267 of the Insolvency Act 1986.

If it did, the judgment could support a bankruptcy petition.

If it did not, ST would first need to obtain recognition of the foreign judgment before relying on it in insolvency proceedings.

The Supreme Court’s decision

The Supreme Court allowed ST’s appeal.

The court reaffirmed the long-established common law principle that a final and conclusive foreign judgment for a fixed sum of money creates an obligation on the judgment debtor to pay that amount.

Importantly, that obligation arises once the foreign judgment is given. It does not depend on the judgment first being recognised in England.

The court concluded that this obligation can constitute a “debt” within the meaning of section 267 of the Insolvency Act 1986.

As a result, an unrecognised and unregistrable foreign judgment can found a bankruptcy petition, provided the other statutory requirements are met.

Why is this significant?

The decision overturns the Court of Appeal’s earlier ruling and provides welcome clarification on the status of foreign judgments in insolvency proceedings.

The Supreme Court drew a distinction between:
• enforcing a foreign judgment through English execution procedures; and
• relying on the debt created by that judgment for insolvency purposes.

While a foreign judgment has no automatic effect as an English judgment and cannot be directly enforced without further steps, it nevertheless creates a legal obligation that can amount to a debt.

This means that creditors holding qualifying foreign judgments may, in some cases, be able to commence bankruptcy proceedings without first obtaining recognition of the judgment in England.

What does this mean in practice?

The judgment is likely to be particularly relevant in cross-border insolvency matters where a creditor has obtained a judgment in a jurisdiction that falls outside the statutory registration regimes for foreign judgments.

Creditors may now be able to rely on such judgments as the basis for bankruptcy proceedings without the additional cost and delay associated with recognition proceedings.

However, the case does not remove the ability of debtors to challenge a petition on other grounds. The Supreme Court remitted the remaining issues in this case to the Court of Appeal, including whether the alleged debt was genuinely disputed on substantial grounds.

The decision therefore strengthens the position of foreign judgment creditors, while leaving intact the existing protections available to debtors facing bankruptcy proceedings.

If you are an insolvency practitioner seeking legal advice on foreign judgment debts or cross-border insolvency matters, contact Alexander Neale or Jonathan Holgate to discuss how we can support you.