Valeriy Ernestovich Drelle v Servis-Terminal LLC (In Liquidation in the Russian Federation)
Before the Supreme Court ruling in Drelle v Servis-Terminal LLC, practitioners relied on the Court of Appeal’s ruling that an unregistrable and unrecognised foreign judgement could not form the basis of being owed a debt sufficient to entitle a creditor to present a bankruptcy petition under section 267 of the Insolvency Act 1986 (the 1986 Act).
However, the Supreme Court have reversed the Court of Appeal’s decision and held that an unregistrable and unrecognised foreign judgement can form the basis of insolvency proceedings.
Background to the appeal
The appeal concerned whether an unrecognised and unregistrable foreign judgement for a debt or definite sum of money awarded in the creditor’s favour can constitute a debt under section 267 of the 1986 Act.
An ‘unrecognised’ foreign judgement is a judgement of a foreign court that has not been made the subject of recognition proceedings in the UK. An ‘unregistrable’ foreign judgement is a judgement of a foreign court which is not subject to any statutory registration process in the UK.
In May 2019 the Respondent, Mr Drelle, was ordered by the Arbitrazh Court of Yaroslavl Region to pay RUB 2 billion to the Appellant, Servis-Terminal LLC (ST). ST is a Russian company acting through its trustee-in-bankruptcy.
In October 2020 ST served a statutory demand and a bankruptcy petition under the 1986 Act on the basis of the Russian judgement. The Russian judgement had not been subject to recognition proceedings, nor was it registrable under a statutory registration regime.
The UK Insolvency and Companies Court made a bankruptcy order against Mr Drelle. He appealed to the High Court, arguing that the Russian judgement could not constitute a debt under section 267 unless it had been recognised in recognition proceedings. The High Court dismissed the appeal.
Mr Drelle appealed the Court of Appeal who allowed the appeal and held that an unrecognised foreign judgement could not provide a basis for a bankruptcy petition.
ST appealed to the Supreme court challenging the Court of Appeal’s conclusion.
The Supreme Court judgement
The Supreme Court unanimously allowed the appeal, relying on the following:
- The obligation principle (or the doctrine of obligation). The Supreme Court relied on the principle that an unimpeachable judgement from a court of competent jurisdiction is final and conclusive between the parties and gives rise to an obligation on the debtor to pay the sums ordered, despite not being directly enforced in England and Wales. This obligation arises when the judgement is given and does not depend upon recognition.
- The common law meaning of “debt”. The Court assumed that section 267 was using the wider, common law definition of “debt” to mean “a legal obligation owed by one person to pay a sum of money to another person” and stated that it has always been understood in common law that an unrecognised foreign judgement for a sum of money did give rise to an immediate legal obligation to pay that sum which was enforceable in an English court.
The Supreme Court rejected the arguments favoured by the Court of Appeal, including:
- No direct operation in England and Wales. A foreign judgement can form the basis for a petition despite not having a ‘direct’ operation in England and Wales. It has an ‘indirect’ operation as it can form the basis for a claim in England and Wales based on the judgement itself.
- The use of foreign judgement solely as a shield. The Court found that the Court of Appeal were wrong in this regard as Dicey rule 51 allows the use of foreign judgements as a sword as well as a shield.
- The revenue rule. The Court of Appeal relied heavily on the revenue rule, that English courts cannot enforce a penal, revenue or other public law of a foreign state. The Supreme Court found this to be a false analogy, as this case deals with a private person bringing a claim asserting a private right.
- Insolvency proceedings are a means of enforcing a judgement. Whilst the Supreme Court acknowledged that bankruptcy (or winding up) proceedings are often “loosely categorised as a means of collective enforcement of debts”, they are not a means of enforcement of a judgement. Instead, insolvency proceedings initiate a scheme for the division of a debtor’s assets among its creditors.
Following the judgement, the answer to the question posed in the title of this article is yes, an unregistrable and unrecognised foreign judgement can form the basis of insolvency proceedings.
