On 31 January 2025, the English Court of Appeal handed down a surprising judgment on when it is possible to use a foreign judgment for the purpose of initiating domestic bankruptcy proceedings in the case of Servis-Terminal LLC v Drelle [2025] EWCA Civ 62.
The Court has seemingly reversed the status quo of this area of law, as it decided that a foreign judgment must first be recognised by English Courts before it is used for the purposes of a bankruptcy petition.
Background
Servis-Terminal LLC (the Company), incorporated in Russia, had been declared bankrupt. Its trustee in bankruptcy brought proceedings against Mr Drelle in relation to a loan of RUB 2 billion which the Company had made in December 2011 to another Russian company.
The Arbitrazh Court of Yaroslavl Oblast concluded in its judgment (the Russian Judgment) that damages in the sum of RUB 2 billion were to be recovered from Mr Drelle and it was directed that a writ of execution should be issued. Mr Drelle appealed without success to the Second Arbitrazh Court of Appeal and unsuccessfully brought a cassation appeal. Finally, on 17 February 2020, Mr Drelle was refused permission to appeal to the Russian Supreme Court.
Statutory Demand and Proceedings in England
Approximately eight months later, the Company served on Mr Drelle, now resident in London, a statutory demand under section 268(1)(a) of the Insolvency Act 1986 of Parliament. The statutory demand went unpaid and the Company presented a bankruptcy petition against Mr Drelle, on the basis that he was indebted to it in the sum of RUB 2 billion (equivalent to £19,845,309.40 on 7 October 2020), further to the Russian Judgment.
At first instance, it was held that the debt claimed in the petition was not subject to a genuine and substantial dispute. Accordingly, a bankruptcy order was made against Mr Drelle. On appeal, Mr Drelle raised that the bankruptcy petition could not proceed because the Russian Judgment had not been recognised by an English Court. However, this appeal was dismissed. Mr Drelle then appealed to the Court of Appeal of England and Wales.
Unanimously, the Court of Appeal held that a bankruptcy petition cannot be based on a foreign judgment unless that judgment has first been recognised by the English Courts.
Newey LJ, delivering the leading judgment, stated at paragraph 55 that “where there is no statutory provision to contrary effect, a bankruptcy petition cannot be presented in respect of a foreign judgment which has not been the subject of recognition proceedings”. He further clarified that although an unrecognised judgment may be “determinative for certain purposes, it will have "no direct operation" in this jurisdiction and so cannot be used as a "sword", whether as regards "direct execution" or as the basis of a bankruptcy petition.”
Snowden LJ upheld the general principle that foreign judgments are not automatically recognised in England and Wales. He stated that only an English judgment, or a foreign registered judgment, can invoke the collective enforcement mechanisms of bankruptcy in the English Courts.
Implications
This point may be academic for many, as enforcing a foreign judgment may be a common procedural formality. However, it is important for creditors in bankruptcy or winding up proceedings to be aware of the extra step needed for their ‘debt’ to be considered ‘payable’ in England and Wales. Therefore, this ruling may favour debtors because they now receive an extra layer of protection against potentially invalid or unregisterable/unenforceable judgments from abroad.
Application in the Isle of Man
Caselaw from England and Wales is not binding on Courts in the Isle of Man, however, it is persuasive. We consider that it may be unlikely that our Courts would follow this judgment, in light of the Staff of Government Division (the Island’s Court of Appeal) decision in Obertor Limited v Gaetano Limited 2DS 2010/17 dated 25 November 2010.
Within that case, Gaetano Limited applied for a winding up order against Obertor Limited (Obertor), on the grounds that Obertor was unable to pay its debts. Obertor had been served with a statutory demand, further to an Order of the Chancery Division of the English High Court (the English Judgment). The English Judgment had not been registered under the Judgments (Reciprocal Enforcement) (Isle of Man) Act 1968 (JRPA 1968).
The Staff of Government Division recognised that a sum payable under a statutory demand is ‘inextricably linked’ with a foreign judgment. It held that section 6 JRPA 1968 did not prevent the continuation of winding up proceedings based on a statutory demand that relied upon the unregistered English Judgment and that to construe section 6 of the JRPA 1968 differently would add another “unnecessary procedural hurdle” for judgment creditors seeking winding up orders.
It was also held that allowing the proceedings would not deprive a debtor of any protection that enforcing a judgment first may bring, such as an argument of fraud, these could be argued in the winding up proceedings.
It will be interesting to see whether Drelle is appealed to the Supreme Court and if not, whether Courts in the Isle of Man follow this unexpected judgment of the Court of Appeal in England and Wales. We consider that the English Supreme Court could well overturn the Court of Appeal decision, particularly in light of the Judicial Committee of the Privy Council (JCPC) recent decision in Sian Participation which held that a winding-up petition was not a debt enforcement proceeding. Click here to read our article on that JCPC decision.
For further information on how Maher Law’s specialist dispute resolution team can assist in relation to cross border insolvency and bankruptcy, please contact Tom Maher at tom@maher.im.
11 February 2025
