Can a Foreign Judgment Be Used for a Bankruptcy Petition in England and Wales?

The appellant, Servis-Terminal LLC, was a Russian company that entered bankruptcy proceedings in 2017. Mr Drelle, the respondent, was a former director and shareholder of Servis-Terminal.

The dispute arose from a loan advanced by Servis-Terminal to another Russian company, Fort-Steiton LLC, in December 2011 for RUB 2 billion (approximately £18 million at current exchange rates).

The loan was guaranteed by Mr Motylev, who was also the chairman and majority shareholder of Russian Credit Bank.

Following the collapse of Russian Credit Bank in 2015, Servis-Terminal suffered substantial losses, and the loan advanced to Fort-Steiton was never repaid.

In April 2017, Servis-Terminal was declared bankrupt in Russia and a trustee in bankruptcy was appointed. The trustee subsequently commenced proceedings against Mr Drelle, alleging that he had acted unreasonably and in bad faith by causing Servis-Terminal to enter into the loan agreement with Fort-Steiton.

After lengthy proceedings, the Russian court held that Mr Drelle had breached his duties and ordered him to pay RUB 2 billion to Servis-Terminal. Mr Drelle's subsequent appeals through the Russian court system were unsuccessful, following which, Mr Drelle left Russia and settled in London.

In October 2020, Servis-Terminal served a statutory demand on Mr Drelle and shortly afterwards presented a bankruptcy petition in England, relying on the Russian judgment debt.

Mr Drelle challenged the petition, arguing, amongst other things, that the Russian judgment could not give rise to a petition debt because it was incapable of being registered in England under any of the statutory regimes and had not been recognised by the English courts.

The Supreme Court allowed the appeal, holding that a final and conclusive foreign judgment gives rise to a legal obligation to pay, and such obligation constitutes a “debt” within the meaning of section 267 of the Insolvency Act 1986.

In reaching that conclusion, the Supreme Court reaffirmed the longstanding common law "obligation principle". In essence, this principle provides that a final foreign judgment given by a court of competent jurisdiction creates a legal obligation on the debtor to pay the judgment sum.

Crucially, that obligation exists from the date of the foreign judgment itself and is not contingent upon any recognition proceedings being brought in England.

In doing so, the Supreme Court rejected the Court of Appeal's reasoning that an unrecognised foreign judgment has no legal effect in England unless and until recognition proceedings have been brought and clarified the proposition that a foreign judgment has "no direct operation" in England and Wales.

The Supreme Court explained that this does not mean that a foreign judgment has no legal effect. Rather, it means that the judgment cannot be directly enforced through the English courts unless the relevant recognition or enforcement requirements have been satisfied.

The Court further emphasised that bankruptcy proceedings are not equivalent to the enforcement of a judgment debt.

Rather, bankruptcy is a collective insolvency process designed to secure the fair distribution of a debtor's assets amongst creditors. Therefore, the presentation of a bankruptcy petition does not constitute the direct enforcement of a foreign judgment.

Accordingly, the Supreme Court held that the legal obligation arising under an unrecognised and unregistrable foreign judgment is capable of giving rise to a petitionable debt for the purposes of section 267 of the Insolvency Act 1986.