UK Supreme Court refuses to enforce US judgment made in insolvency proceedings against English resident defendants

In Rubin v Eurofinance SA [2012] UKSC 46, the Supreme Court (by a majority of 4 to 1) reversed the Court of Appeal's unanimous decision and held that the English court would not enforce a judgment made by the New York court in insolvency proceedings to which the defendant did not submit. In doing so, the Supreme Court gave valuable guidance as to the inherent conflict between the principle of universalism in insolvency proceedings and the common law rule that a foreign judgment should not be enforced unless the defendant was present in the foreign jurisdiction or otherwise voluntarily submitted to the proceedings in its courts.

Though the Supreme Court's decision is most relevant to the enforcement of judgments made in foreign insolvency proceedings, it may also affect the scope of the English court's ability to assist foreign insolvency proceedings. Importantly, the decision allows English residents with English assets to continue to make their own decisions about whether to submit to a foreign jurisdiction outside the EU, regardless of whether or not their counterparty has entered a foreign insolvency proceeding. John Whiteoak and Andrew Cooke comment on the decision.

	John Whiteoak Partner +44 20 7466 2010
	Andrew Cooke Associate +44 20 7466 7566

Legal background

A judgment establishing the rights or liabilities of a person (a "judgment in personam") made by a foreign court will generally only be enforced in England where the English resident defendant against whom enforcement is sought either:

• was, at the time the foreign proceedings were instituted, present in the foreign jurisdiction;
• was a claimant or counter-claimant in the foreign proceedings;
• submitted to the foreign proceedings by voluntarily appearing in them; or
• had, prior to the commencement of proceedings, agreed to submit to the jurisdiction of the foreign court.

However, the common law has long recognised that, as a matter of policy, it is beneficial for all matters in relation to the insolvency of a corporation to be dealt with in a single court. This is referred to as the principle of universalism and is a policy recognised not just in England but in several other legal systems, including the UNCITRAL Model Law and the EU Regulation on Insolvency Proceedings 2000 (the "EU Regulation").

Factual background

In December 2007, English receivers of a trust that had gone into US Chapter 11 bankruptcy proceedings in New York commenced proceedings in the New York court against, amongst others, three individuals resident in England (the "Romans"). In those proceedings, which fell within the category of "adversary proceedings" under US federal bankruptcy law, the receivers asserted that the trust should be permitted to recover payments that it had made to the Romans prior to the commencement of insolvency proceedings. Recovery was sought on the basis of the US equivalent of section 238 (transactions at an undervalue) of the English Insolvency Act 1986, together with local law restitution claims.

The receivers served the claims personally on the Romans, but they neither acknowledged nor participated in the New York court's proceedings.

In July 2008, default and summary judgment was entered against the Romans by the New York court (the "New York Judgment"). In November 2008, the receivers applied to the English High Court for an order:

• recognising the Chapter 11 proceedings as a "foreign main proceeding" and the receivers as "foreign representatives" for the purposes of the Cross Border Insolvency Regulations ("CBIR"); and
• enforcing the New York Judgment under CPR Parts 70 and 73.

High Court decision

Mr Nicholas Strauss QC, sitting as a deputy judge, granted an order recognising both the Chapter 11 proceedings as a "foreign main proceeding" and the receivers as "foreign representatives". However, he refused to enforce the New York Judgment in the adversary proceedings because:

1. at common law, the English court will not enforce a judgment in personam contrary to the usual jurisdictional rules in relation to foreign judgments, which turn on the defendant's presence in the foreign jurisdiction or submission to its court; and
2. the CBIR did not provide alternative means for enforcement of the New York Judgment simply because it formed part of foreign main proceedings.

Court of Appeal decision

On appeal, the receivers no longer sought enforcement of the New York Judgment in relation to the adversary proceedings insofar as it concerned local law claims for restitution. As a result, the receivers sought enforcement of the New York Judgment only in relation to proceedings regarding the avoidance of pre-insolvency transactions, analogous to section 238 of the English Insolvency Act 1986.

Ward LJ, giving the unanimous decision of the Court of Appeal, reversed the deputy judge's decision and held that the New York Judgment could be enforced in England. Following the decisions of the Privy Council in Cambridge Gas Transportation Corpn. v Official Committee of Unsecured Creditors of Navigator Holdings plc [2006] UKPC 26 and the House of Lords in In re HIH Casualty and General Insurance Ltd [2008] UKHL 21, Ward LJ held that:

• the New York Judgment was a judgment in personam but also a judgment made in insolvency proceedings that had as their purpose a collective proceeding to enforce rights rather than establish them (applying HIH);
• the ordinary rules for enforcing foreign judgments in personam did not apply to judgments made in insolvency proceedings (applying Cambridge Gas);
• instead, the private international law principle of universalism for insolvency proceedings should be applied so that the New York court's insolvency proceedings would apply to all of the trust's assets and claims, wherever located; and
• accordingly, the English court should do whatever it could do to assist the Chapter 11 proceedings, including the enforcement of the New York Judgment, provided that unfairness did not result to the Romans.

On the facts of this case, the Court of Appeal held that unfairness would not result because the Romans were aware of the adversary proceedings, had taken advice in relation to them and chosen not to participate in them.

Supreme Court decision

Reversing the Court of Appeal, Lord Collins (with whom Lords Walker, Mance and Sumption agreed) held that the New York Judgment could not be enforced in England at common law or under the CBIR.

Lord Collins' starting point was that the New York Judgment was clearly in personam. As a result, the usual rule in relation to judgments in personam ought to apply unless a special rule applied to judgments in personam that were made in the course of insolvency proceedings, including in actions for the avoidance of pre-insolvency transactions. Lord Collins concluded that no such special rule had been recognised by the English common law in the past, nor should it be now. This was on the grounds that:

(1) Where a foreign liquidator brings proceedings in a foreign court to recover a debt owed by an English defendant to the foreign company, the previous case law was clear that he could not enforce that judgment in England unless the defendant was present in the foreign jurisdiction or had submitted to the foreign court. Lord Collins considered there to be no reason to apply a different rule in cases involving transaction avoidance proceedings (including, for example, for the recovery of a preferential payment), even where such a transaction avoidance claim would only be available to a foreign liquidator in the context of a foreign insolvency proceeding.

(2) If a special rule were to apply to foreign judgments in insolvency proceedings, the English court would be required to determine in each application for enforcement by the English court whether: (a) the foreign insolvency was sufficiently closely connected to the foreign court; and (b) the defendant against whom enforcement in England is sought was sufficiently closely connected to the foreign court. English law has never sought to apply either of these tests to foreign insolvency proceedings. Their application where the English court considers whether to accept jurisdiction over overseas defendants in insolvency proceedings (such as where a liquidator brings a claim to recover a preference against an overseas defendant) does not lead to any expectation that they should also be used when considering whether to enforce a judgment in England that was made in foreign insolvency proceedings.

(3) A change in the settled law of enforcement of foreign judgments is a matter for the legislature, particularly where special rules are proposed in the context of international insolvencies. Any judge-made rule would only be detrimental to UK businesses, since the English court would enforce the judgments of a foreign court in an insolvency context where a foreign court was unlikely to do so in relation to English judgments. The answer is to ensure that international insolvencies are regulated by international treaties and conventions that provide for mutual recognition and enforcement between UK and foreign courts.

Lord Collins also held that the New York Judgment could not be enforced under the CBIR on the ground that although the CBIR made express provision as to the assistance that could be given by an English court to a recognised foreign main proceeding, it made no express provision as to the enforcement by an English court of all judgments made in that foreign main proceeding. As Lord Mance noted, the enforcement of foreign judgments is so fundamental in international cases that had the CBIR been intended to provide the English court with a power to enforce any foreign court's judgment in insolvency proceedings, they would have done so expressly. Articles 21, 25 and 27 of Schedule 1 to the CBIR (which gives effect in England to the UNCITRAL Model Law) do list certain forms of assistance that an English court might provide to the foreign main proceeding, but do not make any mention of enforcement of judgments.

Comment

The Supreme Court's decision is to be welcomed over the Court of Appeal's surprising, and potentially radical, analysis. Unlike the Court of Appeal's decision, the Supreme Court's approach will protect English resident individuals from the jurisdiction of foreign courts to which they have not submitted.

However, the Supreme Court's decision that the principle of universalism has no application in this context demonstrates a fundamental problem: in the context of international insolvencies outside the EU, absent specific national and international legislation, it is not possible to avoid difficult legal issues as to which courts have jurisdiction to apply which law. Those difficult issues lead to complex, lengthy and costly proceedings, which can result in little or no substantial benefit for an insolvent company's creditors.

Indeed, one only has to look to the facts of this case for an example. Though the New York Judgment must be carefully treated as it was made in the absence of any defence, it would unquestionably have been in the interests of creditors to recover sums paid to the Romans if the New York court was correct that such payments constituted preferences or similarly avoidable transactions under US law. It would not be desirable for businessmen in England to be able to avoid the possible consequences upon insolvency of their businesses by ensuring that those businesses would, upon insolvency, be subject to foreign main proceedings.

Fortunately, that situation will only arise in limited circumstances. As Lord Collins noted, even on the facts of Rubin, it would have been possible for the High Court appointed receivers to bring proceedings in England, on behalf of the trust, to recover sums paid to the Romans. The receivers, as recognised foreign representatives, would have had standing to make an application under section 238 of the Insolvency Act 1986 pursuant to the CBIR, Schedule 1, article 23. If the receivers went on to obtain judgment against the Romans in England, that judgment could have been enforced against the Romans.

Similarly, the breadth of the doctrine of submission in relation to foreign judgments in personam means that the circumstances in Rubin rarely arise. In New Cap Reinsurance Corporation (in liquidation) v A E Grant, which was heard by the Supreme Court in conjunction with Rubin, it was held that an Australian judgment could be enforced against an English defendant where the defendant was also a creditor of the insolvent Australian company and had submitted a proof of claim in the Australian insolvency proceedings.

That ruling may leave parties facing a difficult choice as to whether or not an English person should enter a proof of claim in a foreign jurisdiction. The person will need to determine whether the benefit of obtaining a dividend from a foreign insolvency proceeding is outweighed by the risk that in seeking such dividend, that person may be exposed not only to ancillary counter-claims but also to transaction avoidance claims available to an insolvent entity (or its liquidator) in the foreign insolvency proceedings.

The decision in Rubin also seems to overrule the previous Privy Council decision in Cambridge Gas. In that case, the Privy Council permitted the ownership of assets located in the Isle of Man to be determined in a US insolvency proceeding even though the party that owned the assets had not submitted to the US court.

It should be noted that the Rubin appeal concerns only the position under the common law and the CBIR. Where a foreign judgment is given in an EU insolvency proceeding, it will be recognised and enforceable in England with no further formalities under article 25(1) of the EU Regulation. The structure of the Regulation, with in-built protections reflecting the policy requirements of the EU's Member States, reinforces Lord Collins' remarks that any enforcement of foreign judgments in international insolvencies is best suited to legislation, treaties and conventions. For now, English defendants can choose whether or not to submit to foreign jurisdiction outside the EU, regardless of the insolvency of their counterparty.

Finally, the Supreme Court's judgment is noteworthy because it contains implicit support for the Court of Appeal's judgment in Adams v Cape Industries [1990] Ch 433 , thus providing greater certainty as regards the rules for the common law enforcement of foreign judgments, whether or not related to foreign insolvency proceedings.