Court of Appeal finds bankruptcy petition cannot be presented on basis of unrecognised foreign judgment

In a judgment handed down at the end of January, the Court of Appeal held that a bankruptcy petition could not be presented on the basis of a Russian judgment where that judgment had not been the subject of recognition proceedings in the English court: Servis-Terminal LLC v Drelle [2025] EWCA Civ 62. The court overturned the High Court's decision, which had reached the opposite conclusion.

The decision shows that, before a creditor under a foreign judgment can petition for bankruptcy against the judgment debtor in this jurisdiction, it will need to either register the judgment under one of the statutory schemes that give effect to bilateral enforcement treaties between the UK and various foreign states or (if those schemes don't apply, as in the case of Russia and various other countries such as the US and China) bring an action on the judgment at common law. The decision also suggests that the same will be true if the creditor wishes to serve a statutory demand in respect of the judgment debt. This decision will therefore mean further time and expense for creditors wishing to enforce foreign judgments in England (at least against individuals).   

The Court of Appeal's judgment does not directly address the question of whether a winding up petition against a company, as opposed to a bankruptcy petition against an individual, can be presented on the basis of an unrecognised and unregistered foreign judgment. While there are no doubt arguments that can be made both ways, the court's conclusion that such a judgment does not constitute a debt that can be pursued in England seems likely to be read across to the winding up context. Unlike a bankruptcy petition, however, a winding up petition can also be presented where the creditor proves that the value of the company's assets is less than its liabilities "taking into account its contingent and prospective liabilities" – which may include the liability represented by an unregistered and unrecognised foreign judgment.

It should also be noted that the decision does not necessarily preclude a creditor petitioning for bankruptcy on the basis of a foreign debt, where that debt is for a liquidated sum, exists independently, and is not the subject of any foreign judgment – subject of course to the requirement that the debt is not disputed on substantial grounds.

Background

Servis-Terminal LLC ("the Company") obtained a Russian court judgment against Mr Drelle for RUB 2 billion on the basis that he had failed to act in good faith or reasonably when, as a director of the Company, he had procured it to make a loan in that amount to another Russian company, which was not repaid.

The Company served a statutory demand on Mr Drelle, who was by then resident in London, under the Insolvency Act 1986, in which it claimed to be owed RUB 2 million based on the Russian judgment. It later presented a bankruptcy petition against Mr Drelle, which was granted by ICC Judge Burton on the basis that the judgment represented a debt that was not subject to a genuine and substantial dispute.

That decision was upheld by Richards J, who dismissed an argument (raised before him on appeal, but not before ICC Judge Burton at first instance) that the debt could not form the basis of a bankruptcy petition as the Russian judgment had not been the subject of recognition proceedings in this jurisdiction.

Mr Drelle challenged that conclusion on appeal to the Court of Appeal.

Decision

The Court of Appeal allowed the appeal, finding that a bankruptcy petition cannot be presented in respect of a foreign judgment which has not been recognised or registered in England. Newey LJ gave the leading judgment, Snowden LJ gave a short concurring judgment and Popplewell LJ agreed with both judgments.

Newey LJ noted that s.267 of the 1986 Act provides for a bankruptcy petition to be presented in respect of a “debt” which “is for a liquidated sum payable to the petitioning creditor”. It does not state that a foreign judgment will not give rise to a “debt” unless recognised or registered in this jurisdiction, and (as recognised in rules 45 and 51 of Dicey, Morris & Collins on the Conflict of Laws) a foreign judgment can be conclusive as to matters decided in it.

However, rule 45 of Dicey Morris & Collins also states that a foreign judgment "has no direct operation in England", and so a judgment creditor seeking to enforce it in England cannot do so by direct execution of the judgment but must bring an action on the foreign judgment at common law (or register the foreign judgment under the statutory regimes that apply to judgments from certain foreign states, which do not include Russia). While Newey LJ acknowledged that insolvency proceedings are not a form of “direct execution", he said they are still a form of enforcement as the judgment is not being used merely defensively but as a “sword”.

Newey LJ went on to explain that the principle that a foreign judgment has no direct operation in England reflects the common law’s aversion to enforcing a foreign exercise of sovereign power. That logic, he said, suggests that any use of an unrecognised and unregistered judgment as a “sword”, including presentation of a bankruptcy petition founded on it, is objectionable.

He concluded that an unrecognised foreign judgment is not to be seen as giving rise to a “debt” capable of founding bankruptcy proceedings under s.267 – in a similar way to the fact that (as was not disputed) a foreign tax liability cannot be regarded as a debt for these purposes, as it is not enforceable in England (under the so-called "revenue rule"), despite there being no express carve-out to that effect in s.267. In each case, the enforcement of such debts would represent an exercise of foreign sovereign power.

Similarly, Newey LJ commented, it was hard to see how it could be appropriate to serve a statutory demand in respect of an unrecognised foreign judgment if that lack of recognition meant that, in the eyes of English law, there was no debt that could be pursued – despite footnotes suggesting the contrary in some of the leading textbooks.

The court's conclusion was also consistent with the position in relation to judgments which fall into the statutory enforcement schemes, such as the Foreign Judgments (Reciprocal Enforcement) Act 1933, but have not been registered under those schemes:

• The 1933 Act provides: under s.6, that no proceedings can be brought for the recovery of a sum payable under a foreign judgment to which the Act applies, other than proceedings by way of registration; and under s.2, that a registered judgment shall have the same force and effect, and proceedings may be taken on it, as if it had been an English judgment.
• In Re a Judgment Debtor [1939] Ch 601, the Court of Appeal concluded that a bankruptcy notice could be served on the basis of a French judgment which had been registered under the 1933 Act.
• Newey LJ said it was clear from the judgment that the court considered that the bar in s.6 on "proceedings for recovery of a sum payable under a foreign judgment" encompassed bankruptcy proceedings. Accordingly, the decision was authority that a bankruptcy petition cannot be presented in respect of an unregistered foreign judgment.
• Newey LJ was inclined to think this point was integral to the court's reasoning and therefore binding, but even if not it would be persuasive and the decision had a sound basis under the 1933 Act.

If, therefore, a bankruptcy petition could be founded on an unrecognised foreign judgment, in cases that fell outside the statutory schemes, it would mean that a holder of such a judgment was in a better position than a holder of an unregistered judgment. Snowden LJ made a similar point in his concurring judgment, considering that just as a person could not invoke the individual enforcement mechanisms of the English court for his own benefit before obtaining an English judgment or registering the foreign judgment, the same person could not invoke the collective enforcement mechanisms of bankruptcy or winding up proceedings without doing the same.

Newey LJ acknowledged that bankruptcy proceedings need not be based on a judgment debt, but in this case there was no debt that could found the petition independently of the foreign judgment. The liability that had given rise to the Russian judgment was an entitlement to damages for breach of duty, not a liquidated debt. Even if there had been a debt underlying the Russian judgment which could have grounded a petition in this case, s.34 of the Civil Jurisdiction and Judgments Act 1982 bars proceedings on a cause of action which is the subject of a foreign judgment unless that judgment is not enforceable or entitled to recognition in England, which was not the case here.

Newey LJ's conclusion that an unrecognised foreign judgment did not constitute a "debt" for the purposes of s.267 of the 1986 Act was reinforced by the requirement under that section that a "debt" in respect of which a bankruptcy petition is presented should be payable "either immediately or at some certain, future time". A sum ordered to be paid under a foreign judgment could not be regarded as "payable" if it was unenforceable unless and until recognised by the English court.