The procedural issues attached to certain steps related to insolvency can be incredibly complex, especially where they involve a conflict of laws. Getting expert legal advice is essential to ensure any Court petitions made for Winding Up or bankruptcy are correct, and the risk of the petition being challenged is minimised. The decision in Drelle v Servis-Terminal LLC provides a comprehensive illustration of the arguments and legal considerations that can arise when a petition for bankruptcy is based on a foreign judgment.
How Do I Bring a Bankruptcy Petition in England and Wales?
To successfully bring a bankruptcy petition, the Creditor must show that the Debtor owes money and cannot pay the debt and there is no reasonable prospect that they will be able to satisfy it in the future.
Under section 267(2)(c) of the Insolvency Act 1986 the Creditor must serve a Statutory Demand on the Debtor, stating that the outstanding debt must be paid. If the Debtor fails to pay the amount stated in the Statutory Demand and the Statutory Demand is not set aside, the Creditor can bring a bankruptcy petition. Often the Statutory Demand will be based on a County Court Judgment (CCJ) stating the debtor owes the money and it must be paid by a certain date.
When it comes to foreign judgments stating that a debt is owed and must be paid, section 6 of the Foreign Judgments (Reciprocal Enforcement) Act 1933 (1933 Act) provides that if the judgment is subject to the 1933 Act, the creditor must have it recognised by an English Court before they can enforce it. However, not all foreign judgments for debt fall under the 1933 Act.
Background to Drelle v Servis-Terminal LLC
The High Court was asked to determine an appeal regarding a bankruptcy petition which was founded on a judgment of a Russian court (Russian judgment) stating the Debtor owed the Creditor RUB 2 billion (approximately £22 million). The Russian judgment was not registrable under the 1933 Act and the Creditor did not seek to have it recognised by a court in England and Wales. Instead, the Creditor petitioned for bankruptcy under section 267 of the Insolvency Act 1986.
The Debtor argued that the Russian judgment was not a debt within section 267 because it could not be enforced without registration under the 1933 Act. This issue had not come before the Court at first instance because the Debtor had relied on other grounds to contest the petition, including the fact that the debt was disputed on the grounds the Russian Court had not been impartial in its ruling.
The question was whether the Russian judgment met the requirements of section 267(2)(b), specifically whether it gave rise to a "debt payable... either immediately or at some certain, future time." Only debts that satisfied section 267 could be found in a bankruptcy petition.
The Court’s Decision
In situations where a foreign court has made a judgment, the Courts in England and Wales will apply the principles set out in Dicey, Morris & Collins on the Conflict of Laws. Rule 48 from Dicey states that a foreign judgment will be considered safe and final, unless it can be called into question on grounds of fraud, being contrary to public policy, or opposed to natural justice.
The Honourable Mr Justice Richards, after examining the initial Russian judgment concluded that it was well-reasoned and had been upheld at every appeal stage. Each appeal judgment was also logical and there was no evidence of any political interference.
After considering all the other facts, Justice Richardson stated there was no substantive dispute surrounding the debt, therefore, a bankruptcy order could be made.
Regarding the argument that the Creditor had not taken steps to have the Russian judgment formally recognised in the English Courts, Justice Richardson held that the fact the foreign judgment was ‘unrecognised’ did not mean a debt did not exist.
Justice Richardson then went on to consider the case of Sun Legend Investments Ltd v Jade Yuk Kuen Ho [2013] BPIR 533:
“Thus far, my own analysis leads me to the conclusion that Mr Drelle's arguments based on the Debt point should be dismissed. I note that in Sun Legend Investments Ltd v Jade Yuk Kuen Ho [2013] BPIR 533, District Judge Musgrave, sitting in the Birmingham County Court, considered an identical issue to that arising in the present case. Sun Legend Investments is concerned with a Hong Kong judgment. The debtor opposed the making of a bankruptcy order on the basis that the creditor was not entitled to present a bankruptcy petition based on sums due under that judgment until after successful Recognition Proceedings. The overall force of the debtor's opposition to the making of a bankruptcy order was somewhat diminished by the fact that, in open correspondence, her English solicitors had admitted that the debt was due. Nevertheless, District Judge Musgrave considered the debtor's argument, concluding as follows:
“Sun Legend has a cause of action and is in a position no different from any other creditor who seeks to pursue bankruptcy without holding an English judgment. […] I also accept the submission that a bankruptcy petition does not constitute enforcement of the Hong Kong judgment. The bankruptcy jurisdiction since 1986 is a separate jurisdiction involving a class remedy. There is no requirement for an English judgment as a precondition to proceeding with a petition. There is in my view a debt due to Sun Legend which satisfies the requirements of the Insolvency Act 1986”.”
The appeal was subsequently dismissed, and the Creditor was free to bring a bankruptcy petition.
Comment
This case clarifies that a foreign judgment that does not fall under the ambit of the 1933 Act but states a debt exists can be relied on if the Creditor wishes to bring a bankruptcy petition in a Court in England and Wales, even if the Creditor does not seek to have the judgment recognised. However, the judgment does create an anomaly because in cases where the foreign judgment is covered by the 1933 Act, the Creditor would be required to have the judgment recognised by the Courts in England and Wales.
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