The Supreme Court has ruled that foreign judgments for a debt or definite sum of money can, without more, create an immediate common law obligation within this jurisdiction for the debtor to pay the sum owed. Crucially, that obligation does not depend on recognition or registration in this jurisdiction. As a result, a foreign judgment debt is capable of forming the basis of a bankruptcy petition in England and Wales, even where the judgment has not been recognised or registered here.
Background
Mr Drelle was a Russian national living in the UK and a former director of Servis-Terminal LLC (ST) in Russia. ST obtained judgment in Russia against Mr Drelle for RUB 2bn (approximately £22m) in relation to, amongst other things, alleged breaches of his directors’ duties (the Russian Judgment). Mr Drelle sought to appeal the Russian Judgment in Russia, but was ultimately unsuccessful.
ST did not obtain recognition of the Russian Judgment in England and Wales, and the judgment was not capable of registration in this jurisdiction. ST commenced bankruptcy proceedings against Mr Drelle based on the Russian Judgment, and a bankruptcy order was ultimately made in the Insolvency and Companies Court on 31 March 2023. ICC Judge Burton concluded that the Russian Judgment was a debt capable of founding a bankruptcy petition in England.
That decision was appealed to the High Court (discussed here) and then to the Court of Appeal (discussed here), before coming to the Supreme Court.
The law
Section 267 of the Insolvency Act 1986 (the Act) sets out the grounds for presenting a bankruptcy petition. Section 267(2)(b) provides that:
“a creditor’s petition may be presented to the court in respect of a debt or debts only if, at the time the petition is presented, the debt, or each of the debts, is for a liquidated sum payable to the petitioning creditor… either immediately or at some certain, future time, and is unsecured”
The Court of Appeal previously held that an unrecognised foreign judgment such as the Russian Judgment could not provide a basis for a bankruptcy petition. The key question before the Supreme Court was whether an unrecognised and unregistrable foreign judgment for a debt or definite sum of money awarded in the creditor’s favour could constitute a “debt” for the purposes of section 267 of the Act.
Supreme Court Decision
The Supreme Court judgment was given by Lord Briggs and Lord Hamblen, with whom the other Lords agreed. The relevant issues to be determined were:
At common law, what is the legal effect of an unrecognised foreign judgment for a debt or definite sum?
Does such a judgment give rise to a “debt” within the meaning of section 267 of the Act such that a bankruptcy petition can be presented in reliance on it?
Issue 1 – The effect of the Russian judgment
It is a long-established principle of common law that where a foreign court with jurisdiction gives a final judgment for a definite sum of money, that judgment creates an immediate legal obligation on the debtor to pay the relevant sum (the “obligation principle”). The obligation principle was first established in two decisions dating back to the 1840s. In Russell v Smith (1842) 9 M & W 810, Parke B stated:
“Where the Court of a foreign country imposes a duty to pay a sum certain, there arises an obligation to pay, which may be enforced in this country.”
Importantly, the court held that the obligation principle arises when a final and conclusive judgment is given by the relevant foreign court. It does not depend on recognition of that judgment in this jurisdiction.
Issue 2 – The meaning of “debt” under section 267 of the Act
The Lords considered that the term “debt” in section 267 is used in a wide and general sense. That is clear from the more prescriptive requirements imposed by that section on a debt which is to be the subject of a petition. The court held that there was no reason why “debt” in section 267 of the Act should be construed more narrowly. Accordingly, the obligation to pay a sum of money under an unregistrable, unrecognised foreign judgment is a debt capable of forming the basis of a bankruptcy petition.
The Supreme Court unanimously allowed the appeal and upheld the making of the bankruptcy order on the basis that the Russian Judgment was a “debt” capable of founding a bankruptcy petition. No prior recognition or registration of the judgment was required.
Implications
This decision removes potential barriers to the enforcement of foreign judgment debts through bankruptcy proceedings in this jurisdiction. That will be welcome news for foreign creditors who have already incurred significant costs in obtaining judgment.
The Supreme Court did not determine whether the same principle applies to winding up proceedings. However, the court’s reasoning relied largely on general common law principles concerning the nature of the underlying debt. Those principles may well apply equally to corporate insolvency proceedings, opening the possibility for creditors to rely on unrecognised foreign judgments in winding up proceedings too.
