Foreign judgments have emerged as a significant element in the landscape of cross-border legal disputes, particularly in cases involving bankruptcy proceedings. The recent case of Drelle v Servis-Terminal LLC[2024] EWHC 521 (Ch) serves as a landmark example, addressing whether a foreign judgment debt can form the basis of a bankruptcy petition in England and Wales without formal recognition. This article delves into the legal principles surrounding the case, the arguments presented by both sides, and the broader implications of the decision.

The Framework for Bankruptcy Petitions in England and Wales

Under English law, creditors may present a bankruptcy petition against a debtor by demonstrating that the debtor is unable to pay their debts or lacks a reasonable prospect of doing so. Section 267(2)(c) of the Insolvency Act 1986 provides that a creditor meets this threshold by:

• Serving a statutory demand on the debtor, which remains unmet or unchallenged, or
• Showing that execution or other process for the debt has been returned unsatisfied, in whole or in part (Section 268(1)(b) Insolvency Act 1986).

In many instances, statutory demands are based on unpaid judgments. However, when the judgment originates from a foreign jurisdiction, the situation becomes more complex.

The Role and Recognition of Foreign Judgments

Domestic judgments typically raise no procedural issues in bankruptcy petitions. However, Section 6 of the Foreign Judgments (Reciprocal Enforcement) Act 1933 (“FJ(RE) Act 1933”) stipulates that foreign judgments subject to the Act must first be recognised by the English courts before enforcement actions can proceed. For judgments outside the Act’s scope,such as in the Drelle case, the process relies on the common law principles outlined in Dicey, Morris & Collins on the Conflict of Laws ("Dicey").

These principles regard foreign judgments as generally inviolate, barring specific exceptions such as fraud, public policy violations, or procedural improprieties.

Case Background: Drelle v Servis-Terminal LLC

Mr. Valeriy Drelle, a Russian national residing in England,faced a bankruptcy petition predicated on a £11 million judgment from a Russiancourt. This judgment arose from allegations that Mr. Drelle, in his capacity asa director of Servis-Terminal LLC ("ST"), breached hisfiduciary duties by authorising an unsecured loan that was not repaid. Despiteexhausting multiple appeals, including at the Russian Supreme Court, thejudgment remained upheld.

In opposing the bankruptcy petition, Mr. Drelle argued thatthe Russian proceedings were tainted by unfairness and breached naturaljustice. He alleged undue influence by Gazprom Neft ("GPN"),ST’s largest creditor and a Russian state-controlled entity, which funded ST’slegal costs. Mr. Drelle maintained that the proceedings were orchestrated tosecure a judgment against him, making it a miscarriage of justice.

In a related development, the English court orderedServis-Terminal and its backer GPN to provide security for costs in the amountof £675,000. This marked a significant precedent, recognising the challenges inenforcing English judgments in Russia due to geopolitical tensions andsanctions. The court acknowledged that recovering costs from an insolvententity such as ST or a sanctioned entity like GPN would be problematic, therebyjustifying the need for upfront security.

Arguments Presented to the English Court

ST’s Position

ST maintained that the Russian judgment constituted a validdebt, sufficient to support a bankruptcy petition. It argued that the EnglishBankruptcy Court was not required to re-litigate the merits of the judgment butmerely to confirm whether the debt was enforceable and undisputed.

Mr. Drelle’s Position

Mr. Drelle asserted that the debt was subject to a genuine and substantial dispute, which invalidated its use as grounds for bankruptcy. He contended that ST should have sought recognition of the judgment through Civil Procedure Rules Part 7 before pursuing bankruptcy. This would have allowed a thorough examination of the judgment’s validity, including the opportunity for disclosure and cross-examination of expert witnesses.

He warned that allowing the bankruptcy petition to proceed would amount to “recognition by the back door,” shifting the burden onto him to disprove the validity of the debt without adequate procedural safeguards.

The Court’s Decision

The Bankruptcy Court’s role was to determine whether Mr. Drelle’s objections raised a bona fide dispute on substantial grounds. The court examined the Russian appellate courts’ reasoned decisions, which upheld the initial judgment, and found no evidence of political interference or judicial bias.

Consequently, the court concluded that the debt was not subject to a genuine and substantial dispute and, therefore, the court could make a bankruptcy order.

Key Legal Findings

Foreign Judgments in Bankruptcy: The court affirmed that an unsatisfied foreign judgment could constitute a debt under Section 267 of the Insolvency Act 1986, even if not formally recognised under the FJ(RE) Act 1933.

Impeaching Foreign Judgments: English courts will generally treatforeign judgments as inviolate but retain the discretion to go behind thejudgment if there is evidence of fraud, collusion, or miscarriage of justice.No such evidence was found in this case.

Procedural Anomalies: The decision underscores a peculiar inconsistency: judgmentssubject to the FJ(RE) Act 1933 require formal recognition, while others, likethe Russian judgment here, may bypass this requirement in bankruptcyproceedings.

Implications for Cross-Border Disputes

This case highlights the nuanced approach required whendealing with foreign judgments in English courts, particularly in bankruptcycontexts. For creditors, the ruling provides a pathway to enforce foreign debtsmore efficiently. For debtors, the case emphasises the importance of robustlegal challenges to protect against potential injustices. The security forcosts order adds another layer of protection for parties facing enforcementchallenges in politically sensitive jurisdictions.

Conclusion

The appeal of Valeriy Drelle’s case exemplifies the intricate dynamics of integrating foreign judgments into English legal frameworks. By permitting an unrecognised judgment to underpin a bankruptcy petition, the court has expanded the scope of enforceability for foreign debts. As cross-border disputes become increasingly prevalent, the balance between international comity and domestic procedural safeguards will remain a critical area for legal development.