Servis-Terminal LLC v Valeriy Ernestovich Drelle: what it means for English insolvency law

Significantly, the Court held that a bankruptcy petition cannot be based on a foreign judgment unless that judgment has first been recognised by the English courts. This is the first time the Court of Appeal has considered this issue, and the judgment disapproves certain academic commentary in the area.  Those involved in similar proceedings will therefore need to consider carefully the implications of this judgment on their position.

Servis-Terminal LLC, a Russian company in liquidation, obtained a judgment from the Arbitrazh Court of Yaroslavl Oblast against Valeriy Ernestovich Drelle for 2 billion RUB (approximately £16 million). Mr Drelle’s appeals against the judgment in Russia all failed.

Servis-Terminal LLC sought to enforce the judgment in England against Mr Drelle, who was now resident in London. The company served a statutory demand on him, which went unpaid, and subsequently filed a bankruptcy petition on 14 October 2020. 

At first instance, ICC Judge Burton ruled that there was no genuine and substantial dispute regarding the debt and made a bankruptcy order against Mr Drelle on 31 March 2023. Initially, Mr Drelle did not argue that a foreign judgment could not support a bankruptcy petition; rather, he contended that the judgment itself was unsafe.

On appeal, however, Mr Drelle argued that the bankruptcy petition could not proceed because the Russian judgment had not been recognised by an English court. Richards J dismissed the appeal on 11 March 2024, holding that the foreign judgment still constituted a “debt” under section 267 of the Insolvency Act 1986.

The issue before the Court of Appeal was therefore whether a foreign judgment, without prior recognition in this jurisdiction, could constitute a payable debt for the purposes of a creditor’s bankruptcy petition.

The Court of Appeal unanimously allowed the appeal and dismissed the petition.  In doing so, it confirmed that foreign judgments must be recognised in this jurisdiction before they can be the subject of a bankruptcy petition.

Notably, section 267(2)(b) of the Insolvency Act 1986 provides that in order for a debt to be the grounds for a creditor’s petition, it must be for a liquidated sum payable to the petitioning creditor either immediately or at some certain future time.  It has now been confirmed that a foreign judgment debt cannot be regarded as ‘payable’ for these purposes without recognition. 

Newey LJ, delivering the leading judgment, held (at paragraph 55) "while an unrecognised judgment may be determinative for certain purposes, it will have "no direct operation" in this jurisdiction and so cannot be used as a "sword", whether as regards "direct execution" or as the basis of a bankruptcy petition… A sum for the payment of which a foreign judgment provides is not, as it appears to me, to be regarded as so "payable" if the judgment is unenforceable unless and until recognised by a Court in this jurisdiction.”

In addition, Snowden LJ explained that (paragraph 64) “a person should not be able to invoke the collective enforcement mechanisms of bankruptcy or winding-up proceedings in the English court unless and until he obtains an English judgment or registers the judgment or has some other basis under a statute or treaty permitting such enforcement of foreign judgment.” 

This reflects the general principle that foreign judgments do not automatically carry enforcement rights in England. Instead, they usually require recognition in this jurisdiction before a creditor can take enforcement steps.

The Court of Appeal’s ruling provides welcome clarity on the interplay between foreign judgments and English insolvency law.

The judgment confirms that foreign judgment debts cannot automatically be used for the purposes of commencing bankruptcy proceedings in England and Wales. Instead, creditors must first take the step of applying for recognition of the foreign judgment before issuing bankruptcy proceedings.  Whilst this may in many cases be a procedural formality, creditors will need to be aware of the additional time and costs involved in obtaining recognition. For debtors, this step ensures that they are protected from potentially unfair or improperly obtained foreign judgments, but if a debtor does wish to avoid the presentation of a bankruptcy petition on the back of a foreign judgment they will need to engage promptly with the judgment creditor’s application for recognition.