Can a foreign judgment debt directly give rise to insolvency proceedings in England?
The Court of Appeal has held that seeking satisfaction of a foreign judgment debt using a statutory demand and the spectre of bankruptcy proceedings first requires the judgment to be recognised in this jurisdiction.
ENFORCEMENT OF FOREIGN JUDGMENTS – PRINCIPLES
The starting position regarding foreign judgments in this jurisdiction is that, unless and until formally recognised: (i) judgments of foreign courts have no prima facie legal effect in England because foreign courts have no authority in England; and (ii) while international comity requires that respect be given to exercises of power within a sovereign's own territory, that is where the obligations of comity end.
Dicey, Morris & Collins on the Conflict of Laws, 16th ed., states in rule 45 that "A judgment of a court of a foreign country…has no direct operation in England but may (1) be enforceable by claim or counterclaim at common law or under statute, or (2) be recognised as a defence to a claim or as conclusive of an issue in a claim" ("Rule 45").
There are a number of ways a foreign judgment may be enforced in England, depending on the jurisdiction of the court that issued the judgment. There are various international conventions, bilateral treaties, and other arrangements in place in England providing for the (usually mutual) recognition and enforcement of foreign judgments from specified jurisdictions, and such enforcement is governed by UK statutes. Where there are no such arrangements in place, foreign judgments may still be enforceable via the common law whereby the judgment creditor would sue on the debt arising from or created by the foreign judgment, or in other words they would sue on the foreign judgment as a debt.
In this context, is it possible to present a statutory demand for payment of a foreign judgment debt? Is it first necessary for the foreign judgment to be recognised in this jurisdiction? The question has practical significance because if a valid statutory demand is not satisfied within 28 days (assuming there is no substantial dispute regarding the underlying debt), the creditor has the right to issue a bankruptcy or winding up petition against the judgment debtor.
Background
The foreign judgment in this case arose from proceedings brought in the Russian courts by the trustee-in-bankruptcy of a Russian company (the "Company") against the Company's former chief executive officer, Mr Valeriy Drelle, for damages arising from unpaid loans he had caused the Company to advance, having acted in bad faith and unreasonably.
Mr Drelle resided in London, and the Company served on him a statutory demand, pursuant to section 268(1)(a) of the (UK) Insolvency Act 1986 (the "1986 Act"), in respect of the judgment debt from the Russian proceedings. The demand was not satisfied, and the Company petitioned for Mr Drelle's bankruptcy. The English courts granted the petition, made a bankruptcy order against Mr Drelle, and dismissed his initial appeal, holding that the Russian judgment did not need to be formally recognised in England through recognition proceedings in order for it to form the basis of a bankruptcy petition. That the foreign judgment had not been recognised did not prevent it being a "debt" within the meaning of the 1986 Act, and the Court drew a comparison with a trade debt in respect of which there is no court judgment. Mr Drelle appealed to the Court of Appeal.
Parties' positions
In the Court of Appeal, Mr Drelle observed that a foreign judgment within the scope of the Foreign Judgments (Reciprocal Enforcement) Act 1933 (the "1933 Act") needed to be registered before it could found the basis of a bankruptcy or winding-up petition, because prior to registration the judgment did not constitute a "debt" within the meaning of section 267 of the 1986 Act. Although Russian court judgments do not fall within the scope of the 1933 Act, on the same basis, any foreign judgment must need to be registered or recognised before it could constitute a "debt" for the purposes of demands and bankruptcy proceedings under the 1986 Act.
The Company argued that the 1986 Act did not require that a "debt" should be the subject of a judgment or even that it should be enforceable at common law, and that Rule 45 did not apply because presentation of a bankruptcy petition does not amount to enforcement by execution of the debt in question.
The Court of Appeal's judgment
The Court of Appeal acknowledged that the 1986 Act does not expressly provide that a foreign judgment cannot be considered to give rise to a "debt" unless recognised or registered, and that a foreign judgment can be determinative on a point even if the judgment is not formally recognised or registered in England. However, the Court observed that Rule 45 reflects the general rule that an unregistered foreign judgment "has no direct operation in England", and that a "judgment creditor seeking to enforce a foreign judgment in England at common law cannot do so by direct execution of the judgment" but "must bring an action on the foreign judgment".
Although insolvency proceedings are not a form of "direct execution", they are a form of collective enforcement of admitted or proven debts, such that a bankruptcy or winding-up petition in respect of a judgment is still a form of enforcement in this sense. Whether seeking to enforce a foreign judgment by way of execution or by commencing insolvency proceedings in respect of the judgment debt, the judgment is not being used merely defensively but as a "sword".
The fact that a foreign judgment can be deemed conclusive on points decided may be important where an application is made for recognition, but the foreign judgment "has no direct operation in England" and so cannot provide the basis for other proceedings unless it is first recognised in England. Accordingly, a foreign judgment is not a "debt" for the purposes of section 267, which requires that such a debt must be "payable".
Importantly, section 6 of the 1933 Act shows that Parliament intended that the only method of executing foreign judgments covered by the 1933 Act – i.e. enforcement of judgments "as a sword" – should be by registration such that, once registered, the judgment is treated as though it were the final judgment of an English court. Until it is recognised, a foreign judgment is only treated as final and conclusive as to the matters decided in the defensive sense of being a res judicata and giving rise to an issue estoppel.
Commentary
The decision raises various points of legal principle and theory regarding the status of foreign judgments, such as why an unrecognised foreign judgment may be thought of as a debt for the purposes of enforcement via common law proceedings, yet not for the purposes of bankruptcy or insolvency proceedings. It may be that permitting unrecognised foreign judgments to found a statutory demand would in effect be a shortcut to "enforcement" of the judgment, at least in the looser sense of applying pressure to cause the debtor to satisfy the debt. Accordingly, the practical effect of the decision is that creditors of foreign judgments will need to seek formal recognition or enforcement routes where available, or (where there are no reciprocal arrangements) to seek to enforce the debt via the common law route before seeking to present a statutory demand and bankruptcy petition. This will typically be more time-consuming for judgments from jurisdictions with which the UK has no reciprocal arrangements for the recognition and enforcement of judgments. From a policy perspective, perhaps the Court felt that it should not be easier or faster to "enforce" (in this manner) judgments from jurisdictions with which the UK has no reciprocal arrangements for the recognition and enforcement of judgments (for example, as here, Russia) than judgments from jurisdictions with which the UK does have reciprocal arrangements and for which there is a formal statutory procedure for such recognition / registration and enforcement.
If you have any queries regarding the recognition process of a foreign judgment, please contact any of the authors.
