England and Wales: a bankruptcy petition cannot be presented on the basis of an unrecognised foreign judgment

I. INTRODUCTION

1. The UK Court of Appeal, in Servis-Terminal LLC v. Valeriy Ernestovich Drelle (“Drelle CA”),^[1] has overturned the English High Court’s decision in Valeriy Ernestovich Drelle v. Servis-Terminal LLC (“Drelle HC”),^[2] and held that a bankruptcy petition cannot be presented on the basis of a foreign judgment that has not been subject to recognition proceedings before the courts of England and Wales.
2. The appeal raised a question of wider significance and clarified that an unrecognised foreign judgment cannot serve as proof of debt for bankruptcy proceedings. As explained below, the decision was founded on Rule 45 of Dicey, Morris & Collins on the Conflict of Laws, 16th edn (“Dicey”), and a limited interpretation of Rule 51 of Dicey.

II. BACKGROUND

3. The bankruptcy trustee of Servis-Terminal LLC (“Servis”) brought proceedings against Mr. Drelle, the former CEO of Servis, for his breach of good faith obligations in relation to a loan of RUB 2 billion made by Servis to one Fort Stetiton LLC. The Arbitrazh Court of Yaroslavl Oblast held in favour of Servis, against Mr. Drelle for RUB 2 billion. Mr. Drelle appealed unsuccessfully, and the judgment became final and conclusive on 17 February 2020 (“Russian Judgment”).
4. Pursuant to the Russian Judgment, Servis served a statutory demand on Mr. Drelle^[3] in terms of Section 268(1)(a) of the Insolvency Act, 1986 (“Insolvency Act”). Subsequently, Servis presented a bankruptcy petition on the basis that the Russian Judgment constituted an unpaid debt.
5. In Drelle HC, Richards J held that a foreign judgment was capable of constituting a ‘debt’ under Section 267 of the Insolvency Act, even if it had not been recognised. The court inter alia relied on Rule 51 of Dicey, noting that, subject to Rules 52 to 55, a foreign judgment is conclusive of the matters it adjudicates. Mr. Drelle appealed against Richards J’s decision.

III. IMPORTANT RULES OF DICEY

6. Rule 45 of Dicey provides 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.”
7. Rule 51 of Dicey, titled “Conclusiveness of foreign judgments: defences”, states that “[a] foreign judgment which is final and conclusive on the merits and not impeachable under any of Rules 52 to 55 is conclusive as to any matter thereby adjudicated upon, and cannot be impeached for any error either (1) of fact; or (2) of law.”

IV. PARTIES’ SUBMISSIONS BEFORE THE COURT OF APPEAL

A. Mr. Drelle’s Submissions

8. Mr. Drelle challenged the validity of the bankruptcy petition, arguing that an unrecognised foreign judgment cannot create a legally enforceable debt under Section 267(2)(b) of the Insolvency Act. He relied on Rule 45 of Dicey, contending that a foreign judgment must be recognised before it can be enforced.
9. In support of this position, Mr. Drelle cited Re a Judgment Debtor (“Judgment Debtor”),^[4] arguing that registrable foreign judgments require registration before they can support a bankruptcy petition, and therefore, unrecognised judgments should be treated similarly.

B. Servis’ Submissions

10. Servis, relying on Bishopsgate Investment Management Limited v. Maxwell (“Bishopgate”),^[5] countered that Section 267(2) does not require a debt to arise from a judgment or be enforceable at common law. Relying on Rule 51 of Dicey, Servis asserted that since Mr. Drelle could not prove fraud or procedural unfairness, the Russian judgment should be treated as a valid debt for the purposes of the bankruptcy petition.
11. Servis also argued that bankruptcy petitions are not equivalent to direct enforcement of a judgment. It cited Ridgeway Motors v. ALTS Ltd (“Ridgeway”),^[6] where the court held that winding-up proceedings are a collective enforcement mechanism designed to distribute a debtor’s assets rather than a process for execution of a judgment. Regarding Judgment Debtor, Servis maintained that the ruling did not prohibit using unregistered foreign judgments for bankruptcy proceedings. Instead, it argued that different treatment of registrable and non-registrable judgments was justified because the holders of registrable and non-registrable judgments were in different positions.

V. THE DECISION

12. The Court held in favour of Mr. Drelle and relied on the following in support of its decision.

A. Common Law Principles on Foreign Judgments

13. The heart of the decision is Rule 45 of Dicey. The Court of Appeal explained Rule 45, noting that there is a general principle that a foreign judgment has no direct operation in England. The Court held that this reflects the common law’s aversion to enforcing a foreign exercise of sovereign power. A foreign creditor therefore, cannot enforce a foreign judgment by direct execution, and using an unrecognised and unregistered judgment as a ‘sword’, was objectionable.
14. While, the Court recognised that Rule 51 confirms that a foreign judgment can be determinative on a point in the absence of recognition, it held that the heading of Rule 51 confirms that it is concerned with defences (see [7] above), and does not lend support to any use of an unrecognised judgment as a basis for other proceedings.
15. The Court rejected Servis’ argument that bankruptcy proceedings are not a form of ‘direct execution’ (relying on Ridgeway), as the creditor presenting the petition in respect of a judgment debt is still seeking enforcement. The Court held that allowing a bankruptcy petition based on an unrecognised foreign judgment would amount to using the judgment as a ‘sword’.
16. This was also held in the concurring opinion of Snowden LJ, who, relying on Cambridge Gas Transportation v. Navigator Holdings,^[7] observed that bankruptcy under the Insolvency Act constitutes a process of collective enforcement of rights against a debtor’s property (and does not create new rights), and an unrecognised foreign judgment cannot be used to invoke the individual enforcement mechanisms of an English court without first obtaining an English judgment, or registering the foreign judgment or has some basis under a statute or treaty that permits its enforcement. Consequently, in the absence of the same, a person should not be able to invoke the collective enforcement mechanisms of bankruptcy or winding up proceedings in the English court.

B. The ‘Revenue Rule’ and the Insolvency Act Framework

17. The Court of Appeal drew an analogy to the ‘revenue rule,’ which embodies the fundamental principle that an English court will not enforce the exercise of sovereign power by a foreign state. It extended this logic to explain that, by necessary implication, the revenue rule precludes the presentation of a bankruptcy petition based on a foreign tax liability. Consequently, a foreign tax cannot be regarded as a ‘debt’ for the purposes of a bankruptcy petition even though the Insolvency Act does not explicitly exclude the same.
18. Similarly, even though ‘debt’ under Section 267 of the Insolvency Act does not state that a foreign judgment cannot be considered to give rise to a ‘debt’ unless recognised or registered (relied on by Richards J); the Court of Appeal held that the Insolvency Act does not exist in vacuum and does not purport to provide comprehensive explanations of all concepts which feature in it.

C. Reliance on Academic Discussions

19. The Court of Appeal quoted passages from Dicey and Briggs, Conflict of Laws, 5th edn., and Fletcher’s Law of Insolvency, 5th edn. (“Fletcher”), noting that the academic commentary also lends support to Mr. Drelle’s case.
20. Notably, while the same paragraph of Fletcher ^[8] was relied upon by Richards J, the Court of Appeal diverged in its interpretation. The Court of Appeal observed that while Richards J’s interpretation was a possibility, the “more obvious” reading suggested that if an otherwise eligible creditor is precluded from directly enforcing a claim at law, they would also be precluded from resorting to the bankruptcy court as an alternative means of enforcement. Consequently, if a foreign judgment creditor cannot pursue direct execution in the absence of recognition or registration, they likewise cannot seek relief through bankruptcy proceedings.

D. Reliance on Precedent

21. The Court of Appeal found Judgment Debtor to be instructive on the principle that a bankruptcy petition under the Insolvency Act, 1914 could not be presented in respect of a foreign judgment prior to its registration. The Court of Appeal reasoned that the same principle must apply to an unrecognised foreign judgment, as failing to do so would create an unjustified distinction between holders of unrecognised judgments and holders of unregistered judgments.
22. Further, the Court of Appeal differentiated Bishopsgate and held that the court in Bishopsgate merely articulated what was already clear from the structure of the Insolvency Act, namely, that bankruptcy proceedings need not necessarily be based on a judgment debt. However, in the case of Mr. Drelle, the bankruptcy proceedings were specifically founded on a foreign judgment, making the distinction crucial.

VI. CONCLUSION

23. In light of the above, the Court of Appeal concluded that in the absence of any statutory provision to the contrary, a payment obligation under an unrecognised foreign judgment cannot constitute ‘debt’ under the Insolvency Act.
24. This decision may have implications beyond England and Wales, particularly for jurisdictions that consider English law as persuasive authority. In the Dubai International Financial Centre (“DIFC)”, Article 8 of Law No. 3 of 2004, as amended, establishes a hierarchy of applicable law. This includes DIFC statutes, decisions of the DIFC courts interpreting those statutes, and common law (including the principles and rules of equity) with regard to the common law of England and Wales and other common law jurisdictions.
25. However, approaches to allowing insolvency proceedings based on foreign judgments vary across common law jurisdictions. In India, for instance, the Supreme Court upheld a ruling by the National Company Law Tribunal (NCLT) allowing a foreign judgment creditor to initiate corporate insolvency resolution process on the basis of a foreign decree of a reciprocating territory. The NCLT had clarified that while it lacked jurisdiction to enforce a foreign decree, there was no bar on taking cognizance of it.^[9]
26. While DIFC Courts, like in England and Wales, follow common law principles for enforcement of foreign judgments, it remains to be seen whether they will adopt the restrictive stance of the Court of Appeal or take a more flexible approach in allowing insolvency petitions based on foreign judgments.