Enforcement: Use of foreign judgments to found bankruptcy and winding-up petitions

Key Takeaways

1. Creditors with foreign judgments against debtors subject to the jurisdiction of the courts of England and Wales may issue bankruptcy or winding-up petitions without first having the foreign judgment registered or recognised. However, this requires that the foreign judgment is final, conclusive, and not impeachable on grounds of fraud, public policy, or natural justice.

2. This approach may be preferable in some cases, as:

(i) it starts an insolvency process that may ultimately lead to a  greater net recovery for the judgment debtor, given (i) the significant powers which officeholders have to get in assets, and (ii) the time and cost of registering or having recognised the foreign judgment and then enforcing it; and

(ii) there are no statutory or common law limitation periods for bankruptcy or winding-up petitions based on a judgment.

3. However, in other cases, such an approach could introduce new challenges and costs, and creditors may still wish to register their foreign judgment or have it recognised where the debtor has significant known assets. This would be in order to take control of the enforcement process with a view to putting themselves in a more favourable position than other unsecured creditors, and avoiding the pari passu distribution pursuant to an insolvency process.

Facts of the Case

Drelle

A creditor (“C”) obtained a Russian judgment (the “Russian Judgment”) of £22m (the “Debt”) against an individual debtor (“D”). C petitioned for D’s bankruptcy in England and Wales based on the Debt, without first having the Russian Judgment registered or recognised in the jurisdiction.

C’s petition was granted, but D appealed, arguing that the Debt was not a “debt” for the purposes of s267 Insolvency Act 1986 (“IA 1986”). D relied on Rule 45 in Dicey, Morris & Collins, The Conflict of Laws (“Dicey”), which provides that foreign judgments have no direct effect unless registered or recognised.

C in response relied on Rule 48 in Dicey, which provides that a foreign judgment is binding in England and Wales, so long as it is final, conclusive, and not otherwise impeachable on grounds of fraud, public policy, or natural justice.

Re A Company

A creditor (“C”) obtained a Lebanese judgment (the “Lebanese Judgment”) of $776,000 (the “Debt”) against an English corporate debtor (“D”). C sent to D a draft English statutory demand for the Debt plus interest, which caused a third party to pay that amount into court in Lebanon. C objected and asked the court to reject the payment as invalid as a matter of Lebanese law, which the court did. C again demanded payment from D and sent a draft winding-up petition.

D appealed in Lebanon the rejection of the payment and asked the Lebanese court for a stay of enforcement. D also asked C to undertake not to take further enforcement steps, which C did not give. D therefore applied to the English court to prohibit C from presenting a winding-up petition on the basis of the Debt. Among D’s reasons were that:

- the Debt did not constitute a “debt” for the purposes of s267 IA 1986 as the Lebanese Judgment had not been registered or recognised by a court in England and Wales, and so it  could not found a winding-up petition; and

- the Lebanese Judgment could not be enforced by way of winding-up petition as it was time-barred pursuant to the Limitation Act 1980 (“LA 1980”), whether as an action founded on simple contract (per s5, LA 1980) or to enforce a judgment (per s24, LA 1980).

The Decision

Drelle

Mr Justice Richards dismissed D’s appeal. He found that D’s reliance on Dicey Rule 45 was misconceived. What mattered was whether the Debt constituted a “debt” for the purposes of s267 IA 1986. If so, then it aligned with Parliament’s intentions when drafting IA 1986 and determining which claims can trigger a bankruptcy petition.

On that issue, Mr Justice Richards found that (i) the Russian Judgment met the criteria in Dicey Rule 48, and (ii) the Debt constituted a liquidated sum that was not subject to any contingency, and was therefore like an English trade debt (which can found a bankruptcy petition). It did not matter that it was not registered or recognised. Therefore, the Debt could found C’s bankruptcy petition against D.

Re A Company

Regarding D’s abovementioned two arguments, the Deputy Judge found:

- following Drelle, the Debt was a debt for the purposes of IA 1986 and could found a winding-up petition, even if the Lebanese Judgment had not been registered or recognised in England and Wales; and

- insolvency proceedings on a judgment are not “action on a judgment” as they are a class remedy (i.e. a separate jurisdiction designed to benefit all creditors simultaneously), and so LA 1980 has no effect. There is no statutory or common law limitation period for bankruptcy or winding-up petitions based on a judgment.

Past articles from the team on court orders including freezing orders, NPOs, third party debt orders, search orders and disclosure orders, can be found on our dedicated Court Orders page.