Supreme Court confirms foreign judgment debts can support insolvency petitions

The judgment clarifies that an unrecognised foreign judgment for a definite sum of money can constitute a debt for insolvency purposes, potentially widening the circumstances in which insolvency proceedings may be used as a recovery tool.

Background

The case concerned a Russian judgment obtained by Servis-Terminal LLC (“ST”) against its former Director General, Mr Drelle, for approximately RUB 2 billion. ST presented a bankruptcy petition in England based on that judgment. A bankruptcy order was made against Mr Drelle at first instance and upheld on appeal to the High Court.

However, the Court of Appeal subsequently overturned that decision, holding that an unrecognised and unregistrable foreign judgment did not constitute a debt capable of supporting a bankruptcy petition under section 267 of the Insolvency Act 1986 (“section 267”).

The Key Issue

The central question before the Supreme Court was whether a foreign money judgment that had not been recognised or registered in England and Wales could nevertheless amount to a "debt" for the purposes of section 267.

If the answer was no, foreign judgment creditors would generally need to take the additional step of commencing proceedings in England to obtain judgment on the foreign judgment before pursuing insolvency. If the answer was yes, insolvency proceedings could potentially be commenced without that intermediate stage.

Supreme Court Decision

The Supreme Court unanimously allowed the appeal. It held that, under the common law "obligation principle", a final and conclusive foreign judgment for a definite sum of money gives rise to an immediate legal obligation on the judgment debtor to pay that sum. That obligation arises when the foreign judgment is made and does not depend upon prior recognition by an English court.

The Supreme Court rejected the argument that an unrecognised foreign judgment lacks legal effect in England. While such a judgment may not have direct enforcement effect without further steps, it nevertheless creates an enforceable obligation which can be sued upon in England. Accordingly, the Supreme Court concluded that the obligation created by the foreign judgment falls within the ordinary meaning of a "debt".

Why this Matters

Although the case concerns a bankruptcy petition, the reasoning is likely to be equally relevant to corporate insolvency. Creditors seeking to rely on foreign judgments may now argue that those judgments can be relied upon to present winding up petitions without first obtaining an English judgment on the debt.

Whilst foreign judgment debts should not automatically be assumed to support a petition, the decision removes what many viewed as a procedural obstacle in cross-border insolvency and debt recovery cases.

Conclusion

By confirming that an unrecognised foreign judgment can create a debt for insolvency purposes, the Supreme Court has strengthened the position of foreign judgment creditors and potentially expanded the circumstances in which insolvency proceedings may be used as a means of debt recovery. The judgment is likely to become a key authority in future cross-border insolvency and enforcement cases.