Servis-Terminal LLC v Valeriy Ernestovich Drelle: a landmark decision on unrecognised foreign judgments as the basis of a bankruptcy petition

Key Takeaway

On 31 January 2025, the Court of Appeal handed down its judgment in Servis-Terminal LLC v Valeriy Ernestovich Drelle [2025] EWCA Civ 62. The judgment confirms that the unenforceability of unrecognised foreign judgments also means they cannot form the basis of a bankruptcy petition. Instead, foreign judgments must go through a formal recognition process first before a statutory demand is issued. Although not discussed in the judgment, the same rule likely applies to winding-up petitions.

Background

The case revolves around a bankruptcy petition that was presented by Servis-Terminal LLC (the “Company”, which was itself in liquidation) against Mr Drelle. Mr Drelle had failed to comply with a statutory demand. The statutory demand was in turn based on a judgment of the Arbitrazh Court of Yaroslavl Oblast in Russia, which held Mr Drelle liable to pay RUB 2 billion in damages for failing to act in good faith or reasonably in his capacity as a director of the Company.

A bankruptcy order was initially made by ICC Judge Burton on the basis that there was no genuine and substantial dispute regarding the debt. On appeal in the High Court before Richards J, Mr Drelle unsuccessfully argued that a bankruptcy order should not have been made because the judgment had not been recognised by an English court. Mr Drelle subsequently brought the matter before the Court of Appeal (the “CA”).

The CA Judgment

The CA overturned the High Court decision, ruling that a foreign judgment had to be recognised in England before serving as the basis of a bankruptcy petition. According to the CA:

1. A foreign judgment cannot (without more) be enforced in England, and bankruptcy petitions are a process of collective enforcement. To allow otherwise would be an improper exercise of foreign sovereign power, contrary to the principles of state sovereignty and territoriality of a court’s jurisdiction. For example, a payment obligation arising from a penal, revenue or other public law of a foreign State cannot be enforced in England for the same reason.
    
2. This position can be supported by academic commentary, which the CA considered at length. For example:
   
   1. Rule 45 in Dicey, Morris & Collins, The Conflict of Laws (16th Ed) (”Dicey”) provides that a judgment of a foreign court “has no direct operation in England but may … be enforceable by claim or counterclaim at common law or under statute … or be recognised as a defence to a claim or as conclusive of an issue in a claim.”
   2. This means that foreign judgments have “no legal effect in England, for foreign judges have no authority in England. Except where Parliament has provided otherwise, foreign judgments cannot be enforced in England by execution, and no person is in contempt of Court or otherwise in peril in England, if she fails to do what she has been ordered to do by a foreign judge”: Briggs, The Conflict of Laws (5th Ed) at 112.
   3. Professor Briggs further commented in "Recognition of Foreign Judgments: a Matter of Obligation" (2013) 129 LQR 87 that, “The fundamental rule of the English common law has always been that an English court has no jurisdiction to enforce a foreign penal, revenue, or what is sometimes described as an 'other public' law. There is now general agreement that … an assertion or exercise of the sovereign right of a foreign state will not be enforced by an English court. It follows that in the absence of legislation, a foreign judgment cannot be enforced in England.”
   4. Finally, Fletcher, The Law of Insolvency (5th Ed) provides at paragraph 6-027: “In certain circumstances, an otherwise eligible creditor is precluded by law from presenting a bankruptcy petition against his debtor, although he still may be able to prove his debt and receive dividend in a bankruptcy” (e.g. in the case of a contingent creditor) “and it may be said that, as a general rule, wherever some obstacle would preclude the creditor from taking direct action at law to enforce his claim against the debtor” (e.g. a requirement for recognition) “he will equally be precluded from resorting to the bankruptcy court as an alternative means of enforcement. For although he may be loosely termed a 'creditor', such a claimant in reality is not yet personally owed any proper, legally enforceable 'debt' which can become the basis of the petition.”
       
3. In practice, most foreign judgments requiring the payment of money will be recognised by the English courts. However, by implementing a mandatory recognition process, the English courts preserve their authority to impeach a foreign judgment on grounds of fraud, public policy, lack of jurisdiction, or procedural irregularity. This ultimately provides debtors with better protection against foreign judgments that were unfairly or improperly obtained.
    
4. The effect of the above is that:
   1. An obligation to make payment as imposed by an unrecognised foreign judgment is not a debt recognised under English law. This includes for the purposes of founding a bankruptcy petition per s.267 of the Insolvency Act 1986.
   2. An unrecognised foreign judgment may be used as a “shield”, but not as a “sword”. It may presumably be relied on to defend a bankruptcy petition (e.g. to support a cross-claim). But presenting a bankruptcy petition is a form of enforcement, and thus in this case a foreign judgment would be used as a “sword”.
   3. A debt arising from a foreign judgment is nevertheless provable in bankruptcy.

For the above reasons, the CA unanimously allowed the appeal and dismissed the bankruptcy petition.

Implications

It is now clear that a foreign judgment must be recognised in England before forming the basis of a bankruptcy petition. The same likely applies to the winding up of companies, given that both have similar statutory requirements.

Practitioners and creditors alike should keep in mind the following points:

1. The CA’s judgment does not affect debts arising from an arbitral award.  Arbitral awards will likely be treated differently because they do not involve a foreign exercise of sovereign power but are a matter of contract between the parties.  As such, they can generally serve as the basis for bankruptcy and winding-up petitions, even if they have not been formally recognised. Relevant case law is referenced below.
    
2. If a creditor has a claim for a liquidated sum that existed before the foreign judgment was issued, they can use that claim (rather than the foreign judgment) to issue a statutory demand (and later file a petition). This can arise where, for example, a creditor seeks repayment of a loan or payment of consideration under contract. The foreign judgment can nevertheless still be valuable as supporting evidence for the petition.
    
3. In many instances, applying for recognition will be a straightforward procedural formality. However, if the application is contested—whether on valid or frivolous grounds—creditors may face an extended delay (and incur significant costs) before bankruptcy or liquidation proceedings can be commenced. The CA has indicated that any petition based on an unrecognised foreign judgment will be dismissed, and there is no suggestion that a petition may be stayed instead if there are exceptional circumstances. Therefore, creditors should act swiftly if there is a risk of misappropriation of assets justifying the appointment of provisional liquidators, or if there is a need to invoke referral back and avoidance provisions under the relevant insolvency legislation.

The position in Hong Kong

It was decided in Re James Chor Cheung Wong [2018] 2 HKLRD 284 that foreign judgments have to be registered under the Foreign Judgments (Reciprocal Enforcement) Ordinance (Cap 319) (“FJREO”) before a bankruptcy petition can be presented.

In particular, section 8 of FJREO provides, “No proceedings for the recovery of a sum payable under a foreign judgment, being a judgment to which the provisions of this Ordinance apply, other than proceedings by way of registration of the judgment, shall be entertained in any court in the Colony.” Deputy High Court Judge To held that the word “proceedings” includes bankruptcy proceedings, and therefore a foreign judgment falling within the scope of the FJREO must be registered before it can form the basis of a bankruptcy petition.

However, in the later case of Liu Yongliang v Bank of China Limited, Dongguan Branch [2021] HCA 1048, the HK Court of Appeal held inter alia that a judgment issued by a Mainland Court did not need to be registered before a bankruptcy petition was presented. 

Section 22(2) of the Mainland Judgments (Reciprocal Enforcement) Ordinance (Cap 597) (“MJREO”) provides that “no proceedings for the recovery of a sum payable under the Mainland judgment” will be entertained in Hong Kong absent registration.  Further, section 5(1) of the Foreign Judgments (Restriction on Recognition and Enforcement) Ordinance (Cap 43) (“FJRREO”) provides that “no proceedings may be brought by a person in Hong Kong on a cause of action in respect of which a judgment has been given in his favour in proceedings against the same parties, or their privies, in a court of an overseas country, unless that judgment is not enforceable or entitled to recognition in Hong Kong.”

The Court of Appeal in Liu Yongliang held that a bankruptcy petition was not a proceeding “for the recovery of a sum payable”, and “given the class right nature of bankruptcy proceedings, they are also not “proceedings between the same parties, or their privies” as the Mainland proceedings”.  In the circumstances, a Mainland judgment did not need to be registered under the MJREO before forming the basis of a statutory demand or petition.

Given that both s.8 FJREO and s.22(2) MJREO contain substantially the same wording, there is good reason to believe that the Court of Appeal decision in Liu Yongliang overturned the first instance decision in Re James Chor Cheung Wong.  Nevertheless, both decisions rested heavily on the proper construction of statutory provisions, and not on broader principles of state sovereignty and territoriality of a court’s jurisdiction.  It remains to be seen whether the UK CA’s commentary in Servis-Terminal v Drelle may lead the appellate courts in Hong Kong to change their view in the future.

Our perspective

There is room for further debate about whether presenting a bankruptcy or winding-up petition qualifies as a form of enforcement, as suggested by the CA throughout its decision in this case. This is a question with wide-ranging implications.

One view is that petitions are an exercise of a class right, not a mode of enforcement: see In Re International Tin Council [1987] Ch 419. This view explains why debts arising from arbitration awards can form the basis of a petition, even if they are not recognised or otherwise enforceable within the jurisdiction: see the Hong Kong case of Re Lucky Resources (HK) Ltd [2016] 4 HKLRD 301 and paragraph 7.61 of French, Applications to Wind Up Companies (3rd Ed):

“The presentation of a petition to wind up a company based on non-payment of an arbitration award against the company in the petitioner’s favour is not an enforcement of the arbitration award and so does not require leave under the Arbitration Act 1996, s 66.”

Another illuminating passage can be found in the Singapore case Pacific King Shipping Pte Ltd v Glory Wealth Shipping Pte Ltd [2010] SGHC 173, where Philip Pillai J (as he then was) stated at [19]:

“[I]t should be noted that the statutory demand is quite distinct from enforcing the award. All it establishes is that the unsatisfied demand results in a presumption of insolvency being a ground for winding up. Upon an order for winding up being made, the liquidator would be responsible for the orderly determination and discharge of the company’s liabilities against its assets. The liquidator remains at liberty to dispute any proof of debt by the defendant based on the arbitration award. Should a liquidator dispute such debt, notwithstanding the obstacles set out in the defendant may then be obliged to either register or enforce the award under the IAA. … [T]he primary considerations arising in the context of insolvency relate to the protection of all creditors and not the debtor whose unsatisfied claim which a later court may decide to be unenforceable.”

The reasoning in Pacific King was later endorsed by the BVI Court of Appeal in Vendort Traders Inc v Evrostroy Grupp LLC, BVIHCVAP 2012/0041 (a decision later affirmed by the Privy Council), where it was stated at [16] that, “an award by itself establishes that a debt is immediately owed; immediately enforcing such debt is an entirely different thing.”

More recently, the Privy Council handed down its decision on Sian Participation Corp (In Liquidation) v Halimeda International Ltd [2024] UKPC 16.  In the judgment given by Lord Briggs and Lord Hamblen, the Board stated:

“32. … First and foremost [the process for the initiation of an insolvency liquidation in the UK and the BVI] is a process which exists for the benefit of a class rather than just the individual applicant (or petitioner).  … The court may permit another unpaid creditor to be substituted as applicant or petitioner…. Nor is it a private procedure. The rules provide for an application or petition to be advertised before it is heard, so that any stakeholder in the company can attend to support or oppose it….

33. Secondly the process of seeking and obtaining an order for the appointment of a liquidator (or a winding up order in the UK) does not require or involve any pursuit or adjudication of the applicant’s claim to be a creditor, either as to liability or quantum. … The liquidator is free to reject the applicant’s proof of debt, in part or in whole …. If the debt is disputed by the liquidator that dispute may be referred to court or to arbitration….

…

35. Fourthly, and in sharp contrast with the role of the court (or arbitrator) in proceedings for the enforcement of a debt, the court’s power on the hearing of a liquidation application (or winding up petition) are discretionary. …”

In the present case, Lord Justice Snowden considered a similar argument and rejected it at [73]: “the expression “class remedy” is simply an alternative expression used in some cases to describe the process for collective enforcement of debts in an insolvency”.

Such a response seems to contradict the then-prevailing jurisprudence as set out above, and therefore merits further consideration.  If a winding-up or bankruptcy petition is not a mode of enforcement by the foreign judgment creditor, then the idea that unrecognised foreign judgments cannot be enforced in England becomes irrelevant. 

However, even if this were the case, it would not necessarily mean that the CA’s decision was wrong.  Even if a winding-up or bankruptcy petition is not considered a mode of enforcement per se, a petitioner must still show that the debtor is unable to pay its debts.  And as explained by the CA, an obligation to make payment imposed by an unrecognised foreign judgment is not a debt recognised under English law.