Servis-Terminal LLC v Valeriy Ernestovich Drelle

Hearing dates: 11 & 12 December 2024

Approved Judgment

This judgment was handed down remotely at 10.30am on 31 January 2025 by circulation to the parties or their representatives by e-mail and by release to the National Archives.

This appeal raises a question of wider significance: can a bankruptcy petition be presented on the basis that a payment ordered by a foreign Court has not been made in circumstances where the foreign judgment has not been the subject of recognition proceedings in this jurisdiction?

Basic facts

The appellant, Mr Valeriy Drelle, was formerly the chief executive officer of the respondent to the appeal, Servis-Terminal LLC (“the Company”), which is incorporated in Russia. The Company having been declared bankrupt, its trustee in bankruptcy brought proceedings against Mr Drelle in relation to a loan of RUB 2 billion which the Company had made in December 2011 to another Russian company, Fort Steiton LLC (“Fort Steiton”), with the benefit of a personal guarantee from Fort Steiton's owner, Mr Motylev. Another company controlled by Mr Motylev, Intercom Capital LLC (“Intercom”), succeeded to the obligations of Fort Steiton in respect of the loan on 5 November 2014. Intercom having failed to repay the loan, the Company obtained judgments against both Intercom and Mr Motylev. However, it did not succeed in recovering all that it was owed.

The proceedings against Mr Drelle were founded on article 53(3) of the Civil Code of the Russian Federation. It was alleged by the Company that Mr Drelle had failed to act in good faith or reasonably when, as a director of the Company, he had procured it to make the loan to Fort Steiton. The Company claimed that Mr Drelle was in consequence liable to compensate it for the losses it had suffered on the loan.

The Arbitrazh Court of Yaroslavl Oblast gave judgment on the claim on 24 May 2019. It concluded in its judgment (“the Judgment”) that Mr Drelle had not acted in good faith or reasonably in that he had failed to verify the financial position of either Fort Steiton or Mr Motylev. The Court therefore ruled that there should be recovered from Mr Drelle damages in the amount of RUB 2 billion. It further directed that a writ of execution should be issued.

Mr Drelle appealed, but without success. The Second Arbitrazh Court of Appeal upheld the Judgment on 6 August 2019. Mr Drelle then brought a cassation appeal to the Arbitrazh Court of Volgo-Vyatsky District, but he was again unsuccessful and, on 17 February 2020, he was refused permission to appeal to the Russian Supreme Court.

On 9 October 2020, the Company served on Mr Drelle, who was by now resident in London, a statutory demand under section 268(1)(a) of the Insolvency Act 1986 (“the 1986 Act”) in which it claimed to be owed RUB 2 billion on the strength of the Judgment and the dismissal of the appeals against it. On 14 October 2020, the Company presented a bankruptcy petition against Mr Drelle on the footing that he was indebted to it in the sum of RUB 2 billion (equivalent to £19,845,309.40 on 7 October 2020) “based on an unpaid judgment debt in favour of [the Company] based on the order of Arbitrazh Court of Yaroslavl Region, granted on 25 May 2019 … which fell due for payment on 6 August 2019”.

The petition came before ICC Judge Burton in June 2022. In a judgment dated 9 March 2023, ICC Judge Burton held that the debt claimed in the petition was not subject to a genuine and substantial dispute. Accordingly, on 31 March 2023, ICC Judge Burton made a bankruptcy order against Mr Drelle.

Mr Drelle appealed, but the appeal was dismissed by Richards J on 11 March 2024. Richards J held that the fact that the Judgment had not been the subject of recognition proceedings in this jurisdiction did not prevent it from being the basis of a bankruptcy petition. He further declined to interfere with ICC Judge Burton's conclusion that the alleged debt was not otherwise subject to a substantial dispute.

Mr Drelle now challenges Richards J's decision in this Court. Four grounds of appeal have been advanced. The first is to the effect that, not having been recognised in this jurisdiction, the Judgment could not found a bankruptcy petition. The remainder relate to whether the conclusion that the alleged debt was not the subject of substantial dispute can be impugned for other reasons.

I shall first consider whether the Judgment was capable of providing the basis for a bankruptcy petition unless and until it was recognised.

Was the Judgment capable of providing the basis for a bankruptcy petition?

The position of foreign judgments in this jurisdiction

Dicey, Morris & Collins on the Conflict of Laws, 16th ed., states as follows in rule 45:

“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.”

Briggs, The Conflict of Laws, 5 ^th ed., explains at 112:

“The first rule of foreign judgments is that judgments of foreign courts have, as such, 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. As judicial adjudication is an exercise of state sovereignty, this is obvious: state sovereignty ends at the border of the state, and while international comity may certainly require that respect be given to exercises of that power within the sovereign's own territory, that is where the conventional obligations of comity end.”

As, however, Dicey, Morris & Collins'rule 45(1) indicates, the common law allows for claims to be brought to enforce foreign judgments. Assuming that the foreign Court is considered to have had jurisdiction, a final and conclusive foreign judgment which provides for the payment of a definite sum of money can in general be the subject of a claim: see Dicey, Morris & Collins, at rule 46. That will not be so, however, if the foreign judgment is “impeachable” for fraud, on public policy grounds or because the proceedings in which the judgment was obtained did not accord with principles of natural justice: see Dicey, Morris & Collins, at rules 46, 53, 54 and 55. Further, “English courts have no jurisdiction to entertain an action … for the enforcement, either directly or indirectly, of a penal, revenue or other public law of a foreign State”: see Dicey, Morris & Collins, at rule 20.

Parker LJ, giving the judgment of the Court of Appeal, said this in Owens Bank Ltd v Bracco [1992] 2 AC 443 (affirmed by the House of Lords), at 457, about enforcement of a foreign judgment at common law:

“The first method of enforcement here of a foreign judgment was by an action upon the judgment. The foreign judgment, in the absence of statute, could have no direct operation in England and Wales because of the principle of the territoriality of a court's jurisdiction. At first, the basis for enforcing the foreign judgment by action in this country was thought to be the doctrine of comity but that was later replaced by the doctrine of obligation, namely, that the judgment of a court having competent jurisdiction over the defendant imposed on him an obligation to pay the sum for which judgment had been given: see Russell v. Smyth (1842) 9 M. & W. 810, 819; Schibsby v. Westenholz (1870) L.R. 6 Q.B. 155 and the cases cited in Dicey & Morris, The Conflict of Laws, 11th ed. (1987), vol. 1, p. 420. It followed that anything which may properly be held to negative that obligation was a defence to the action upon the judgment. It is pointed out by the editors of Dicey & Morris, The Conflict of Laws, at p. 421, that the right, which the plaintiff seeks to enforce in such proceedings, is a right created and defined by English law and not by foreign law. Thus, in order for the foreign judgment to be enforced in this country, it is essential that the foreign court should have had jurisdiction over the defendant, not in the sense of the foreign law but according to the rules of our law: see Adams v. Cape Industries Plc.[1990] Ch. 433, 513H; and the defences which may be pleaded by the defendant in an action upon a foreign judgment, such as that the judgment was obtained by fraud, are themselves creatures exclusively of English law.”

Somewhat more recently, Lord Collins explained in Rubin v Eurofinance SA[2012] UKSC 46, [2013] 1 AC 236, at paragraph 9, that the “theoretical basis for the enforcement of foreign judgments at common law is that they are enforced on the basis of a principle that where a court of competent jurisdiction has adjudicated a certain sum to be due from one person to another, a legal obligation arises to pay that sum, on which an action of debt to enforce the judgment may be maintained”. Lord Collins added, however, that “this is a purely theoretical and historical basis for the enforcement of foreign judgments at...