Useful guidance in relation to the recognition of foreign insolvency proceedings

In the case of Re Bedzhamov, we highlight some useful guidance to the recognition of foreign insolvency proceedings at common law and the effect of such recognition. The English Court declined to assist a Russian Trustee in Bankruptcy enforcing against a London property and remitted the Russian Trustee’s application for recognition of the Russian Bankruptcy Order back to the High Court on the basis it should not have been recognised on the facts of that case.

Background

A was a Trustee in Bankruptcy appointed in Russia in respect of B, who was a Russian citizen domiciled in England.  B was the subject of ongoing criminal and civil proceedings in Russia in connection with his alleged involvement in a fraud perpetrated against Vneshprombank LLC (V). B was also a defendant in UK proceedings brought by V for damages arising from the same alleged fraud (“the UK Proceedings”).

A made an application seeking recognition at common law in England and Wales of her appointment as Trustee in Bankruptcy in Russia in July 2018. This application also sought ancillary orders for A to take control of B’s English assets, which included a valuable property in London (“the Recognition Application”).

In March 2019 a worldwide freezing order was made in the UK Proceedings, which said order was varied in March 2021 to allow B to sell the London property and use its proceeds of sale to pay his accrued and anticipated living expenses, his legal fees in defending the UK Proceedings and other disbursements.

A made a second application to set this worldwide freezing order aside.

In the Recognition Application, the Court determined that none of the bars (such as fraud, natural justice or public policy) to common law recognition of the bankruptcy order against B applied on the evidence before it, and therefore the existence of the bankruptcy order made in Russia and A’s appointment as Trustee in Bankruptcy in Russia of B were recognised.  The Court further determined that the Recognition Application should not be adjourned to the trial of the UK Proceedings where the issues could be aired in Court.

The Court considered the effect at common law of recognition of a foreign insolvency.

The Court found that there was no general power at common law to make an order vesting immovable property in a foreign Trustee in Bankruptcy. There was no English case that showed the Court making an order at common law vesting immovable property located in England in a foreign Trustee or ordering a bankrupt to transfer any such property to a foreign trustee.

The Russian court may view ownership of the London property as having vested in A as a matter of Russian Law and make orders against B requiring him to transfer that property to A as a matter of Russian Law. However, they could not enforce those orders in England against B without the assistance of the English Court. Therefore, although the Russian bankruptcy order had to be recognised in England there was no common law power to ‘entrust’ the London property to A.  Nor was there a common law power to declare that it had vested in A or to order it to be transferred to A or sold by A or anyone else for A’s benefit.

As a result, A’s application for recognition was successful but her application for further assistance in relation to the London property failed. The court did not have to address any of the discretionary factors that might be relevant to the question of whether any such assistance should be given. There was also no need to set aside the worldwide freezing order so that application was dismissed.

Both parties appealed, B against whether the court was right to recognise a Russian bankruptcy order which B said was impeachable on the grounds of fraud and that the debt which led to the making of the bankruptcy order was based on fraud, and A over the court declining to grant assistance in relation to the London property and declining to set aside the worldwide freezing order. Judgment was given in the Appeal on 21 January 2022 in Kireeva (as bankruptcy trustee of Georgy Ivanovich Bedzhamov) v Bedzhamov; Vneshprombank LLC v Bedzhamov & others (2022) EWCA Civ 35 (“the Appeal Judgment”).

The Appeal Judgment

The Appeal Judgment provides an examination of the various methods by which a foreign insolvency proceeding may be assisted under the law of England and Wales.

Section 426 Insolvency Act 1986 (“IA”), which authorises the English Courts to assist a foreign court having insolvency jurisdiction, did not apply in this case as Russia is not a relevant country or territory under that section.

The Cross Border Insolvency Regulations 2006, which provide for the UNCITRAL model law to have force of law in Great Britain and allow foreign courts and office holders to obtain relief in this jurisdiction on an extensive basis including entrusting the administration or realisation of all or part of a debtor’s assets located in Great Britain to the foreign representative or another person on his behalf, did not apply here as B’s centre of main interests is not in Russia nor did B have an establishment in Russia.

Arguments were made by A in relation to the assistance in respect of the London property that (1) section 426 IA and the common law recognition could be equated for relevant purposes, which both served as gateways to allow the relevant foreign office-holder who has passed through them to seek assistance in relation to immovables; and (2) that the immovables rule bears only on title to immovable property. When a foreign office holder is recognised, the immovables rule means that title is not recognised as vesting automatically in the office-holder but the English Court will recognise everything else. Notwithstanding the immovables rule, the English Court will accept that the office-holder has complete dominion over all the bankrupt’s assets, whether movable or immovable, and that immovables are held by the bankrupt for and at the direction of the office-holder.

The Appeal Court did not accept these arguments and held that the Judge had been right to decline to grant A assistance in relation to the London Property even on the basis that the Russian Bankruptcy Order was recognised in England and the Appeal was dismissed.

The Appeal Court also dismissed A’s appeal against the Judge’s decision that her position as B’s Trustee must have given her standing to oppose the worldwide freezing order in the UK Proceedings.  The Appeal Court held that not only was the judge’s decision not to grant A assistance in relation to the London Property correct but that the Judge had been mistaken in recognising the Russian bankruptcy since the Judge had not been able to reach the conclusion that the bankruptcy had been well-founded due to, among other things, a failure to cross-examine B on his evidence.

In these circumstances, B’s appeal against whether the court was right to recognise a Russian bankruptcy order which he said was impeachable on the grounds of fraud and that the debt which led to the making of the bankruptcy order was based on fraud, the Court allowed it and remitted A’s application for recognition to the High Court.