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Supreme Court ruling on foreign insolvency judgments “goes against global nature of business” says expert

Out-Law News | 26 Oct 2012 | 3:22 pm | 3 min. read

Insolvency cases should not be treated differently to other cases when it comes to deciding what foreign judgments can be enforced in the UK, the Supreme Court has said.

One expert said that the ruling runs counter to the increasing trend for business to be conducted across international borders.

The Court has ruled that parties to foreign judgments in insolvency cases must have previously submitted to the jurisdiction of the relevant court before that judgment can be enforced in the UK.

Over the course of two related judgments (59-page / 273KB PDF), the Court overturned a previous ruling by the Court of Appeal which had found that these cases could be treated exceptionally. Parties must meet certain jurisdictional criteria, known as the ‘Dicey Rule’, in every case unless Parliament legislates otherwise, the Supreme Court said.

However restructuring law expert Alastair Lomax of Pinsent Masons, the law firm behind Out-Law.com, said that in overturning the Court of Appeal’s decision the Supreme Court had gone against an “increasing trend”, particularly in civil law jurisdictions, to recognise in law the increasing effect of globalisation on businesses.

“The decision appears to have stopped in its tracks moves to liberalise the effect under UK law of foreign insolvency proceedings and the assistance that UK courts will offer to those seeking to enforce judgments in those proceedings against debtors and their assets in the UK,” he said. “This outcome is perhaps unhelpful in terms of reciprocity with other jurisdictions.  It is liable to make enforcement action more difficult and expensive in cross-border insolvencies than would otherwise have been the case and it may send out the wrong message to debtors who are seeking to avoid the consequences of their misdeeds overseas by keeping within these shores.  Many will regard this as a missed opportunity.”

He added that it “would appear to fall to our politicians rather than our judges” to enable the UK to adopt a more global approach in such cases in future.

In his leading judgment, Lord Collins described the universal approach as “only a trend”. The “limited scope” of the existing rule was intentional as there is no expectation that foreign courts will in turn enforce UK judgments, he said.

“If there is to be a different rule for foreign judgments in such proceedings ... the court will have to ascertain (or, more accurately, develop) two jurisdictional rules,” he said. “A change in the settled law of the recognition and enforcement of judgments, and in particular the formulation of a rule for the identification of those courts which are to be regarded as courts of competent jurisdiction ... has all the hallmarks of legislation, and is a matter for the legislature and not for judicial innovation. The law relating to the enforcement of foreign judgments and the law relating to international insolvency are not areas of law which have in recent times been left to be developed by judge-made law.”

The Dicey Rule states that in order for a foreign judgment to be enforceable or recognised in the UK, the party that the judgment has been made against must be ‘in personam’. This means that the party must be a resident of the same country as the court pronouncing the judgment, have claimed or counterclaimed in the proceedings or have otherwise submitted to the jurisdiction of that court.

In rejecting the argument that that rule should be expanded in the context of insolvency proceedings, the Supreme Court explicitly rejected the Supreme Court of Canada’s “real and substantial connection” test used in deciding whether to recognise and enforce foreign judgments, stating that there was “no support” for that approach other than in family law matters.

Both cases were applications to have certain ‘avoidance’ judgments, where transactions are carried out at an undervalue before formal insolvency proceedings begin so as to put some creditors in a better position than they would otherwise have been, overturned. One of the cases, Eurofinance, involved a judgment made by the US Federal Bankruptcy Court for the Southern District of New York worth around $10 million in fraudulent transactions. The other decision, Grant, was granted following the Rubin decision and involved a judgment worth about US$8m.

In both appeals the parties claimed that they were neither present in the foreign country nor had they submitted to the jurisdiction of the court. However, the evidence suggested that Grant had submitted to the jurisdiction of the Australian court meaning that its judgment could be enforced against him in the UK.

In addition to reaffirming that the traditional rule for the recognition of foreign judgments was equally applicable to insolvency proceedings as any other type of ruling, the Supreme Court also held that the United National Commission on International Trade Law (UNCITRAL) model law did not provide an alternative method of enforcing insolvency judgments. UNICITRAL, incorporated into English law via the Cross Border Insolvency Regulations, does not deal with the recognition and enforcement of foreign judgments against third parties either expressly or by implication, the Supreme Court said.

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