08 Nov 2012

UK Supreme Court reinstates settled law on enforcement of foreign judgments in insolvency

by Karen O'Flynn, Oliver Jones

If you’re pursuing assets in England relevant to a non-European bankruptcy or insolvency, you can’t rely on a (default) foreign judgment and must instead bring fresh proceedings in the English courts

Two attempts by the English Court of Appeal to dilute the requirements for the enforcement of foreign judgments in the field of insolvency have been rejected by the UK Supreme Court. That rejection means that there is no insolvency exception to the general principle of law that a judgment of a foreign court cannot be enforced against the judgment debtor unless:

  • the judgment debtor was present in the foreign country when the proceedings were begun; or
  • it has submitted to the jurisdiction of the foreign court.

The two sets of proceedings to enforce a foreign judgment

There were two proceedings: New Cap Reinsurance Corp (in liq) v A E Grant and Rubin v Eurofinance SA. In New Cap, the liquidator of an Australian company obtained a default judgment from the New South Wales Supreme Court against a Lloyd's Syndicate, which was based in England and which did not submit to the jurisdiction of the New South Wales court, for about US$8 million in respect of an unfair preference under Australian law.

Justice Barrett issued a letter of request for assistance to the English High Court under section 426 of the Insolvency Act 1986 (UK), invoking the judicial assistance provisions to give effect to the NSW judgment. The liquidator also sought to enforce the judgment in England under the Foreign Judgments (Reciprocal Enforcement) Act 1933 (UK).

Something similar arose in Rubin. A trust was established under English law, with trustees resident in England. The trust related to a voucher scheme for consumers of goods or services in North America. Under the scheme, consumers would receive a 100% rebate of the purchase price over three years, if they passed a series of memory and comprehension tests. The consumers were more accurate and responsive than expected, so the scheme folded.

The trust was placed into Chapter 11 proceedings in New York. Litigation was commenced in the US Federal Bankruptcy Court for the Southern District of New York against various defendants, who were not consumers, but had received money from the trust. The defendants were located in England and did not participate in the US proceedings. The plaintiffs obtained judgment from the US Bankruptcy Court in default of appearance for about US$10 million under laws relating to fraudulent conveyances and transfers. They sought its enforcement in England at common law and under the international assistance provisions of the UNCITRAL Model Law on Cross-Border Insolvency (as implemented by the Cross-Border Insolvency Regulations 2006 (UK)).

Were these foreign judgments enforceable?

In short, there were two foreign money judgments and two sets of defendants who were located outside of the foreign jurisdiction and had not participated in the foreign proceedings. There were four separate bases for enforcement of one or both of the foreign judgments in England: the common law, the 1933 Act, section 426 of the Insolvency Act and the Model Law. Was any of this enough to ground enforceability?

The answer would once have been an emphatic negative. Enforceability, whether at common law or under the 1933 Act, would only arise if the defendants were present in the foreign jurisdiction or had submitted to the foreign court in some way, eg by agreement or voluntary and unconditional appearance. A defendant which had been at pains to remain apart from the foreign jurisdiction and its courts would be safe from enforcement. This is the requirement of international jurisdiction.

Yet, the English Court of Appeal had put forward a striking change to the status quo. Rubin was decided first. The Lord Justices did not decide whether enforcement was permissible by virtue of the Model Law. Instead, on the basis of the judgment of the Privy Council in Cambridge Gas [2007] 1 AC 508, they held that the enforcement arose at common law. The principle that insolvency or bankruptcy should be unitary and universal justified a relaxation of international jurisdiction. In New Cap, the Court applied the same thinking to the 1933 Act, while also finding enforcement to be available under section 426 of the Insolvency Act.

These innovations were comprehensively rejected by the UK Supreme Court. International jurisdiction is required in all cases of enforcement. Bankruptcy or insolvency should not, as a matter of law or policy, be an exception. The provisions for judicial assistance in the Insolvency Act or judicial co-operation under the Model Law did not provide independent bases for the enforcement of foreign judgments. Any change of the settled law would have to be undertaken by Parliament.

What does this mean for foreign insolvencies and gaining access to assets in England?

The consequences are clear. English defendants who remain at arm's length from non-European jurisdictions and their courts continue to enjoy the protection of international jurisdiction, even where there is bankruptcy or insolvency. Those pursuing assets in England relevant to a non-European bankruptcy or insolvency cannot rely on a (default) foreign judgment and must instead bring fresh proceedings in the English courts.

The question for Australian defendants and those pursuing assets here is: will the Australian courts follow the Privy Council and the English Court of Appeal, on the one hand, or the UK Supreme Court, on the other? The answer is difficult to predict. However, given the absence of High Court authority clearly recognising international jurisdiction, the question could be asked and answered soon.

In a second article we will consider what is covered by the concept of submission to the jurisdiction of a foreign court. As will be seen, a defendant which deliberately avoids taking any step in the litigation, but participates in the liquidation, may be caught.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.