On January 21, 2025, the Court of Appeal in England in Valeriy Ernestovich Drelle v Servis-Terminal LLC (Drelle)1ruled that a debt based on a foreign judgment that has not been recognised in England cannot be used to found an application for a bankruptcy order. This article explores the decision in Drelle and its applicability in the BVI in the context of applications to appoint liquidators of a BVI company.
Applications for appointing company liquidators
Applications for the appointment of liquidators of companies are commonplace in the BVI because of the large number of offshore companies that are domiciled in the jurisdiction. The most common ground for applying is that the company is insolvent. Section 162 (1) of the BVI Insolvency Act 2003 (the Act) provides that the court may, on the application by one or more of the persons listed in section 162(2), appoint a person as a liquidator of the company, more commonly referred to as an order winding up the company. The persons listed in section 162(2) include creditors of the company.
Section 8 of the Act states that the company is insolvent if:
- it fails to comply with the requirements of a statutory demand that has not been set aside under section 157;
- execution or other process issued on a judgment, decree or order of a BVI court in favor of a creditor of the company is returned wholly or partly unsatisfied; or
- either
– the value of the company’s liabilities exceeds its assets, or
– the company is unable to pay its debts as they fall due.
The application is usually, but not always, preceded by a statutory demand by the creditor for payment of the amount due from the company. If the statutory demand is not complied with, or set aside by the court, the company is presumed to be insolvent.
The Act does not define a debt. The ordinary meaning of a debt is simply an amount of money that a person is obliged to pay to another. It is a defence, and one that is frequently used, that the debt relied on, wheresoever incurred, is disputed on genuine and substantial grounds.2 It has never been disputed that a debt incurred outside the Virgin Islands that is not disputed on substantial grounds can be used to apply for the winding up of a BVI company, or that a debt created or evidenced by a foreign judgment cannot be so used.
Drelle v Servis-Terminal LLC
The reliance on a debt that is created or confirmed by a foreign judgment was considered by the Court of Appeal in England in Drelle. The respondent, a Russian company (the Company) sued for and obtained a final money judgment in Russia against the appellant, Valeriy Drelle, for two billion rubles. The Company served a statutory demand on Mr. Drelle in London (where he was residing) for the amount of the judgment debt. The demand was not satisfied and the Company filed a petition under section 267 of the Insolvency Act 1986 (UK) (the UK Act) seeking a bankruptcy order against Mr. Drelle.
Section 267 of the UK Act provides that a creditor can present a bankruptcy petition on the basis of an unpaid debt that is for a liquidated sum that is payable either immediately or at some certain, future time, and the debtor appears either to be unable to pay or to have no reasonable prospect of being able to pay.
The Company did not apply for recognition of the judgment in England before filing the bankruptcy petition. The petition came before ICC Judge Burton who found that the debt was a debt within the meaning of section 267 of the UK Act and it was not disputed on substantial grounds. He made the bankruptcy order.
On appeal to the Chancery Division, Mr. Drelle raised for the first time that the Company could not have presented a bankruptcy petition against him based on an unsatisfied foreign judgment that had not been recognised in England. However, Richards J found that an unrecognized foreign judgment did not prevent the judgment constituting a “debt” within the meaning of section 267 of the UK Act, and there was no other challenge to the debt.
Accordingly, Richards J allowed the petition to proceed and made the bankruptcy order. The Court of Appeal allowed Mr. Drelle’s appeal and set aside the bankruptcy order made by Richards J. Newey. Snowden LLJ delivered judgments giving reasons for allowing the appeal and setting aside the bankruptcy order. Popplewell LJ agreed with both judgments.
In coming to its conclusion, the Court of Appeal acknowledged the general principles that when a creditor applies for a bankruptcy order he is not trying to enforce an individual right, or to enforce a foreign judgment. Rather, he is exercising a collective enforcement of the admitted or proven debts of the debtor for the benefit of all the general body of creditors on a pari passu basis.3
Further, that a foreign judgment that is final on the merits and is not subject to appeal is conclusive of any matter that it adjudicated, and such issues do not have to be relitigated in the local courts4. There may be other obstacles to enforcement such as impeaching the judgment because it was obtained by fraud or in breach of the rules of natural justice, or the foreign court lacked jurisdiction. None of these obstacles are relevant to the issues in Drelle.
Having considered the general principles the Court of Appeal noted that a judgment of a foreign court is an exercise of state sovereignty and the common law’s “[a]version to enforcing a foreign exercise of sovereign power”5, whether directly or indirectly. As such, a foreign judgment has no effect in England and it is not enforceable unless it is recognised or registered in England or is used to file a new claim resulting in an English judgment. The Court was unanimous in finding that using a foreign judgment to apply for bankruptcy of the judgment debtor is an indirect enforcement of the foreign judgment because the ultimate aim of a creditor’s bankruptcy petition is for the petitioner/applicant to get at least part payment of the amount owing on the judgment debt by the debtor. Further, that the Company was using the foreign judgment as a sword to obtain indirect satisfaction of the judgment debt, is not permitted under English law. This can be seen in paragraph 39 of the judgment where Newey LJ said:
“While, therefore, a creditor who presents a bankruptcy or winding-up petition in respect of a judgment debt may not be engaged in “direct execution,” it is still seeking enforcement. In each case, the judgment is not being used merely defensively but as a ‘sword’.”
The Company must get an order registering or recognising the foreign judgment before it can take any steps, whether directly by execution or indirectly by applying for a bankruptcy order, which may result in partial or complete satisfaction of the judgment debt.
The Court’s reasoning on the use of the foreign judgment is summed up in paragraph 64 of the judgment of Snowden LJ where he said:
“Against this background, I consider that in the same way as a person who relies upon a foreign judgment cannot invoke the individual enforcement mechanisms of the English court for his own benefit unless and until he obtains an English judgment, or registers the foreign judgment or has some other basis under a statute or treaty that permits its enforcement, so also such a person should not be able to invoke the collective enforcement mechanisms of bankruptcy or winding up proceedings in the English court unless and until he obtains an English judgment, or registers the judgment or has some other basis under a statute or treaty permitting such enforcement of the foreign judgment.”
The Company having failed to take any steps to make the Russian judgment effective in England, the Court of Appeal allowed Mr. Drelle’s appeal and set aside the bankruptcy order.
The decision in Drelle adds certainty to the insolvency practice in England and it is now settled that a debt based on an unrecognized foreign judgment cannot be used to found a bankruptcy application in England.
The following issues arise from the judgment in Drelle:
- Drelle was a bankruptcy case. Does the reasoning and conclusion of the Court of Appeal apply in corporate insolvency cases.
- Even if the case applies in insolvency cases, should the decision be followed in the BVI.
Drelle applied to corporate insolvency
This is a short point. The principles regarding State sovereignty and the lack of effectiveness of a foreign judgment that is not converted into an English judgment by registration or otherwise, as expounded by the Court of Appeal, apply equally to corporate insolvencies. This is clear from several passages in the judgments where Their Lordships speak of “bankruptcy or winding up proceedings.”6 It is clear that the Court of Appeal’s decision applies equally to personal bankruptcies and corporate insolvencies.
Drelle’s application in the BVI
The more difficult issue is whether a BVI court is either bound to follow the decision in Drelle, and if it is not bound, whether it should follow the decision.
The answer to the first part of the question is settled – the High Court of the BVI is not bound by decisions of the English Court of Appeal. However, such decisions are persuasive and are generally followed.
The second part of the question is not as straightforward. The judgments in Drelle are well-reasoned and deal with the relevant legal issue – using an unrecognized foreign judgment to launch bankruptcy and/or insolvency proceedings. No suggestion will be made in this article that the Court of Appeal erred in its decision. That said, the decision does not appear to be in accordance with the law and practice in the BVI.
The BVI is a jurisdiction where hundreds of thousands of companies have been incorporated and probably 99% of them operate or have operated outside the BVI. The debts that they incur are external to the BVI and when left unsatisfied the unpaid creditors may seek to wind up the defaulting companies. The BVI, as the domicile of these companies, is the only jurisdiction where they can be effectively wound up and dissolved. As a result, there are numerous applications to the BVI courts every year to wind up BVI companies.
The undisputed practice in the BVI is that creditors applications for winding up are presented based on debts that are incurred overseas and have no connection with the BVI other than that the debtor is a BVI company. It has never been disputed or litigated that the debt cannot be based on an unrecognised judgment of a foreign court. In Re Atlantic Ventures Inc7, an order was made appointing a liquidator of the debtor company based on two judgments of the General Division of the High Court of the Republic of Singapore. The judgments were not recognised in the BVI. The application was heavily contested but the point regarding non-recognition of the judgment debts was not taken or debated. This is not surprising. There is no logical reason why an undisputed foreign debt should lose its undoubted status as a debt for the purposes of a section 162 application because the creditor has taken the additional step of converting the debt into a judgment debt by a foreign court.
If a winding up application is presented to a BVI court based on an unrecognised foreign judgment debt, the court will probably consider the effect of the decision in Drelle. If the court decides to apply Drelle the application should be dismissed. This would mean that a foreign debt that would have qualified as a debt under section 162 of the Act, would lose that quality because the creditor took the additional step of obtaining a judgment in a foreign court.
On the other hand the BVI court may decide to apply the long-standing test for determining whether a judgment debt qualifies as a debt for applying to appoint liquidators is whether the debt is disputed on genuine and substantial grounds.7If it is not disputed, or if it is disputed but the dispute is not genuine and substantial, the debt will be treated as a debt for the purposes of a section 162 of the Act and the application will proceed. This test has been applied repeatedly in the BVI, and as recently as June 2024 by the Privy Council in Sian Participation Corp v Halimeda International Limited.8
The BVI court may also consider the interpretation of the Act. There are no restrictions in the Act on the type of debt that can be used to apply for a winding up order. By contrast, section 296 in the part of the Act dealing with personal bankruptcies, provides that:
“(1) A creditor’s application for a bankruptcy order shall be made in respect of a liability or liabilities where at the time of the application,
(a) the amount of the liability, or the aggregate amount of the liabilities, exceeds the prescribed minimum; and
(b) the liability, or each of the liabilities, is for a liquidated sum payable to the applicant creditor immediately.
(2) An application under subsection (1) may not be made in respect of a liability incurred outside the Virgin Islands unless the liability is payable by the debtor to the creditor by virtue of a judgment or award enforceable by execution in the Virgin Islands.”
Subsection (2) imposes a restriction on using foreign debts and unrecognised foreign judgment debts to apply for a bankruptcy order. This restriction is stronger than the restrictions in Drelle in that the statutory restrictions apply to all foreign debts unless they are based on a foreign judgment or award that that is enforceable by execution in the BVI. In other words, the foreign debt must be recognised or become enforceable in some other way in the BVI before the bankruptcy application is filed.
Applications for a winding up order are made under Part VI of the Act. There are no similar restrictions on a creditor’s right to apply in Part VI. If it was the Legislature’s intention to impose restrictions on winding up applications based on foreign debts or judgments (as in bankruptcies) it would have been very simple to include in Part VI a provision similar to section 296. The inference is that the Legislature was aware of characteristics of foreign debts and chose to exclude them from the type of debts that a creditor can use to apply for a bankruptcy order under Part XI of the Act. The Legislature did not impose any restrictions on the use of foreign debts or unrecognized foreign judgments to apply for the winding up of a BVI company under Part VI of the Act.
Having regard to the long-standing practice in the BVI regarding creditors’ winding up applications, and the wording of the Act, it will be interesting to see how a BVI court deals with the decision in Drelle. The situation may never arise because prudence would dictate that an unpaid judgment creditor would apply to recognise his foreign judgment debt rather than risk the possibility of litigation to determine whether it can be used as the basis of a winding up application.
[1] [2025] EWCA Civ 62
[2] Sparkasse Bregenz Bank AG v Associated Capital Corporation – BVI Appeal No 10 of 2002
[3] Ridgeway Motors (Isleworth) Ltd v ALTS Ltd [2005] EWCA Civ 92 (a winding up case)
[4] Dicey Morris and Collins 16th edition rule 41
[5] Supra note 1 paragraph 41
[6] See for example the two passages from the judgment cited above
[7] Supra note 2
[8] [2024] UKPC 16 (a case dealing with a foreign debt)
Paul Webster KC
+ 284-393-5800
pwebster@onealwebster.com
