This article was first published by Lexis®PSL on 20/03/2020, PDF of article here.
A second bankruptcy petition was brought by a Russian bank against a Russian debtor, who was already bankrupt in Russia. The petition was based on Russian law debts, for which the bank had already proven in the Russian bankruptcy. The petition was defended on the basis that the bank did not have standing to petition. Under Russian law, when bankruptcy proceedings are opened, creditors can only prove in the Russian bankruptcy and cannot take any other steps. The question for the court was whether a creditor’s standing to petition is a procedural issue (governed by English law) or a substantive one (governed by Russian law, as the lex causae). Written by Alexander Halban, barrister at Littleton Chambers and counsel for the respondent.
What are the practical implications of this case?
This is the first reported case of a bankruptcy petition being brought in England by a foreign creditor against a debtor (based outside the EU), where the creditor has already proven for the same debts in a foreign bankruptcy.
The decision has a number of practical implications for cases falling outside the Regulation (EU) 848/2015 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast) and potentially in future, for all bankruptcy petitions (depending on whether insolvency is covered in any future UK-EU trade agreement after Brexit).
First, in a bankruptcy petition founded on a debt governed by a foreign law, the parties should obtain expert evidence on the issues of:
Secondly, where the debtor is already subject to bankruptcy proceedings abroad, the expert evidence should explain any specific prohibitions under the insolvency law applicable to the first bankruptcy. These prohibitions have to be matters of foreign substantive law—not, or not solely, procedural—to be applicable to English proceedings.
Thirdly, where a bankrupt has foreign assets, it is for the trustee in bankruptcy (or equivalent) to seek recognition of the bankruptcy under the relevant law of the state—in the UK, the Cross-Border Insolvency Regulations 2006, SI 2006/1030 (implementing the UNCITRAL Model Law). Individual creditors may be prevented—or substantially limited—in their ability to take steps abroad outside the bankruptcy.
What was the background?
The debtor, Mr Laptev, is a businessman in bankruptcy in Russia. Among his creditors is a Russian bank, VTB Bank (VTB), which is owed debts of 2.2bn rubles (circa £25m) on Russian law guarantee contracts.
VTB was registered as a creditor in Mr Laptev’s Russian bankruptcy. It later brought a second bankruptcy petition against Mr Laptev in England, based on the same debts as claimed in the Russian bankruptcy. VTB alleged that Mr Laptev had places of residence in England, properties in his ex-wife’s name, so that the English court had jurisdiction.
Among other grounds, Mr Laptev defended the petition on an issue of jurisdiction/standing: VTB was not a creditor to whom debts were ‘payable’ under section 267 of the Insolvency Act 1986. Mr Laptev’s Russian law expert, Dr Gerbutov, said that Russian law prohibited creditors from taking any actions outside a Russian bankruptcy. Once Russian bankruptcy proceedings were opened, the registration of the creditor’s debt in the bankruptcy was the exclusive remedy and/or the sole method of performing the debt. Thus in this case, VTB could not bring a second petition in England.
VTB disagreed. Its Russian law expert, Ms Knutova, said that Russian law did not prohibit a creditor from taking steps against the bankrupt abroad, where it was acting on behalf of all creditors and where it did not violate the priority order in the bankruptcy. VTB also disputed that Russian law applied to the issue at all.
What did the court decide?
The court first had to decide if the issue was a matter of English or Russian law. Under English conflict of laws rules, procedural matters are always governed by English law, while substantive matters are governed by the applicable foreign law (lex causae).
The court agreed with submissions for Mr Laptev that under Article 12 of Regulation (EC) 593/2008 of 17 June 2008 on the law applicable to contractual obligations (Rome I), issues of remedy and performance of a contract were substantive matters governed by the law of the contract.
The court agreed with Dr Gerbutov’s evidence that the Russian law prohibition on creditors pursuing a bankrupt outside the bankruptcy was both substantive and procedural—Russian insolvency law created a special regime in which debts were settled, in place of the parties’ substantive contractual rights. Thus Russian law governed the question of whether the debts were ‘payable’ to VTB.
The precise issue of whether a Russian creditor could petition for bankruptcy in a foreign court had not been decided by the Russian courts. However, Russian courts had decided that creditors’ individual enforcement steps taken abroad during a pending bankruptcy violated Russian insolvency law. The English court found that this prohibition covered all steps abroad taken outside the Russian bankruptcy.
The court disagreed with Ms Knutova’s evidence for VTB that Russian law only prohibited creditors taking steps outside the bankruptcy for their own benefit, not where one creditor is acting for all— there was no support for this in Russian case law. It was the role of the trustee to take steps abroad against the bankrupt’s assets abroad, not of any individual creditor.
The judge dismissed the bankruptcy petition for lack of jurisdiction. She said, obiter, that she would have decided the factual issues on place of residence in VTB’s favour.
This post was written by Alexander Halban (2009 call). Alexander practises in commercial, civil fraud, company and insolvency disputes with a focus on cross-border issues. He is a fluent Russian speaker and has expertise in Russian and CIS disputes.