English Court enforces Russian bankruptcy law

Recently, the English Court has decided that Russian bankruptcy law prevents direct creditor action in the UK when Russian insolvency proceedings are underway.

This decision blocked a Russian bank’s attempt to pursue parallel Russian bankruptcy law proceedings in that particular case, but there is another way, which we pinpoint here.

Mr Laptev went into bankruptcy in Moscow when loan guarantees he made to PJSC Bank were called in. The bank claimed the Russian Ruble (RUB) equivalent of £25m in the bankruptcy. Whilst the Russian bankruptcy was pending, the bank also sought to put Mr Laptev into bankruptcy in England.

Under English law, an individual may be put into bankruptcy in this jurisdiction, even if their centre of main interests is outside EU Member States (save Denmark) if, for example, they have had “a place of residence” here.

The issues

Mr Laptev objected to the parallel English bankruptcy proceedings on a number of grounds, including that the English Court should apply Russian law, and Russian law prevented direct creditor action, even in another jurisdiction.

Court decided – Russian bankruptcy law applies

The English Court, in compliance with EU legislation, applied Russian substantive law to prevent this parallel bankruptcy proceeding, as follows.

There is nothing novel for the English Court to apply substantive foreign law in resolving disputes in this jurisdiction. It will always, however, apply its own procedural law. EU legislation (Rome I) provides that remedies (in this case, for the failure of Mr Laptev to make good on the guarantees to the bank) are matters of substantive law. As the guarantee contracts were governed by Russian law, so too would the bank’s substantive remedies in front of the English Court.

The distinction mattered in this case because a rule of Russian law prevents the bank (as a creditor in the Russian bankruptcy) taking any action to pursue the £25m debt outside the Russian bankruptcy.  The English Court therefore had to decide whether that rule was a matter of substantive or procedural Russian law.

This decision was based, as ever, on expert evidence. Whilst there were no Russian court decisions on this issue, the judge preferred Mr Laptev’s expert evidence on this issue. Therefore, the parallel English bankruptcy could not proceed.

Importantly, this decision will extend to any sort of direct creditor action whilst there is a pending Russian bankruptcy – for example, litigating a breach of contract (as well as initiating an insolvency/bankruptcy process).

The alternative – recognition of the Russian bankruptcy

Whilst the English Court was clear that a parallel bankruptcy could not be commenced in this jurisdiction, creditors in this situation do have another option. They could encourage the Russian trustee in bankruptcy to seek recognition in this jurisdiction.

This would put the creditor in a very similar position to that which the bank was trying to achieve in the Laptev case.  The UK has adopted the UNCITRAL Model Law on cross border insolvencies.  As such, through a relatively straight forward procedure, a Russian bankruptcy may be recognised in this jurisdiction and the trustee will have access to the sorts of tools available in a domestically driven bankruptcy process.

This article has been co-written by Alex Shirtcliff, Henry Watkinson and Catherine Levi.