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The Court of Appeal recently considered immovable property in relation to a Russian bankruptcy, with a majority declining to appoint the Trustee as receiver of the Bankrupt’s £35m property. In addition it was held that the High Court had been wrong to reject evidence in relation to the validity of the Russian bankruptcy without cross-examining the witness.
In 2018, Russian banker Georgy Bedzhamov (the Bankrupt) was made bankrupt in Russia with debts in the region of £30 million, predominantly made up of a judgment in favour of Vneshprombank LLC (“VPB”) which formed the basis of the bankruptcy order. Lyubov Kireeva was appointed as his Trustee in Russia.
VPB issued proceedings in the UK based on their judgment and obtained a worldwide freezing order restraining £1.34 billion of assets, although they did not seek recognition of the judgment. VPB claimed they were the victim of a substantial fraud perpetrated by the Bankrupt and his sister, whereas the Bankrupt alleged VPB had obtained the judgment on the basis of forged documents.
In February 2021, the Trustee issued an application for recognition at common law of the Russian bankruptcy order and of herself as Trustee and for orders relating to the Bankrupt’s property at Belgrave Square, London worth in the region of £35 million.
At the same time, the Bankrupt applied for an order varying the freezing order to sell the Belgrave Square Property to pay his living expenses, legal fees and other disbursements. This order was made but the Trustee was given permission to apply to set it aside under CPR 40.9 on the basis she was not a party to the proceedings.
The Trustee applied to set aside the order, and the application was heard with her recognition application. As discussed in our previous , Snowden J held the Russian bankruptcy and the Trustee’s appointment should be recognised in this jurisdiction, but dismissed her claims regarding Belgrave Square and the set aside application.
The Bankrupt and Trustee both appealed to the Court of Appeal. The case was heard by Newey LJ, Arnold LJ and Stuart-Smith LJ.
Newey LJ held that Snowden J was wrong to conclude VPB’s judgment was well-founded. In earlier proceedings, the Bankrupt had produced a witness statement late in the day asserting that his signature was forged on a personal guarantee.
As the Trustee did not object to the late filing of the statement, it was admitted. Newey LJ held that Snowden J was not entitled to dismiss the Bankrupt’s evidence on the balance of probabilities as he was not cross examined on it, instead Snowden J should have considered whether the Bankrupt’s account was manifestly incredible but made no finding to that effect.
There was insufficient evidence to establish if VPB’s judgment had been obtained fraudulently. As the decision to recognise the Russian bankruptcy was based on VPB’s judgment, Newey LJ held that Snowden J was mistaken in recognising the Russian bankruptcy and therefore that decision must be set aside and the recognition application was to be remitted to the High Court for directions in order that the Bankrupt’s evidence could be cross-examined.
The immovables rule
The “immovables rule” means that, as a matter of English law, a foreign Court has no jurisdiction to make orders in respect of land in England and rights relating to such land are governed exclusively by English law.
In considering whether the Belgrave Square Property had vested in the Trustee, it was held that, following recognition at common law, moveable property in England vests in a foreign trustee, but immovable property does not. Whilst the Trustee might have become the owner of the Belgrave Square Property in the eyes of Russian law, she had not done so as a matter of English law.
The Court declined to appoint the Trustee as receiver of the Belgrave Square Property, considering Re Kooperman (1928) and holding Snowden J had been right to decline to follow it, citing it as an unsatisfactory decision.
The Trustee argued that recognition at common law serves as a gateway to the grant of relief pursuant to the Court’s equitable jurisdiction or under which provides “The High Court may by order (whether interlocutory or final) grant an injunction or appoint a receiver in all cases in which it appears to the court to be just and convenient to do so.” In accordance with the principle of “modified universalism”.
The Court considered the principle of “modified universalism” but found that this did not give them the power to assist with foreign proceedings in the same way it could in a domestic insolvency, regardless of whether the country has a similar legal tradition to the UK. As such s37 SCA nor principles of common law allowed the court to circumvent the immovables rule.
It was held that Snowden J was correct to decline to grant the Trustee assistance in relation to the Belgrave Square Property, even on the basis that the Russian bankruptcy was recognised. The Trustee was not entitled to recognition as the Bankrupt’s receiver and, even if she were, she would have at common law no recognisable right or interest in the Belgrave Square Property.
Concluding, Newey LJ noted that if they were to find in favour of the Trustee, this would create a common-law exception to the immovables rule, which was held to be properly a matter for Parliament, not the Courts.
Arnold LJ agreed with Newey LJ in relation to the recognition application but dissented in relation to the immovables aspect of the appeal. He stated that the English courts should exercise their own powers to provide the Trustee with assistance in discharging her duty to realise assets for the benefit of creditors by making an order in personam against the Bankrupt.
By a majority, the Court of Appeal dismissed the Immovables and Set Aside Appeals, but allowed the Recognition Appeal and remitted the Trustee’s application for recognition back to the High Court.
By the Trustee not objecting to the late filing of witness evidence by the Bankrupt, submitted the night before the final day of the hearing, Snowden J could not discount the statement and instead should have considered the evidence with the benefit of the Bankrupt’s cross examination. The Bankrupt will have an opportunity to seek to persuade the court that the judgment debt was obtained fraudulently when the matter is heard by the High Court.
The Court was not prepared to create a common law exception to the immovables rule, but Arnold LJ’s dissenting opinion may open the door for further consideration. This decision will have far-reaching consequences in cross-border cases where common law recognition is sought.
It should be remembered the Cross Border Insolvency Regulations 2006 (“CBIR”) expressly, on recognition, entrusts “the administration or realisation of all or part of the debtors assets located in Great Britain to the foreign representative or another person designated by the Court” which would have resulted in a different outcome. However recognition under the CBIR was not possible due to the lack of a COMI or an establishment in Russia.