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The High Court of Justice, in the recent case of Protasov v Derev, determined that there was no basis for a provisional freezing order to continue after recognition of foreign bankruptcy proceedings under the UNICTRAL Model Law on Cross-Border Insolvency (the Model Law) as implemented in England & Wales by the Cross-Border Insolvency Regulations 2006.
Mr Derev, was declared bankrupt in Russia in July 2019 and Mr Protasov was appointed his bankruptcy manager.
Mr Derev relocated to London, where he had significant assets, shortly before the bankruptcy order was made. Upon his appointment, Mr Protasov applied to the High Court of Justice in England and Wales for recognition of the Russian bankruptcy as foreign main proceedings under Article 17 of the Model Law and the application was listed for a hearing in December 2020.
In the meantime, due to a risk of the assets being dissipated by the bankrupt, Mr Protasov successfully applied for a provisional freezing order which was awarded by Zacaroli J pursuant to Articles 19(1)(c) and 21(1)(c) of the Model Law, provisionally suspending the bankrupt's rights to deal with his assets worldwide .
When the recognition order was subsequently made on 1 December 2020, the Court had to decide whether the freezing order should continue.
The parties' positions
Mr Protasov sought that the freezing order should continue due to the bankrupt's conduct and a continuing risk of interference with the bankruptcy assets. In particular, he was concerned that the bankrupt had failed to disclose significant assets, such as various loans owed to him, or to deliver up luxury watches to the bankruptcy manager. He argued that the Court had jurisdiction to allow the freezing order to continue under (i) the extension to section 25 of the Civil Jurisdiction and Judgments Act 1982 in the Civil Jurisdiction and Judgments Act 1982 (Interim Relief) Order 1997 and (ii) Article 21(1)(g) of the Model Law combined with section 37 of the Senior Courts Act 1981.
The bankrupt said that even if the Court had jurisdiction to make the order sought, it should not exercise it. He argued that freezing orders are not typically used in bankruptcy proceedings and there are other means by which a trustee in bankruptcy (or his foreign equivalent) could achieve the same result.
The matter came before Mr Justice Adam Johnson on 24 February 2021
- Section 25 of the Civil Jurisdiction and Judgments Act 1982
The Court agreed that section 25 had been extended to cover insolvency proceedings but found that it was not relevant in the present case where an interim relief was sought to be continued by the bankruptcy manager against the debtor. Pursuant to the decision in ETI International NV v Republic of Olivia, the foreign proceedings had to be substantive proceedings. The Court held that in this context substantive proceedings meant a type of proceedings concerned with the vindication of private law rights, and was not satisfied that the foreign proceedings, which under Article 2 of the Model Law are defined as “collective judicial or administrative proceedings…for the purpose of reorganisation or liquidation”, met the criteria.
- Article 21(1)(g) the Model Law (read in conjunction with Section 37 of the Senior Court Acts 1981
The judge held that as Mr Derev was based in London, it had a strict jurisdiction to make the order sought, but determined that it would not be appropriate to do so in this matter.
The parties were able to identify only one case, Raithatha v Williamson, where a freezing order had been made against a bankrupt. That case, however, concerned the bankrupt's future assets under a pensions scheme and the freezing injunction was required to prevent the bankrupt from realising those benefits until the outcome of the trustee in bankruptcy's application to claim them under an income payments order.
- Extension of interim relief under the Model Law
Noting that Article 19(2) provides that any interim relief expires when the application for recognition is decided unless expressly extended under Article 21(f), the Court went on to consider whether it would be appropriate to extend the freezing order in this case.
The Court noted that pursuant to Article 20(1)(c), upon recognition of foreign proceedings, the bankrupt's rights to deal with any of his assets are suspended. According to Article 20(2)(a) and (b) the scope and effect of the suspension is the same as if the bankruptcy order had been made under the Insolvency Act 1986 (IA 1986) and is subject to the same court's powers, prohibitions, limitations and conditions as would apply under English law. The Court, in particular, mentioned the fact that, under IA 1986:
- the bankrupt has no control over his assets (section 306),
- a trustee in bankruptcy has broad powers over the bankrupt and his assets (for example, section 366)
- and the whole process is under the general control of the court (section 363) which has a power to order the arrest of a bankrupt (section 364).
The Court held that, when the recognition order was made, the provisional suspension under the freezing order was superseded by a permanent suspension of the bankrupt’s rights by way of Article 20(1) and Article 20(2) of the Model Law. There was therefore no reason for the freezing order to be extended.
This decision demonstrates that the courts will prefer to adhere to the standard practice than to set a new precedent unnecessarily – particularly given that the bankruptcy regime in England & Wales is so well established as a means of taking control of assets in the bankruptcy estate. This decision highlights certainty and predictability of the English legal system, which incidentally are often reasons for choosing English law as the governing law of various commercial contracts.