Common Law Remains ‘Immoveable’ in Matters of Cross-Border Insolvency
This post has been written by Yiannis Bazinas, Managing Partner, Bazinas Law Firm, Athens, Greece.
The effect of insolvency proceedings on assets located in different jurisdictions is perhaps the most typical issue one encounters in cross-border insolvency cases. Still, under English law, the rather fundamental question of what effect a foreign insolvency has on assets situated in England does not lend itself to an unequivocal answer. Instead, the answer depends on which of the many potentially applicable and overlapping frameworks, which include the Cross-Border Insolvency Regulations 2006 (CBIR), Section 426 of the Insolvency Act 1986, as well as the traditional common law rules, apply to the recognition of the proceeding in question. Whereas most recent cases involve the application of the CBIR or Section 426, giving the impression that the common law rules have been effectively superseded, the common law framework remains relevant, to the extent that the statutory regimes do not apply.
Under the common law rules, an English court will recognise a foreign insolvency proceeding if the debtor was domiciled or submitted to the jurisdiction of the foreign court. Nevertheless, the proprietary effects of recognition vary, depending on the nature of the debtor’s property in England. Whereas moveable property is considered to vest directly in the foreign trustee, the same does not apply in respect of immoveable property, as a result of the so-called ‘immovables rule’, which stipulates that issues concerning rights and interests in land and other immoveable property are governed by the law of the country where such property is situated. The immoveables rule thus effectively precludes a foreign insolvency proceeding from conferring any right or interest over the debtor’s immovable property in England on the foreign trustee. For a long time, however, commentators had argued that an English court could nevertheless make orders empowering the foreign trustee to sell such property or to appoint the trustee as a receiver of the property in England in order to assist in its realisation. That issue was revisited in the recent decision of the UK Supreme Court in Kireeva v Bedzhamov [2024] UKSC 39.
Facts
The Supreme Court decision is the last chapter in a long saga of protracted litigation between Mr Georgy Bedzhamov and his Russian bankruptcy trustee, Ms Lyubov Kireeva. Bedzhamov was the director of a Russian bank, who fled Russia in 2015 in the midst of allegations that he was involved in a high-profile fraud case, which led to the bank’s eventual failure. Around the same time, Bedzhamov acquired an interest in a London property, where he finally settled in 2017. Following Bedzhamov’s departure from Russia, a number of parties allegedly injured by the fraud, including two Russian banks, filed claims against him before the Russian courts and eventually succeeded in declaring him bankrupt in 2018. Kireeva was appointed the trustee in the Russian bankruptcy and focused her efforts on taking control and realising the London property for the benefit of creditors in the Russian proceedings. Toward that end, Kireeva filed an application before the English courts, seeking the recognition of the Russian bankruptcy proceedings at common law and requesting assistance, in the form of an order entrusting her with the London property, as forming part of the Russian bankruptcy estate. The reason for the trustee’s reliance on the common law rules was that, since Bedzhamov did not have his centre of main interests or any establishment in Russia, the Russian proceedings were not capable of recognition as foreign main or non-main proceedings under the CBIR, while at the same time the court had no power to grant assistance under Section 426, as Russia is not classified as a ‘relevant country or territory’, under that section.
At first instance, Snowden J recognized the Russian bankruptcy proceedings on the ground that Bedzhamov had submitted to the jurisdiction of the Russian courts but refused to grant the requested assistance, citing the immovables rule. On appeal, Kireeva argued that the effect of the immovables rule was limited to preventing the automatic vesting of immovable property in the trustee but did not prohibit an English court from recognising that the property fell within the scope of the foreign estate and providing assistance to its realization. The Court of Appeal, however, rejected the trustee’s arguments, stating that, as a result of the immoveables rule, the trustee had no interest over the London property, which entitled her to protection through the grant of an order by the court. Eventually, Kireeva appealed to the Supreme Court.
Judgment
The Supreme Court, in a unanimous decision, rejected the trustee’s appeal and affirmed the supremacy of the immoveables rule as regards the effect of a foreign insolvency proceeding in England at common law. In the court’s view, the immovables rule is a substantive rule of English law, which rests on public policy concerns, and cannot be departed from, unless a statutory exception applies. The court then noted that the provisions of the CBIR and Section 426 constitute statutory exceptions to the rule but were both inapplicable in the present case. The Supreme Court also rejected the trustee’s arguments that, although English law does not permit the automatic vesting of immovable property with the foreign trustee, it recognises the trustee’s authority to realise the assets of the estate for the benefit of creditors and therefore does not bar an English court from assisting the trustee to that effect. In the court’s view, the provisions of Russian law that stipulate that all the property of the debtor, including property located in England, forms part of the Russian estate were fundamentally at odds with the immovables rule and could not be recognised and given effect in England. The court also noted that this outcome was not contrary to the principle of modified universalism, which provides that an English court has a common law power to assist a foreign proceeding, since the principle is necessarily subject to English substantive law. Finally, the court underlined that any development of the common law towards the direction sought by the trustee would not be an incremental development but rather a substantial departure from existing law and as such should be the outcome of legislative intervention and not judicial deliberation.
Comment
The main contribution of the Supreme Court’s decision in Kireeva is that it clarifies what was considered, until very recently, a grey area in the English law of cross-border insolvency. As a matter of fact, the Supreme Court went as far as saying that prior English judgments (Re Kooperman [1928] WN 101, (1928) 13 B&CR 49, Araya v Coghill, Re Drumm), which impliedly suggested that it was possible for an English court to assist a foreign trustee in realising immoveable property in England, were wrongly decided. After Kireeva, it is now settled that an English court’s general duty of assistance to a foreign insolvency trustee does not extend to assistance in the realisation of immovable property located in England. Nevertheless, it should be obvious that this limited scope of assistance at common law significantly undermines the efficiency of foreign insolvency proceedings, as it effectively places English immoveable property interests beyond the reach of the foreign trustee. As the Supreme Court noted, however, the outcome in Kireeva owed more to the actions of Bedzhamov’s creditors, who opted to commence proceedings against him in Russia rather than England, even though the latter course of action was open to them. It seems, therefore, that, to the extent that a debtor has immovable property in England and a foreign insolvency proceeding will not be able to benefit from recognition and assistance under either the CBIR or Section 426, the commencement of English insolvency proceedings (either as standalone proceedings or in parallel with a foreign insolvency) will be inevitable.
In more conceptual terms, Kireeva is yet another nail in the coffin of modified universalism, as a standalone normative rule. In fact, one wonders whether modified universalism, which has been defined as the golden thread running through English insolvency law, actually means anything outside the context of a specific statutory framework. As the Supreme Court argued, the duty to assist a foreign insolvency trustee at common law, which is in essence a procedural duty of the court and the hallmark of the English modified universalist approach, must yield to substantive rules of English law, such as the immovables rule, unless a clearly defined statutory exception applies. In that sense, Kireeva is the latest in a long line of English judgments, including Rubin and Bakshiyeva, which have found that the common law duty of assistance, even if interpreted under the light of the principle of modified universalism, cannot be relied upon to trump existing rules of English law. Given the limited resonance of modified universalism as a norm that can assist in the interpretation and development of the common law rules, the common law framework for cross-border insolvency looks increasingly ‘dead in the water’. In the aftermath of Kireeva, it is reasonable to expect that the statutory frameworks of the CBIR and Section 426 will carry an even larger share of the weight in dealing with the various intricacies and issues arising in future cross-border insolvencies.