Accessibility of English bankruptcy to foreign debtors—JSC Bank of Moscow v Kekhman

When do English courts have discretion to annul an order in international bankruptcy cases? Michael Swainston QC at Brick Court Chambers examines the decision in JSC Bank of Moscow v Kekhman and others, a leading judgment on the accessibility of English bankruptcy to foreign debtors.

Original news

JSC Bank of Moscow v Kekhman and others [2015] EWHC 396 (Ch), [2015] All ER (D) 288 (Feb)

The Chancery Division considered an appeal against a decision of the Chief Registrar, in which he declined to annul a bankruptcy order made against K, a Russian businessman. The court held that, while the Chief Registrar had erred in principle in his approach to his jurisdiction to annul the bankruptcy order, the court had not had a discretion to annul the order, and the appeal would be dismissed.

Briefly, what was the background to this case?

Mr Vladimir Kekhman has been a very successful entrepreneur in Russia, building a huge fruit importation business under JFC Group, a BVI company, with subsidiaries in Russia, the BVI, Cyprus, Luxembourg, Panama, Costa Rica and Ecuador. On his case, he pulled back from this business when he began his subsequent career as head of the Mikhailovsky Theatre in St Petersburg, and left the running of it to his partners, Mr Afanasiev and Mrs Zakharova.

Mr Kekhman subsequently enjoyed great success in the running of the Mikhailovsky which has been restored to the first rank of international arts venues.

Meanwhile, however, the fruit business failed. JFC Russia is subject to a Russian bankruptcy process and Mr Kekhman has been exposed to multiple liabilities, including substantial English law liabilities, as a guarantor of loans to JFC Group companies.

Russian law does not have a personal bankruptcy regime for individuals who are not registered entrepreneurs. Mr Kekhman therefore sought to invoke English jurisdiction and English bankruptcy law to secure a transparent administration of his international affairs and to assist with his business rehabilitation.

He accordingly visited London for two days during which he presented a petition for his own bankruptcy. Chief Registrar Baister made the order requested, and subsequently rejected an annulment application by the Bank of Moscow. This refusal of annulment was challenged before Morgan J on the subject appeal.

What were the legal issues that the judge had to decide?

Mr Justice Morgan had to consider whether Chief Registrar Baister decided correctly when he refused to annul the bankruptcy order.

Why did these issues arise?

The question arose because the Bank of Moscow objected to the English bankruptcy order being made, and sought to argue that it 'ought not to have been made' under the Insolvency Act 1986, s 282.

What were the main legal arguments put forward?

The challenges by the Bank of Moscow came down to arguments that:

  • on the analogy of corporate insolvency cases, there needed to be a sufficient connection with the English jurisdiction before the English court should, as a matter of discretion, exercise its jurisdiction and make a bankruptcy order, and that no sufficient connection existed
  • such an order would operate unfairly among Mr Kekhman's creditors, and
  • an English bankruptcy order would offend comity when, according to Mr Kekhman's Russian 'personal law', he could not be subject to bankruptcy

What did the judge decide, and why?

The judge held that a connection with the jurisdiction was required, and that it existed in this case because of Mr Kekhman's English law liabilities, which were subject to English jurisdiction, and which would abate as a result of an English bankruptcy. He rejected the argument that an English bankruptcy order would operate unfairly among creditors, essentially because the objections taken were theoretical rather than real on the facts of the case. In particular, the judge did not disturb the Chief Registrar's assessment that the order would not be recognised in Russia. The real impact of an English order would therefore be outside Russia—in England in relation to English law liabilities subject to English jurisdiction, and in other jurisdictions which may choose to recognise the English order depending on whether they preferred free-for-all or orderly distribution. Accordingly, there was no incursion on comity as against Russia. There was also benefit to an English order because it would discharge Mr Kekhman's English law liabilities, and provide an opportunity for his partial rehabilitation in England and/or in other jurisdictions that recognised the order.

To what extent is the judgment helpful in clarifying the law in this area?

This is a leading judgment on the accessibility of English bankruptcy to foreign debtors, and especially those beset by liabilities subject to English law and jurisdiction. It represents a value judgment in favour of the English law policy of rehabilitation coupled with orderly and transparent distribution of a debtor's assets. An English court will further that policy where there are sufficient connections with the jurisdiction (especially English law liabilities) and where there is an international estate, even if the debtor is subject to a free-for-all at home.

What practical lessons can those advising clients in this area take away from the case?

The case illustrates the potential for a commercial and pragmatic approach to bankruptcy of individuals with international business interests, where a significant part of their liabilities are subject to English law and jurisdiction. English law may offer a route to their international rehabilitation even where the law of their home-state does not.

Michael Swainston QC has a broad litigation and advisory practice in England and overseas in areas including commercial and corporate litigation, international arbitration, human rights, humanitarian law and related public international law. He has particular experience in litigation connected with Russia and CIS countries, and acts for the Russian Federation in the European Court of Human Rights. In JSC Bank of Moscow v Kekhman and others, Michael was leading counsel for the First Respondent.

Interviewed by Kate Beaumont.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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First published on LexisPSL Restructuring and Insolvency

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