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In this post, Pippa Borton, Associate at CMS, previews the decision awaited from the Supreme Court in Kireeva v Bedzhamov.
Overview
Mr Georgy Bedzhamov (“Mr Bedzhamov”) was made bankrupt by the Moscow Arbitrazh Court on 20 September 2017 (“the Russian Bankruptcy”). Ms Lyubov Kireeva (“Ms Kireeva”) was appointed as his receiver. This case concerns Ms Kireeva’s application in the English High Court for recognition of her appointment and relief in relation to accessing real estate held by Mr Bedzhamov at 17 Belgrave Square and 17 Belgrave Mews in London (“the Belgrave Square Property”).
Background
On 23 October 2015 VTB 24 Bank (“VTB 24”) made a loan to Mr Bedzhamov’s sister. His sister failed to meet her obligations in respect of the loan and VTB 24 brought a claim in the Meshanskiy District Court of Moscow against Mr Bedzhamov, as guarantor. Although Mr Bedzhamov denied signing the guarantee, judgment was made in VTB 24’s favour on 22 December 2016.
Separately, Vneshprombank LLC (“VPB”), of which Mr Bedzhamov’s sister had been president and which was declared bankrupt in 2016, successfully brought a claim against Mr Bedzhamov in the Khamovniki District Court of Moscow seeking the Russian ruble equivalent of upwards of £30 million for unjust enrichment. Mr Bedzhamov has made several unsuccessful attempts to overturn this judgment, on the basis that it was obtained improperly and/or fraudulently.
In 2017, VTB 24 and VPB filed bankruptcy petitions against Mr Bedzhamov in the Moscow Arbitrazh Court. The court accepted VTB 24’s petition and ordered a debt restructuring procedure to be introduced in respect of Mr Bedzhamov’s debts. The court subsequently accepted VPB’s claim and an additional claim advanced by the Federal Tax Service as claims in the bankruptcy. On 17 June 2018 Mr Bedzhamov was declared bankrupt and on 2 July 2018, Ms Kireeva was appointed as receiver (the Russian equivalent of a trustee in bankruptcy).
Mr Bedzhamov has been living in England since 2015 and has been domiciled there from at least 2017.
High Court Proceedings
In late 2018, VPB issued proceedings in the English High Court against Mr Bedzhamov for fraud, funded by an entity called A1 LLC. Shortly thereafter, VPB was granted a worldwide freezing order restraining Mr Bedzhamov of disposing of his assets to the value of £1.34 billion (“the Freezing Order”). The Freezing Order remains in force.
On 21 January 2021, the Tverskoy District Court of Moscow ordered seizure of the Belgrave Square Property. On 19 February 2021, Ms Kireeva brought an application (also funded by A1 LLC) in the English High Court under which she sought to have her position as Mr Bedzhamov’s receiver recognised at common law (“the Recognition Application”). She also sought an order that the Belgrave Square Property be entrusted to her.
On 21 February 2021, Mr Bedzhamov applied to have the Freezing Order partially lifted so he could sell the Belgrave Square Property. Mr Bedzhamov’s application was granted by Falk J on 5 March 2021 (“Falk J’s Order”). Falk J’s Order included permission for Ms Kireeva to apply to set it aside under Civil Procedure Rule 40.9 and Ms Kireeva duly applied to do so on 16 March 2021 (“the Set Aside Application”).
The Set Aside Application was heard along with the Recognition Application by Snowden J (as he then was). Judgment was handed down on 13 August 2021. The judge concluded:
- The Russian Bankruptcy and Ms Kireeva’s appointment should be recognised under English common law. Since Mr Bedzhamov was no longer domiciled in Russia, Ms Kireeva had to show that Mr Bedzhamov had submitted to the jurisdiction of the Russian court. It was found that he had done so because he had instructed his legal advisor to attend hearings in Russia on his behalf. Mr Bedzhamov claimed that it would be a breach of natural justice to allow the Recognition Application, alleging that the signatures on the guarantee had been forged, and submitted a witness statement in support this. However, Snowden J did not consider that the witness statement provided cogent enough evidence. In particular, he pointed out that Mr Bedzhamov had not provided any expert evidence to support the alleged forgeries.
- The court could not assist with the entrustment of the Belgrave Square Property to Ms Kireeva since there was “no common law power to ‘entrust’ the Belgrave Square Property to the Trustee” and no “common law power to declare that it has vested in the Trustee in order to be transferred to the Trustee or sold by her or anyone else for her benefit”. A foreign bankruptcy order could not vest immoveable property in England in the hands of a foreign trustee.
- The Set Aside Application was dismissed on the basis the court could not grant Ms Kireeva assistance in relation to the Belgrave Square Property.
Court of Appeal
Ms Kireeva appealed Snowden J’s refusal at first instance to assist with the Belgrave Square Property (“the Immoveables Appeal”) and set aside Falk J’s Order (“the Set Aside Appeal”).
Mr Bedzhamov appealed Snowden J’s decision to recognise the Russian Bankruptcy and Ms Kireeva’s appointment as receiver (“the Recognition Appeal”).
The appeals were heard by Newy LJ, Arnold LJ and Stuart-Smith LJ.
The Recognition Appeal
All three judges were in agreement that the Recognition Appeal should be allowed on the basis that Mr Bedzhamov had not been cross-examined on his witness statement and it was therefore not possible to arrive at a conclusion in relation to the evidence therein and dismiss the possibility of the signatures having been obtained by fraud. On that basis, the matter was remitted to the High Court for directions to be made for a hearing in which Mr Bedzhamov could be cross-examined on his witness statement.
The Immovables and Set Aside Appeals
Counsel for Ms Kireeva raised various legal arguments as to why the court should assist Ms Kireeva in accessing the Belgrave Square Property. Underlying these arguments was an English common law principle known as ‘modified universalism’. This concept was described in Rubin v Eurofinance SA [2012] UKSC 46, [2013] 1 AC 236 (“Rubin”) as the “administration of multinational insolvencies by a leading court applying a single bankruptcy law”. The idea behind the concept is that in international insolvency, English courts, where possible, should cooperate with foreign office holders to distribute assets to creditors.
Counsel for Mr Bedzhamov argued that modified universalism could not overcome the ‘immovables rule’, a well-established principle of private international law, which says that a foreign court has no jurisdiction over immovable property in England and such property can be governed only by the laws of England. As Stuart-Smith LJ remarked: “What is at issue in the Immovables Appeal is essentially a demarcation dispute between the Immovables Rule and the principle of “modified universalism””.
Arguments in favour of Ms Kireeva
It was common ground that Ms Kireeva could not rely on any statutory means of relief in relation to the Belgrave Square Property. There are two statutes which enable an English court to assist a foreign trustee in bankruptcy, namely (i) the Insolvency Act 1986, s 426 (“Section 426”) and (ii) the Cross-Border Insolvency Regulations 2006 (“CBIR”). Section 426, under which the English Courts “shall assist the courts having the corresponding jurisdiction in any other part of the United Kingdom or any relevant country or territory”, did not apply because Russia was not considered a relevant country or territory. Ms Kireeva was also unable to rely on the relevant provisions of the CBIR, which requires the debtor to have either the centre of his main interests or an establishment in the country in which the foreign representative has been appointed, because Mr Bedzhamov had left Russia in 2015 and had not returned to live there.
Although counsel for Ms Kireeva accepted that their client could not rely on Section 426, they argued that Ms Kireeva’s recognition as Mr Bedzhamov’s trustee in bankruptcy provided a gateway, in the same way Section 426 was a gateway, for the court to grant relief to Ms Kireeva pursuant to its equitable jurisdiction or under the Senior Courts Act 1981, s 37 (“Section 37”). Section 37 states “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.”
Ms Kireeva’s counsel pointed to the case of Re Kooperman [(1928) 13 B&CR 49] (“Re Kooperman”) as an example of the court granting such relief. Mr Kooperman was declared bankrupt in a Belgian Court. His trustee in bankruptcy applied for relief against a property owned by Mr Kooperman in England. Whilst the English Court acknowledged that the Belgian Court could have no power over immovable property in England, it was willing to assist the foreign trustee by appointing an English receiver over the leasehold property, who was given authority to sell and retain the proceeds of the property. Re Kooperman is cited in Dicey, Morris & Collins on the Conflict of Laws (“Dicey”), paragraph 31-084 as an example of how the English Courts may, in certain circumstances, circumvent the immovables rule: “A foreign trustee who would otherwise be met by the obstacle contained in this Rule may be able to mitigate its effect if the English court, in a proper case, is prepared to appoint a receiver of the rents and profits of the immovables.”.
Relying on a comment made about Re Kooperman in Kerr and Hunter on Receivers and Administrators, 21st ed., footnote 441, counsel for Ms Kireeva also suggested that Ms Kireeva could obtain a vesting order under the Trustee Act 1925, s 44 on the basis that Mr Bedzhamov held the Belgrave Square Property on trust for Ms Kireeva.
Ms Kireeva’s counsel also pointed to obiter comments made by Lord Hoffman in Cambridge Gas Transportation Corpn v Official Committee of Unsecured Creditors of Navigator Holdings plc [2006] UKPC 26, [2007] 1 AC 508 (“Cambridge Gas”) (which concerned creditors’ representatives appointed under the United States Bankruptcy Code who sought assistance from the Court in the Isle of Man). Lord Hoffman surmised that “in the case of immovable property belonging to a foreign bankrupt, there is no automatic vesting but the English court has a discretion to assist the foreign trustee by enabling him to obtain title to or otherwise deal with the property”. He further commented that where there is no statute specifying what the court should do, it “must at least be able to provide assistance by doing whatever it could have done in the case of a domestic insolvency”.
Finally, Ms Kireeva’s counsel argued that the immovables rule only relates to the title of the real estate so, although the court cannot vest the property in the foreign office holder, it can recognise that the immovables are held by the bankrupt at the direction of the foreign office-holder.
Judgments of Newey LJ and Stuart-Smith LJ
Newey LJ and Stuart-Smith LJ ultimately rejected all the above arguments and held that the Immovables and Set Aside Appeals should be dismissed. They did not agree that recognition of a foreign office-holder under Section 426 could be equated with recognition at common law. Section 426 can be invoked specifically where the foreign jurisdiction shares the same legal traditions as the UK, it does not follow that this can apply to any jurisdiction in the world.
The judges saw the decision in Re Kooperman as problematic for several reasons. First, it was a first instance decision and therefore not binding on the Court of Appeal. Second, the office-holder in Re Kooperman had applied for without notice relief so a reasoned judgment for the decision was not provided. Third, Re Kooperman referred to only one other authority which concerned only movable property in England.
With the exception of Re Kooperman, where foreign office-holders had been granted relief in domestic courts in relation to immovables, the courts had derived their power from statute. Mr Bedzhamov’s counsel referred to multiple international cases to demonstrate this point.
The suggestion that a vesting order could be obtained under the Trustee Act 1925, s 44 was also rejected. Ms Kireeva had based this argument on the fact that, under Russian law, she had a proprietary interest in the Belgrave Square Property. However, since, as far as Newey LJ was aware, there was no concept of trusts under Russian law, the argument did not make sense. Even if it were possible to come to this conclusion under Russian law, the Russian Bankruptcy could not cause the Belgrave Square Property to be held on trust for Ms Kireeva because, as an immovable, the property was subject only to the jurisdiction of England.
As regards the obiter comments in Cambridge Gas, the Court of Appeal highlighted past criticisms of the decision. In Rubin, the judge asserted that since the property was situated in the Isle of Man, it could not be subject to an order of the US Bankruptcy Court. He contended that the issue of enforcement of foreign judgments should not be decided by judge-made law but rather by legislation.
Finally, as regards the argument that the immovables rule only relates to the title of immovable property, Newey LJ contended that such an analysis “underestimates the significance of the immovables rule and is not supported by either case law or the commentaries”.
Dissenting Judgment of Arnold LJ
Arnold LJ disagreed with the conclusions of Newey LJ and Stuart-Smith LJ that the Immovables and Set Aside Appeals should be dismissed.
First in relation to Rule 132 in Dicey which states “[a]ll rights over, or in relation to, an immovable” are … governed by the law of the country where the immovable is situated (lex situs)”, Arnold LJ emphasised that this is a choice of law rule intended to create convenience and expediency for the court. In other words, the court has discretion in what it chooses to do. He goes on to suggest that, although not apparent from commentary, the same rationale should apply to Rule 217 of Dicey (which specifically deals with bankruptcy) which states “an assignment of a bankrupt’s property to the representative of his creditors, under the bankruptcy law of a foreign country, other than Scotland or Northern Ireland, is not, and does not operate as, an assignment of any immovables of the bankrupt situate in England”.
Arnold LJ agreed with Newey LJ and Stuart-Smith LJ that it is not possible for an English court to recognise powers conferred on a foreign office-holder by a foreign court over immovable property in England. Therefore, the English court should not recognise Ms Kireeva’s title to the Belgrave Square Property by virtue of her Russian appointment as Mr Bedzhamov’s receiver. However, Arnold LJ considered that there may be an alternative way for the court to provide assistance. He pointed to commentary in Dicey at 23-065: “Indirectly, of course, a foreign immovable may be affected by the judgment of an English court in personam ordering some person subject to the control of the court to execute a conveyance or mortgage.”
This quotation is not strictly applicable to the present case since it relates to powers affected by an English court over a foreign immovable. However, Arnold LJ surmised the converse it is not necessarily untrue. Since Mr Bedzhamov is subject to the in personam jurisdiction of the English courts, they are able to exercise their discretionary power to assist Ms Kireeva in realising Mr Bedzhamov’s assets for the benefit of creditors. Arnold LJ then asked how could the courts do this in circumstances where they are not able to invoke any statutory powers to assist a foreign-office holder? He argued that the courts may invoke their powers at common law as courts of equity to appoint a receiver in respect of the Belgrave Square Property. This could be done, Arnold LJ argued, on the same basis on which VPB had been granted the Freezing Order against Mr Bedzhamov. As Arnold LJ summarised:
“Thus the remaining issue is whether, in an appropriate case, the English courts should exercise their power to appoint a receiver in circumstances where (i) an application for assistance is made by a foreign office holder (ii) whose appointment has been recognised by the English courts at common law and who seeks assistance in realising (iii) an immovable asset of a bankrupt who is subject to the in personam jurisdiction of the English courts for the benefit of the bankrupt’s creditors.”
This had been done before in Re Kooperman. Arnold LJ acknowledged that this decision was not binding on the Court of Appeal. However, he also noted that the case had not previously received any substantial judicial criticism and had largely been accepted as good law in commentary. Arnold LJ also pointed out that although parts of the decision in Cambridge Gas had been discredited, “the principle of modified universalism remains part of the common law”.
Arnold LJ also suggested an alternative “half-way house solution” in allowing the appointment of a receiver over the rents and profits or sale-proceeds from the Belgrave Square Property since it could be argued that such assets are movables. However, he acknowledged it is also arguable that they are immovables since they derive from an immovable.
Arnold LJ did not consider that the courts exercising their discretionary power in this way would go against the immovables rule or amount to judicial legislation, as had been submitted by Mr Bedzhamov’s counsel, instead “it would represent a confirmation of the existing case law”, “would be a principled development of the law” and/or “would amount to the common law developing in parallel with statute”.
Counsel for Mr Bedzhamov had suggested that Ms Kireeva would need to apply for an English bankruptcy order to be made in respect of Mr Bedzhamov to enable her access to the Belgrave Square Property. Arnold LJ strongly disliked this suggestion saying it would be a “complete retreat from universalism”, “bad policy” and “unworkable in practice”.
Arnold LJ agreed with Newey LJ and Stuart-Smith LJ that the Trustee Act, s 44 was inapplicable in this case.
Supreme Court
The Court of Appeal therefore concluded that modified universalism was subject to local law and public policy. Absent statutory powers, the court could not circumvent the immovables rule and any departure from this principle should be a matter for Parliament. Ms Kireeva has been given permission to appeal this decision by the Supreme Court. The case was heard by Lord Reed, Lord Lloyd-Jones, Lord Briggs, Lady Rose, and Lord Richards on 21-22 November 2023.
