Russian trustee in bankruptcy prevented from exercising rights over London property

The UK Supreme Court held that the effect of the so-called ‘immovables rule’ meant that the English courts would not recognise the property as an asset in the Russian bankruptcy and could not offer the requested assistance to the trustee.

The case revolved around the bankruptcy of Georgy Bedzahmov, a Russian citizen who left Russia in 2015 and lived in England from 2017. He was made bankrupt in a Russian court in 2018 and a trustee in bankruptcy was appointed.

Bedzahmov owned a property in Belgrave Square, London which, as a matter of Russian law, formed part of the bankruptcy estate which the trustee had a duty to realise for the benefit of creditors.

In 2021, the trustee unsuccessfully applied to the High Court to recognise the Russian bankruptcy, and therefore her right to take control of the property, and also to set aside a charge in favour of Bedzahmov’s solicitors against the property. She appealed to the Court of Appeal which, in a split decision, upheld the decision. She then appealed to the Supreme Court.

The immovables rule is a long established principle of English common law that provides that neither the law nor the courts of England and Wales will recognise or give effect to any laws or judicial decisions of a foreign country which seeks to affect the rights or interests of immovable property situated in England and Wales. The effect of the immovables rule was the question for the Supreme Court in this recent decision.

The Supreme Court considered the two statutory exceptions to the immovables rule which apply to insolvency proceedings.

First, section 242 of the Insolvency Act 1986 (IA86) requires an insolvency court in the UK to assist a corresponding court in “any relevant country or territory”.

Second, the Cross-Border Insolvency Regulations 2000 (CBIR) allow the court to entrust all or part of a debtor’s assets to a foreign representative when it is necessary to protect the interest of creditors.

The first exception in section 242 of IA86 was quickly found by the Supreme Court not to apply, as Russia did not appear in the definition of a “relevant country or territory”.

As for the second exception under CBIR, Bedzahmov had left Russia in 2015 and had no centre of main interest or an establishment in Russia at the time of his bankruptcy order and, therefore, the Supreme Court considered the trustee was not permitted to seek the English court’s assistance under CBIR.

In considering the common law, the Supreme Court found that the immovables rule was not focussed on the vesting of title, as the trustee argued, but provided that recognition will not be given to a foreign law that purports to affect the rights or interests in land located in England. It, therefore, prevents the English courts from recognising the relevant property in this case as an asset of the Russian bankruptcy and prevents the trustee from appointing a receiver over the property.

The Supreme Court finally considered whether it had the power to extend common law assistance in the present circumstances. Although the immovables rule was founded in common law, it was modified by statute, namely section 30(1) of the Civil Jurisdiction and Judgments Act 1982, and is qualified by the two statutory exceptions in section 426 of IA86 and CBIR. Therefore, the Supreme Court considered that any modification to the immovables rule to enable the English courts to assist a foreign trustee is a matter for parliament and not the courts.

The foundations of the immovables rule are in place to protect territorial sovereignty by preventing a foreign sovereign state from changing title to property that is situated in another sovereign state. To deviate from this would impinge upon the authority of the UK’s own sovereignty, the Supreme Court held. This decision, therefore, reinforces the English court’s exclusive jurisdiction to make orders that will affect the right and interests to property that is, and will always remain, located in England.

The court’s unwillingness to create new common law to allow the present case to be dismissed under the immovables rule may open the door to difficulties in obtaining common law recognition of insolvency proceedings originating from jurisdictions that do not fall within the statutory exceptions.

Co-written by Stephen Cope of Pinsent Masons.