Whether foreign judgments must be “recognised” in the English courts before instituting insolvency proceedings - Court of Appeal’s judgment in Servis-Terminal v Drelle

In Servis-Terminal LLC v Drelle [2025] EWCA Civ 62, the Court of Appeal considered whether a foreign debt – which had not been subject of recognition proceedings – could form the basis of a bankruptcy petition. Or, in other words, whether a foreign judgment which had not been recognised could be regarded as creating a “debt” for insolvency purposes in this jurisdiction?

Servis-Terminal LLC obtained a Russian court judgment against Mr Drelle. Servis served Mr Drelle (who was resident in London) a statutory demand under the Insolvency Act 1986 on the basis of the Russian judgment. Servis later presented a bankruptcy petition against Mr Drelle which was granted by ICC Judge Burton.

Newey LJ giving the leading judgment (with Popplewell and Snowden LJJ concurring) held (at [55]) that a bankruptcy petition could not be presented in respect of a foreign judgment which had not been recognised or registered in England and Wales.

Territorial competence over debts

Mr Mark Phillips KC of South Square Chambers, appearing for Servis, had a very difficult task. Charles Samek KC of Littleton Chambers appeared for Mr Drelle. Phillips KC submitted that section 267 of the Insolvency Act 1986 did not specify that a debt needed to be enforceable at common law, or even subject to a judgment. 

Newey LJ reiterated that a foreign judicial decision has no direct effect in our domestic jurisdiction. This is basic law. Under Dicey, Morris & Collins, rule 45 explains that: “A judgment of a court of a foreign country ... has no direct operation in England but may: (i) be enforceable by claim or counterclaim at common law or under statute ...” 

The rationale for the common law’s approach was explained (at [41]) as being bound-up in the notion of territorial sovereignty: “the common law’s aversion to enforcing a foreign exercise of a sovereign power.” Snowden LJ held that the “judgment and order is the result of the exercise of sovereign power by the judicial organs of the Russian state.” Professor Adrian Briggs was quoted as explaining that judicial adjudication necessarily entails the exercise of sovereign power. Thus, the foreign court is expressing the sovereignty of the foreign state. This cannot, and should not, be recognised by an English court unqualifiedly under the common law. Therefore, Newey LJ’s approach, in my view, is the only sensible and consistent one.

Moreover, it is trite that a foreign tax order does not give rise to liability under the English courts (falling under the peculiar province of an expressly sovereign power). As such, and since section 267 does not preclude foreign tax liabilities as being regarded as “debt”, it must logically stand that section 267 was not to be interpreted or understood autonomously. Newey LJ held that it was thus not necessary for an express carve-out to that effect under section 267. His Lordship argued (at [44]) that “the 1986 Act does not exist in a vacuum and does not purport to provide comprehensive explanations.” Thus, it was intended to sit harmoniously within the broader common law rules of private international law. Phillips KC (at [68]) appeared to argue that a formulation which departed from these rules was justified on the basis of “the special nature of bankruptcy and corporate insolvency proceedings.” It seems to me that the English courts are, once again, declining to permit the side-stepping of the common law rules for the supposed priorities of insolvency practitioners. 

Phillips KC sought to argue that the Dicey, Morris & Collins rule 45 could be displaced on the basis that a bankruptcy petition was “not enforcement by execution of the debt”; but rather a “wider legal proceeding available for the collective enforcement of the admitted or proved debts of the company”. This was a hopelessly pedantic point that missed the bigger picture. While Newey LJ acknowledged that insolvency proceedings were not a form of “direct execution”, they still formed part of enforcement since the judgment was being used as a “sword”.

Interestingly, Newey LJ commented obiter that it seemed inappropriate for the service a statutory demand in respect of an unrecognised foreign judgment given that, in the eyes of English law, there was no “debt” to be pursued.

Declaratory relief and the scope of res judicata by merger - Supreme Court’s judgement in Nasir v Zavarco

In Nasir v Zavarco Plc [2025] UKSC 5, the Supreme Court considered whether a party seeking declaratory relief (to establish whether it has a cause of action) is barred from a subsequent claim of relief that may flow from obtaining a favourable declaration. In other words, does a judgment of declaratory relief create “an obligation of a higher nature” which necessarily engages the doctrine of merger?

Zavarco Plc was an English public company. On incorporation, it allotted 30% of its issued share capital to Mr Nasir under a commitment to invest €36 million. Mr Nasir did not pay in cash, but transferred shares in another company to Zavarco. Mr Nasir argued that the transfer amounted to consideration for the shares. But, Zavarco maintained that he was still obliged to pay €36 million. Zavarco sought declarations that the shares were unpaid and that it was entitled to forfeit them. At trial, the court granted the declaration sought in favour of Zavarco. Under the articles of association, a member whose shares were forfeited remained liable to pay for them, and Zavarco issued fresh proceedings seeking payment from Mr Nasir. Mr Nasir disputed the court’s jurisdiction on the basis that the claim for payment had merged into the declaratory judgment (in the first action) and had been extinguished as a matter of law.

Lord Hodge (with whom Lord Hamblen, Lord Leggatt, Lord Stephens and Lady Rose agreed) held that the doctrine of merger does not extend to a declaratory judgment. Thus, a declaratory judgment does not create “an obligation of a higher nature.” 

Clarification of the doctrine of merger

Res judicata is the principle of law that a party is precluded from bringing new proceedings if a court of competent jurisdiction has already adjudicated on the matter. His Lordship (at [31]) confirmed that “the doctrine of merger and the various rules and concepts of res judicata is to support the good administration of justice by promoting finality of litigation and preventing the duplication of actions both in the public interest and in the interests of the parties.”

Lord Hodge explained (at [17]) the underlying difference between merger and cause of action estoppel. While the cause of action estoppel “prevents the contradiction of an earlier judgment as to the existence or non-existence of a cause of action,” merger is slightly different. It describes the legal transformation to a cause of action when a court gives judgment. His Lordship argued that its purpose – in promoting finality in litigation – is “designed to make a litigant seek his or her remedies in one action.”

Lord Hodge’s historical assessment largely confirms the orthodox conceptual framework recently articulated by Lord Sumption in Virgin Atlantic v Zodiac Seats [2013] UKSC 46. The doctrine of merger replaces the claimant’s original cause of action (such as a debt claim) with rights granted in the judgment. The “higher nature” of the court’s judgment, once recorded, takes on a “higher” legal status than the original cause of action. Henceforth, the claimant’s enforceable rights are under the judgment as opposed to the contract.

Whether declarations engage the doctrine of merger

Mr Paul Downes KC of Quadrant Chambers - for the appellants - submitted that the doctrine was designed to prevent more than a single claim being litigated between the parties over the same “subject”. Indeed, according to Lord Sumption (at [17] in Virgin Atlantic), merger was a substantive rule of English law which “treat[ed] a cause of action as extinguished once judgment has been given on it” per se. As such, in the appellant’s formulation, it would be inherently objectionable, as a matter of law, for the claimant not to have sought both declaratory and coercive relief in their earlier claim.

Lord Hodge (at [39]) explained that, in the historical context, there had been no authority of English law with respect to declaratory judgments engaging the doctrine of merger. As such, his Lordship had to consider the issue afresh on conceptual and policy grounds. I.e. were there good reasons for extending the merger doctrine?

Lord Hodge ultimately held that there were reasons against extending the scope of merger to declaratory relief.

The most important reason related to the analysis vis-a-vis (1) inherent nature of declaratory relief, and (2) its separate historical development apropos the the doctrine of merger. 

Lord Hodge argued that the case law involving merger (such as, Broome v Wooton (1605) Cro Jac 73 in an action for damages for the taking of property, or King v Hoare (1844) 13 M & W 494; 153 ER 206, claim for debt from the sale of goods) all seemed to hinge on the concept of a judgment given to secure a payment of monies or secure property rights. They had an “executory or coercive effect”, in the language of Spencer Bower and Handley: Res Judicata. Lord Hodge called these “coercive judgments” and held (at [49]) that Spencer Bower and Handley had been correct to confine merger to coercive judgments and exclude it from declaratory judgments. 

Lord Hodge (at [46]) also illustrated that the doctrine of merger and declaratory relief arose in the law with their own special considerations. Declaratory relief was a relatively recent “remedy” provided under English law whereas the merger doctrine was borne out of the common law’s writ system with their specialised remedies. As recent as Virgin Atlantic, these two threads appeared not to have crossed.

The most critical issue of analysis arose in the dictum of Birss J (at [26] in Zavarco Plc v Nasir [2020] EWHC 629 (Ch)). He noted that he could not “see how a declaration which declares to exist the right which the claimant already had before judgment was given, could be said to extinguish that pre-existing right. It does the opposite” (my emphasis). Similarly, Sir David Richards, in the Court of Appeal (at [37] in Zavarco Plc v Nasir [2021] EWCA Civ 1217) held that a “declaration is a quite different remedy from judgment for a debt or damages.”

In my view, the analysis of Birss J and then Lord Hodge has to be the preferred approach. Not only is it plain common sense, but it strikes at the very essence of “a higher remedy” that it necessarily grants the claimant some immediate execution. It would make no sense for the law to transfigure rights under a cause of action (“the inferior remedy”) into a judgment that granted none. Rather, a declaration imposes no obligation on parties. Against a defendant, a claim would have absolutely no executory (or “coercive”) effect. As Briss J correctly distilled, the declaratory relief merely confirmed claimant’s rights existed, and therefore cannot be said to have extinguished it.

Lord Hodge gave further reasons against expanding the remit of res judicata by merger to declaratory relief. Among those, His Lordship held (at [51]) that, as a policy issue, there “may be justifiable reasons for a litigant to seek a declaration before pursuing a claim for a coercive remedy.” This is also an important policy consideration especially in the context of international litigation. His Lordship also held (at [53]) that excluding purely declaratory judgment would not give rise to duplicative or vexatious litigation. This is because in the second action, the legality of right would not be open to contradiction under issue estoppel.

These are sounds practical reasons which confirm the court’s conceptual approach against expanding the remit of res judicata by merger to declaratory judgments as being correct.