‘Visit England’ promotes tourism to England and Wales by reference to the beautiful scenery, world-class museums and abundance of culture on offer. Following the recent judgment of JSC Bank of Moscow v Kekhman & Ors [2015] EWHC 396 (Ch) (Kekhman), it should consider adding an advantageous personal insolvency regime to this list. 

The English personal insolvency regime is considered to be far more debtor friendly than other countries. For example, all debts are generally discharged after one year as opposed to three years in Ireland and six years in Germany. This has encouraged “bankruptcy tourism” where individuals deliberately petition in England to avoid more onerous conditions in less debtor friendly countries. 

Indeed, this tourism phenomenon is not limited to bankrupts: steps to move a company’s centre of main interests (COMI) have increased since the Enterprise Act 2002 introduced a more favourable administration regime.  

Kekhman concerned the bankruptcy of a self-made Russian billionaire and an appeal by JSC Bank of Moscow (JSC Bank) against a decision of Chief Registrar Baister to reject the application of JSC Bank and ZAO Sberbank Leasing to annul and/or rescind a bankruptcy order made on a debtor’s petition by Mr Kekhman on 5 October 2012. 

BACKGROUND

Mr Kekhman is a Russian citizen, domiciled and resident in the Russian Federation. Known as the Banana King, he made his billions in the fruit business, building JFC Group into the leading importer of bananas into Russia, with a 40% market share. JFC Group operated through various companies in Russia, Costa Rica, Cyprus, Ecuador, Luxembourg and Panama, with the overall holding company based in the BVI. In the ultimate Russian status symbol of a Russian oligarch, Mr Kekhman was also the general director of the Mikhailovksy Theatre, one of the oldest opera and ballet houses in Russia. 

JFC Group fell into financial difficulties in 2011 and sought to negotiate and restructure itself. However, all attempts failed, leading the banks to call in their loans, enforce their security and look to Mr Kekhman under the guarantees. Mr Kekhman began winding up his business and in February 2012, JFC Russia initiated insolvency proceedings. However, on 11 September 2012 JSC Bank obtained a worldwide freezing order against the BVI companies in the group. 

MR KEKHMAN’S PETITION

On 25 September 2012, during a 48-hour stay in London, Mr Kekhman presented his own bankruptcy petition in the High Court (the Petition). On 5 October 2012, the Petition came before Chief Registrar Baister who made a bankruptcy order (the order) on the basis of: 

  • the absence of a personal insolvency regime in Russia
  • the availability of assets in the jurisdiction (being £200,000 cash-in-hand that Mr Kekhman undertook to make available to the official receiver)
  • the existence of a connection to the jurisdiction in the form of an English law choice of law/jurisdiction clause in one of the guarantees
  • the opinion of Mr Kekhman’s Russian lawyer that the courts in Russia would recognise the bankruptcy
  • the fact that the bankruptcy would allow for the investigation of Mr Kekhman’s financial position
  • the opportunity for Mr Kekhman’s financial rehabilitation.

THE LAW

Section 264(1) Insolvency Act 1986 provides for a debtor to present a petition for his or her own bankruptcy, subject to the conditions in s265(1) being fulfilled: 

  • A bankruptcy petition shall not be presented to the court under section 264(1)(a) or (b) unless the debtor:

(a) is domiciled in England and Wales

(b) is personally present in England and Wales on the day on which the petition is presented or

(c)at any time in the period of 3 years ending with the day:

(i) has been ordinarily resident, or has had a place of residence, in England and Wales or                      

(ii) has carried on business in England and Wales.

These conditions represent very low hurdles to an individual seeking to forum shop for a favourable personal insolvency regime. Enterprising individuals have been known to rent or buy a cheap property in England with no intention of ever setting foot in it, simply to ensure the conditions are fulfilled. The present case shows that simply being personally present is potentially enough to render the domicile or ordinary residence or the place of business of the debtor irrelevant to the question of jurisdiction. 

THE APPLICATIONS TO ANNUL/RESCIND

JSC Bank was not content with Mr Kekhman’s bankruptcy and applied to have it annulled/rescinded under s282 Insolvency Act 1986. Given the low threshold for jurisdiction, JSC Bank conceded this point and sought to dispute Chief Registrar Baister’s discretion. 

The application was brought on the basis that (i) the order should not have been made on the basis of the facts as they existed at the date of the order, (ii) Mr Kekhman had not established a sufficient connection with England and shown that the bankruptcy would benefit the creditors as a whole and (iii) that Mr Kekhman had breached his duty of full and frank disclosure. 

In considering the applications, Chief Registrar Baister heard from Russian law experts and accepted that the Order was unlikely to be recognised or enforced in Russia (despite what Mr Kekhman’s lawyers had told him at the original hearing) and that the £200,000 cash-in-hand had been brought in breach of a Russian 'arrest' order (which should also have been disclosed at the original hearing). 

However, Chief Registrar Baister declined to use his discretion to annul/rescind the order. Accepting that the arguments were finely balanced and that much of the bases of support for originally making the order had been eroded, Chief Registrar Baister held that the order still had utility when it was made and that he would likely have still made the order, even if all the facts had been properly presented. In his view, the order had utility because there was commercial subject matter on which the order could operate and it would have enabled/made possible:

  • the investigation of Mr Kekhman’s affairs
  • an orderly realisation of his non-Russian asset
  • Mr Kekhman’s financial rehabilitation, even if only outside the Russian Federation, which was of considerable importance to an international businessman. 

THE APPEAL

Not to be discouraged from pursuing Mr Kekhman, JSC Bank sought to appeal Chief Registrar’s judgment and presented no less than thirteen grounds of appeal to Mr Justice Morgan. However, the primary ground was that Chief Registrar Baister had applied the wrong test. On JSC’s case, Mr Kekhman needed to show three things to persuade the court to grant the order: (i) sufficient close connection, (ii) a reasonable possibility of a benefit resulting from the bankruptcy order and (iii) that there was one or more persons interested in the distribution of assets who were persons over whom the English court exercised jurisdiction. 

THE ’CORRECT APPROACH’

Morgan J dismissed Mr Kekhman’s submissions, including that the Court only needed to consider the utility of bankruptcy order. He held that the correct approach when considering whether to annul the order was to consider:

  • the grounds which existed at the time the order was made
  • whether on those grounds, the order ought not to have been made
  • if the order ought not to have been made, whether it should annul the order. 

Morgan J was not persuaded that the Chief Registrar had applied the right test, because he did not decide in “terms that the bankruptcy order ought not to have been made”, concluding that the “Chief Registrar erred in principle in his approach to his jurisdiction”. However, in re-exercising his discretion, Morgan J applied the correct test and held that Mr Kekhman’s liability under the guarantee with an English jurisdiction/choice of law clause, constituted a sufficiently close connection to the English jurisdiction (where the order would lead to the discharge of this liability) and that there was a benefit to the order to both Mr Kekhman through this discharge and to his general creditors through the orderly realisation of assets. 

Morgan J further concluded that the making of the order did not offend obligations of international comity. In particular, an English court could make an order that would be effective in England and in the jurisdictions that choose under their law to recognise it, but it would be wholly ineffective in a jurisdiction that, under its law, refused to recognise it. Accordingly, it was not contrary to the principles of comity for an English court to make an order which would be effective to discharge the debtor’s liability under a contract which the parties had agreed should be governed by English law and subject to English jurisdiction. 

CONCLUSION

‘Insolvency tourists’ jumping on a plane to declare bankruptcy in England is nothing new. While some have warned of the floodgate effect, anticipating a tsunami of foreign nationals declaring bankruptcy in England and Wales, in reality, Mr Kekhman is the latest in a long line of international businessmen who forum shop for the best jurisdiction in which to declare bankruptcy. 

In a literal interpretation of the law, the English Courts have confirmed that the doors are wide open for foreign nationals looking for a more benevolent insolvency regime. While this is likely to be good news for those foreign debtors, their advisors and IPs, the question remains whether this is generally of benefit to overseas creditors. What is noteworthy about Kekhman is the Court’s decision to allow a bankruptcy that has no effect as a matter of Russian law, leaving JSC Bank and other many foreign creditors in difficulty. It appears that overseas creditors are faced with the potentially unattractive options of submitting to the jurisdiction and participating in the English bankruptcy, or staying away and seeking to enforce against assets out of the reach of an English Trustee in Bankruptcy. 

One conclusion from Kekhman is never to get on the wrong side of a Russian bank – given their obvious tenacity. However, practically, an overseas creditor faces an uphill battle to seek to challenge the English court’s jurisdiction. Faced with the prospect of significant legal costs and other professional fees, together with the practical difficulty of unpicking the evidence (in some cases even tracking flights and airplane tickets to see if they have been used), only those creditors with deep pockets and a point to prove can afford to challenge a foreign bankrupt’s petition. 

Kekhman is also a reminder to those who advise international businesses to have a timely exit strategy in place if everything goes wrong, because it can make a substantial difference. For creditors it serves as a reminder to properly consider 'boilerplate' clauses rather than simply skim over them. Morgan J placed significant weight on the face that the guarantee was subject to an English jurisdiction/choice of law clause. If a creditor wishes to place obstacles in the way of a Kekhman style bankruptcy then ensuring that the choice of law/jurisdiction on their contract is in the creditor’s favour is a good place to start.  Finally, if you have any other ideas on how to address the insolvency tourism question – answers on a postcard please. 

This article was published in RECOVERY magazine in September 2015.