IN Rubin and another v Eurofinance SA [2012] UKSC 46, the Supreme Court championed traditional English due process protections to resolve a conflict between the rules applicable to enforcing foreign judgments and the principles guiding cross-border insolvencies. In doing so, the Supreme Court dealt a setback to aspirations for universalism in multinational insolvency proceedings, in which one court, using one set of rules, would adjudicate every claim. The Supreme Court, however, need not have sacrificed universalist aims in order to defend due process. An alternative approach could have achieved both goals.
It is a fundamental tenet of due process that defendants have the right to contest default judgments against them for lack of personal jurisdiction. The English common law rule set out in Dicey, Morris and Collins on the Conflict of Laws, 15th ed. (2012), para. 14R-054 (known as the “Dicey Rule”) is reflected in the Foreign Judgments (Reciprocal Enforcement) Act 1933 (UK). It determines when defendants will succeed in resisting enforcement of an in personam foreign judgment. Under the Dicey Rule, they may prevent English enforcement of foreign default judgments by demonstrating: (i) that they were not present in the foreign jurisdiction at the time that the foreign proceeding commenced; and (ii) that they never agreed to submit to the foreign jurisdiction.
The Dicey Rule, however, clashes with universalist principles in multinational insolvencies which depend on the extraterritorial recognition of foreign judgments to promote uniformity and cost savings. When companies operating across borders become insolvent, the proceedings may fall within the purview of many possible jurisdictions. Multiple proceedings, however, waste assets on duplicate administrative costs and risk creating conflicting outcomes. The principle of universalism in insolvency, therefore, aims to consolidate all potential insolvency claims into one forum. There is then a single process recognised in every other jurisdiction. Streamlining the insolvency proceedings in this way also provides certainty for creditors and makes it easier for them to set interest rates based on accurate calculations of the risks of loans.
In spite of the benefits of universalism, the Supreme Court clarified in Rubin that the Dicey Rule applies to insolvency judgments, making it necessary for companies to file separate claims against English defendants absent from foreign insolvency proceedings. The specific question before the Supreme Court was whether English courts could enforce the ruling of an American bankruptcy court against a British citizen, Adrian Roman, who had not submitted to jurisdiction in the US. Roman received a default judgment from a New York bankruptcy court, ordering him to return more than $1 million worth of assets that he had taken from the Consumers Trust (the “Trust”), an insolvent corporate entity under his authority.
Infringements of American consumer protection laws by Roman and his sons pushed the Trust into bankruptcy. Roman and his sons had operated an illegal scheme in which merchants issued vouchers to customers which entitled the customers to full rebates on their purchases of consumer goods. The merchants paid money for the rebates into the Trust, but the procedures for cashing in the rebates were designed to make it almost impossible for the customers to receive payment. The infringements by Roman led to the imposition of civil penalties that made it inevitable that the Trust would default on its obligations.
The Trust filed for reorganisation in New York bankruptcy court, and the Court found personal jurisdiction over Roman. According to American law, jurisdiction depends only on minimum contacts between the defendant and the US, so long as nothing further “offends traditional notions of fair play and substantial justice.” By conducting business in the US, Roman satisfied the standard and became subject to the jurisdiction of American courts.
After Roman failed to respond to a summons to appear, the New York court entered a default judgment in his absence. Roman was liable to return money to the Trust because he and his sons had capitalised it only with funds to cover a small portion of potential payments. Not expecting the Trust to have to reimburse many customers, they had diverted the rest of the merchants' money to themselves. The payments from the merchants to Roman constituted illegal “fraudulent transfers,' or assets removed from the Trust's estate in order to prevent their distribution to creditors in bankruptcy. The receivers coordinating the bankruptcy applied to the English High Court for enforcement of the American judgment.
The English High Court, however, refused. The High Court judge applied the Dicey Rule and found its requirements for enforcing foreign judgments not met: Roman had not been physically present in the U.S., nor had he voluntarily submitted to American jurisdiction.
The English Court of Appeal reversed the decision of the High Court, even though Roman's conduct had not fulfilled the Dicey standard ([2010] EWCA Civ 895). It agreed to enforce the American default judgment against Roman. In order to reach this outcome, the Court disapplied the Dicey Rule from all insolvency proceedings. Judgments related to the “collective enforcement regime of the bankruptcy proceedings,” the Court said, warranted “worldwide recognition” and therefore fell outside of general limitations on enforcement ([2010] EWCA Civ 895 at [61(4)], [62]).
The interpretation of the law by the Court of Appeal appeared to invent an insolvency exemption from traditional English common law rules. The Court of Appeal offered no more principled basis for departing from established protections of due process. Should English courts enforce foreign judgments in insolvency proceedings differently from all other claims, in the interests of promoting universalism in cross-border insolvencies?
The Supreme Court, in a four to one decision, said “no”. The Court reinstated the Dicey requirements as prerequisites to English enforcement of foreign insolvency orders. As before, English defendants must have been present in a foreign court or agreed to submit to its jurisdiction, in order to be subject to its rulings in England. The Court applied the requirements to a joined appeal that raised similar issues, New Cap Reinsurance Corpn Ltd v Grant [2011] EWCA Civ 971, and found enforceable a default judgment of the New South Wales Supreme Court because the English defendant had submitted to Australian jurisdiction.
The Supreme Court further held that the United Nations Commission on International Trade Law (UNCITRAL) Model Law, incorporated into English law in the Cross Border Insolvency Regulations 2006 (SI 2006/1003), did not provide an alternative route to enforcement. The UNCITRAL Model Law did not address specifically the recognition of foreign judgments against third parties, and the Supreme Court declined to find that it impliedly fell within the scope of the Model Law.
The decision of the Supreme Court did leave open two potential routes for enforcing foreign judgments in insolvency. First, the decision did not purport to affect the recognition of orders within the EU. The European Insolvency Regulation 2000 (EC 1346/2000) requires recognition among the courts of the EU Member States and enforcement of their rulings. Secondly, the decision also did not foreclose the possibility for Parliament to legislate “a change in the settled law of the recognition and enforcement of judgments” in order to further universalist goals for cross-border insolvencies ([2012] UKSC 46 at [129]).
New legislation, however, does not appear to be necessary. The Supreme Court need not have sacrificed universalism in order to uphold due process protections for English citizens. It could instead have achieved both aims by turning to an alternative route to enforcement. The Supreme Court could simply have extended “comity” to American standards of personal jurisdiction. The principle of “comity” encourages reciprocity among foreign courts and respect for the validity of foreign rules. Employing “comity,” the English courts could have enforced the judgment of the New York bankruptcy court against Roman on the basis that it complied with American jurisdictional standards. Roman would have had the opportunity to contest in an English forum whether his actions had fulfilled the American requirements. His due process rights would have been vindicated, even as the reorganization of the Trust could have reached a resolution in one streamlined proceeding.
By skipping directly to the application of the Dicey Rule, the Supreme Court validated due process rights while subverting efforts to establish a more efficient regime for dealing with multinational insolvencies. The ruling of the Supreme Court protects English defendants from becoming subject to the jurisdiction of foreign bankruptcy courts. Had the Supreme Court affirmed the decision of the Court of Appeal, any foreign judgment made in the absence of English defendants would have become binding automatically in England. The imprecise boundaries of an insolvency exception to the Dicey Rule, moreover, would probably have caused substantial uncertainty.
Nevertheless, the Supreme Court decision has contradicted significant developments in many other countries which facilitate unitary insolvency proceedings. Canada, France and Germany, for example, have demonstrated increased willingness to defer to a single proceeding and forgo additional procedures in their own courts. Under Rubin, however, English courts will obstruct the ability of foreign jurisdictions to adjudicate multinational insolvencies in default proceedings with finality, unless English defendants affirmatively submit to them. Otherwise, until English proceedings establish the liability of English defendants, English defendants will remain judgment proof. The extra English proceedings will increase administrative costs and reintroduce possibilities for inconsistent outcomes. The inefficiencies are lamentable because they are unnecessary.
