UK: Bankruptcy "Tourism": Russian Banks Fail To Annul English Bankruptcy Of Russian Businessman

Last Updated: 12 August 2014
Article by Simon Moore

In JSC Bank of Moscow and ZOA Sberbank Leasing v Vladimir Kekhman, the London High Court decided on 9 April 2014 that a well-known Russian businessman, Mr Kekhman, could present his own bankruptcy petition in London even though he was resident and domiciled in Russia, had no real connection with England (he was only in England for two days) and there were very few assets in England for distribution to Mr Kekhman's creditors either. Instead, the Court decided that Mr Kekhman's bankruptcy order should stand because, even if though it seemed at first sight like self-serving opportunistic "forum shopping" by Mr Kekhman, the Court should look at all the circumstances of the case. Here, a decisive factor was the absence in Russia of any personal bankruptcy regime, so English bankruptcy law could be used to plug that gap by providing a system that enabled a proper investigation of Mr Kekhman's affairs, and an orderly realisation of his assets for the benefit of his creditors.  

The facts, briefly, were that Mr Kekhman, as well as being the general director of the Mikhailovsky Theatre in St Petersburg, was the ultimate owner of the JFC Group of companies, the business funded by loans from several banks and which got into financial difficulties in late 2011. In early 2012, security was enforced, guarantees called, and insolvency proceedings were started in Russia against JFC. On 25 September 2012, whilst he was in London on a very brief visit (he arrived at Gatwick Airport the previous day, stayed at a hotel overnight, and went back to Russia the next day) Mr Kekhman presented his own bankruptcy petition at the London High Court. He was entitled to do this, because s 265(1)(b) Insolvency Act 2006 says that the English Court has bankruptcy jurisdiction when a debtor (Mr Kekhman)  is present in England on the day he presents his petition. Mr Kekhman's Court papers said that he was the subject of ten sets of legal proceedings in Russia, has assets in Russia, and owed around $316m to his creditors in Russia, including Bank of Moscow and Sberbank. He also brought with him into England £200,000 in cash, and said he spent around £50,000 a month in living expenses. On 5 October 2012 the English Court made a bankruptcy order, and two accountants from the firm of Mazars were appointed as Mr Kekhman's Trustees in bankruptcy.  

In early 2013, each of Bank of Moscow and Sberbank applied to the Court to set the bankruptcy aside. They argued that (i) Mr Kekhman had misled the Court when he applied for his own bankruptcy: for example he had not disclosed that his Russian assets were arrested so could not be realised by an English Trustee, and (ii) although the English court had the power to make the bankruptcy order, it should not have done so in this case: there was no real connection with England, there was no probability that an English bankruptcy would benefit Mr Kekhman's many Russian creditors, and an English bankruptcy order would not be recognised in Russia. In short, the banks argued that Mr Kekhman was simply a "bankruptcy tourist" who was "shopping" in England to evade Russian law.

After hearing extensive Russian law expert evidence, plus evidence from Mr Kekhman himself, the Judge decided that Mr Kekhman had not deliberately misled the court about his assets or his personal position, so was not prepared to set the bankruptcy order aside for that reason. Of more importance, the Court upheld the bankruptcy order because, in the absence of a personal bankruptcy regime in Russia, the English court was entitled to plug that gap by providing a system that enabled proper investigation of Mr Kekhman's affairs, and an orderly realisation of his assets for the benefit of his creditors. Further, in striking a balance between the competing interests of Mr Kekhman and the banks, the banks were not prejudiced because they would receive a distribution from Mr Kekhman's insolvent estate if any assets in England were realised, plus they could still pursue their claims in Russia  against Mr Kekhman's Russian assets. Finally, what is called "financial rehabilitation" of the debtor (Mr Kekhman) under English law was a major factor in allowing Mr Kekhman's bankruptcy order to stand: unlike under English law, there is little or no incentive under Russian law for a bankrupt to "pick himself up" by obtaining a discharge from bankruptcy and starting his business life again.  

The case is important for lawyers: it rejects the idea of bankruptcy "forum shopping" as objectionable in itself. The case is also important for non UK banks, creditors and the debtors themselves, who may have wrongly thought that what goes on outside England, stays outside England.  

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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