Third-Party Debt Orders in International Debt Recovery
Problem: The central issue in OOO Nevskoe v UAB Baltijos Šalių Industrinio Perdirbimo Centras & Anor [2023] EWHC 15 (KB) was the challenge of enforcing a debt across international borders (in the UK) when the debtor is involved in insolvency proceedings in their home country (Lithuania). This case tests the effectiveness of international debt recovery mechanisms in the face of complex legal landscapes.
Outcome: The English court’s ruling in favour of the Creditor, granting a final Third-Party Debt Order (TPDO), is a landmark decision. It illustrates the English judiciary’s approach to balancing international debt recovery against the backdrop of foreign insolvency proceedings, particularly under the nuanced post-Brexit legal framework.
What is a Third-Party Debt Order?
A Third-Party Debt Order is a judicial order that enables creditors to recover debts directly from third parties holding the debtor’s funds. This order is particularly crucial in cases where the debtor is insolvent or has hidden their assets.
The TPDO freezes funds in the third party’s possession, ensuring that the creditor can recover at least part of the owed amount. Understanding and utilising TPDOs effectively are key in international debt recovery, especially for creditors dealing with foreign debtors who may have assets in different jurisdictions.
The Case
The case involved a Russian company (Claimant) seeking to recover a debt from a Lithuanian company (Defendant) for unpaid goods. Despite the Defendant entering insolvency proceedings in Lithuania, the Claimant applied for a TPDO in the UK, targeting funds in a UK bank account belonging to the Defendant.
This move was a strategic effort to bypass the complexities of the Lithuanian insolvency process and directly access the funds owed. This litigation approach can prove very effective. Our lawyers are strong advocates for carrying out proper and extensive due diligence at the start of a case to explore which assets can be targeted and protected at the outset.
In the period between the granting of the interim TPDO and the hearing to finalise it, the Lithuanian court initiated the defendant’s liquidation in its home country. The Lithuanian liquidators sought a Recognition Order in the UK under the Cross-Border Insolvency Regulations 2006. The primary motivation behind this application was to prevent the claimant from obtaining a conclusive TPDO and gaining an advantage over other creditors.
The English court’s decision, grounded in the principles of the Cross-Border Insolvency Regulations 2006 (CBIR), represents a significant stance on international debt recovery. The CBIR aims to balance the interests of creditors and insolvent estates across borders, but in this case, the English court demonstrated a clear preference for protecting the rights of individual creditors. This was evidenced by the Master’s decision to grant the final TPDO, emphasizing the principle that “the existence of foreign insolvency proceedings has no bearing on the English courts until such time as a Recognition Order is made.” This statement is pivotal as it reflects the court’s discretion in prioritising a creditor’s rights over the collective interests of creditors in a foreign insolvency process.
In the absence of a Recognition Order, the court maintained complete discretion regarding the issuance of an order, such as the final TPDO in this case. The Master emphasised that, in exercising this discretion, English courts tend to favour the ‘first past the post’ principle. In this instance, the claimant creditor was considered ‘first past the post,’ entitling them to the final TPDO.
The Master acknowledged that this might result in the creditor doing better than under the ‘pari passu’ principle (which dictates that in insolvency proceedings, such as administration, liquidation, or bankruptcy, unsecured creditors are entitled to an equal distribution of any available assets or proceeds from the sale of such assets. This distribution is proportional to the debts owed to each creditor, ensuring an equitable treatment of all creditors involved) was irrelevant to the decision.
In making this decision, the Master highlighted that prior to Brexit, the Recast Insolvency Regulation (Regulation (EU) 2015/848) governed the English courts. In accordance with this regulation, countries automatically acknowledged primary insolvency proceedings initiated in other Member States. Therefore, pre-Brexit the English court would have been obligated to recognise and enforce the Lithuanian liquidation proceedings from the moment they began in Lithuania.
However, post-Brexit the English courts are not bound to the regulation and/or to give effect to the Lithuanian liquidation proceedings from the moment they were issued.
Comments
The implications of this ruling are significant for international creditors. It reiterates and highlights the necessity of understanding and leveraging various legal instruments like TPDOs in cross-border insolvency situations.
The case serves as a reminder for creditors to (i) ensure proper due diligence is done on debtors to establish any assets; and (ii) act swiftly and strategically when dealing with debtors in different jurisdictions. Additionally, the ruling underscores the potential impact of Brexit on the UK’s legal landscape, particularly regarding the recognition and enforcement of foreign insolvency proceedings.
There are ways to evaluate necessary enforcement options including Third-Party Debt Orders, charging orders on properties, orders for sale, and others. If there is a lack of details about a debtor’s assets, consider obtaining information through avenues such as an asset disclosure order against the debtor or third parties like banks or corporate service providers. Explore the possibility of a CPR Part 71 examination order if a director or officer of the judgment debtor is within the jurisdiction of England and Wales. Avoid unnecessary delays in initiating desired applications. Many applications can be submitted initially on paper and without prior notice. Act promptly to protect your interests.
Contact us for a Free Consultation at 0207 459 4037 or through our online booking form to explore your options and ensure your rights are upheld in international debt recovery cases.
