Following its judgment on Re Besuno Ltd,(1) the Supreme Court of Cyprus ruled that, in order to carry out winding up proceedings against a judgment debtor, the proper registration of an arbitral award in Cyprus is a sine qua non procedure.
According to section 212(a) of the Cyprus Company Law (CAP 113), a company shall be deemed to be unable to pay its debts if:
a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding five thousand euros (€5.000) then due has served on the company, by leaving it at the registered office of the company, a demand under his hand requiring the company to pay the sum so due and the company has for three weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor.
An arbitral award was issued in Russia in favour of the appellant (joint venture Uralmetprom) and against the respondent company Besuno Ltd. The appellant demanded the payment of the debt and, following section 212(a) of CAP 113, filed a winding up petition after 21 days to the competent Cyprus district court due to the respondent's inability to pay its debts.
The district court rejected the appellant's winding up petition, holding that, because the arbitral award had not been registered in Cyprus, there was no evidence to suggest that the respondent was unable to pay its debts or that the appellant was a recognised creditor of the respondent.
The Supreme Court, applauding the first instance decision, held that:
through the process of recognition and registration, the guarantees of certification of a valid and existing foreign judgment are ensured. The existence of a debt is the necessary and natural consequence of the confirmation of the existence of a judgment […] A debt is not meant to exist without the recognition of a foreign court [judgment] or arbitral award, since the debt arises from the judgment itself.
Therefore, the relevant provisions of CAP 113, regarding the filing of a petition to wind up a company by a creditor, could not apply to the case at hand.
In Cyprus, filing a petition for compulsory winding up against a company that has not satisfied a debt is considered a drastic method for creditors to collect their debts. This is due to both the summary nature of hearings (which is more cost and time effective, compared with raising a civil action) and the potential implications on the company's reputation, as the hearing date of the petition is usually published. Consequently, it is not uncommon for debts to be settled shortly after a petition is presented.
Following the above judgment, the Supreme Court has significantly limited the availability of the compulsory winding up route in relation to arbitral awards prior to their registration in Cyprus.
For further information on this topic please contact Antreas Koualis or Elina Nikolaidou at AG Erotocritou LLC by telephone (+357 25 370 101) or email ([email protected] or [email protected]). The AG Erotocritou LLC​ website can be accessed at www.erotocritou.com.
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