Following its judgment in the case Re Besuno Ltd (2014) 1(Α) CLR 427, the Supreme Court of Cyprus has ruled that, in order to proceed with winding up proceedings against a judgment debtor, the proper registration of an arbitral award in Cyprus is a sine qua non procedure.

Background

Pursuant 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".

Facts

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.

Appeal

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 said case.

Comment

In Cyprus, the filing of a petition for compulsory winding up against a company that has not satisfied a debt, is considered one of the very drastic means for creditors to collect their debts, due to both the summary-nature of the hearings (which is more cost and time effective, compared to raising a civil action), as well as 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.

With 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.

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