In circumstances where a monetary arbitral award is issued against a Cyprus company, the issue arises as to whether the arbitral award would need to be recognised and enforced before the Cyprus Courts prior to the presentation of a petition for liquidation of the judgment debtor.
Cyprus law allows a creditor to present a liquidation petition against a Cyprus company on a number of grounds, including where the Cyprus company is unable to pay its debts. According to section 212 of the Cyprus Companies Act, a Cyprus company is deemed to be unable to pay its debts if (i) it, after judgment is issued against the company, it was served with a statutory demand and failed for the next three weeks to pay or secure or compound to the reasonable satisfaction of the creditor, the sum so due; or (ii) if execution or other process issued on a judgment, decree or order of any Court in favour of a creditor of the company is returned unsatisfied in whole or in part; or (iii) if it is proved to the satisfaction of the Court that the company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, the Court shall take into account the contingent and prospective liabilities of the company.
In the first category of cases involving a statutory demand, Cyprus Courts have consistently observed that such statutory demand must come from a "creditor." A person does not have the status of a creditor if the debt is bona fide or substantially disputed, even if the company is in fact insolvent. The presentation of a petition for the liquidation of a company is not an appropriate method for resolving a disputed debt. If there is any reasonable basis for disputing the existence of the debt (and not just its amount), such a petition should not be submitted and the process of submitting a liquidation petition should not be abused as a means of pressuring a company to pay money for a debt that it disputes.
In view of the above, the question is whether the creditor has locus standi to present a liquidation petition and the Cyprus company can be proved to be unable to pay its debts, in circumstances where the creditor only has in its favour an arbitral award, which has not yet been recognised by a Cyprus Court.
The question is important taking into account that the recognition of an arbitral award may take substantial time and, during this period, the Cyprus company may dissipate assets and render futile any potential enforcement against it.
The Besuno judgment
Uralmetprom Interdepartmental Concern Oao UralMetprom ν. Besuno Ltd (2014) 1 A.A.D 427 (Besuno) concerned the filing of a petition to wind up a company on behalf of a creditor who was a successful litigant in an arbitration award against the company, which had not been registered or recognised in Cyprus. In that case, the said creditor attempted to register the award in Cyprus, however the application failed. Instead of filing a new application, the creditor opted to present a liquidation petition, which was challenged by the company. The Supreme Court, agreeing with the District Court, held that the arbitral award does not maintain legal effect in Cyprus unless it is properly registered and that, therefore, liquidation cannot be pursued solely based on the arbitral awardBottom of Form if it is not registered and recognised prior to the presentation of a liquidation petition.
The Onehim judgment
More recently, in Onehim Group Management Limited v Rostex Enterprises Limited (2024) Civil Appeal No. 116/2015 (Onehim), Onehim entered into a loan agreement with Rostex, pursuant to which Rostex borrowed US$20.000 from Onehim. Rostex breached its obligations under the agreement, prompting Onehim to file a request for arbitration before the ICC. Following arbitration proceedings, an award was issued in favour of Onehim and against Rostex. Rostex failed to comply and Onehim issued a statutory demand and, subsequently, presented a petition to wind up Rostex.
The petition to wind up was dismissed by the District Court on the ground that the statutory demand was not related to the debt arising from the loan agreement but was based solely on the arbitral award. The District Court held that the arbitral award should be recognised and registered in Cyprus before the petition to wind up can be filed for non-compliance with a statutory demand for payment which is based on a foreign arbitral award.
The Cyprus Supreme Court upheld the decision, agreeing that the demand was based on the arbitral award and not on the loan agreement. It observed that Besuno was decided on its own particular facts, which were that the petition was presented simply on grounds a statutory demand in circumstances where a separate application to recognise, register and enforce the arbitral award in Cyprus had already been dismissed. Nevertheless, it decided that, equally, it is not possible for a statutory demand to be based on an arbitral award, which was not yet recognised in Cyprus. The Supreme Court observed that the amounts stated in the statutory demand were based on the arbitral award and not on the loan agreement and, therefore, the demand was defective. It concurred with the Court of First Instance's observation that the absence of such registration rendered the arbitral award unenforceable, thereby precluding its use as grounds for winding-up proceedings. The appellant had the burden of proof regarding the insolvency of the respondent. As such, only with the registration of the arbitral award that could establish a liquidated debt, could section 212(a) be satisfied.
At the same time, the Supreme Court observed that if Onehim had not proceeded with the arbitration, then the demand for payment could have been based on the loan agreement alone and that the petition for winding up would, in those circumstances, be examined based on the provisions of the Cyprus Companies Act.
Final remarks
Both Besuno and Onehim demonstrate that it is important to understand some fundamental aspects of Cyprus liquidation proceedings before deciding further steps in the process of enforcement against Cyprus companies.
A first fundamental point is that neither of these judgments derogate, to any extent, from solid case law which confirms that a liquidation petition can be presented even without a Court judgment or an arbitral award. It is always open to a creditor to present a liquidation petition and prove that (i) the applicant is a creditor of the Cyprus company; and (ii) the Cyprus company is insolvent and a liquidation order shall be issued against it. Of course, the Cyprus company may raise a number of defences (such as the existence of a bona fide defence to the debt) which may otherwise not have been open to the company is a judgment or recognised arbitral award was present; however, the lack of such judgment or recognised arbitral award is not a bar to a liquidation petition.
Having said that, it is equally important to stress that a statutory demand cannot be based on an arbitral award that has not yet been recognised or enforced. If a creditor wishes to issue a statutory demand prior to having a favourable judgment or a favourable arbitral award that has been recognised and has the force of judgment, it has to be based on the debt itself. A statutory demand based on an award which has not been recognised by a Cyprus Court is fundamentally defective (Onehim).
Thirdly, it is not available to a creditor to pursue liquidation proceedings (on any ground) if it has obtained an arbitral award and its application to recognise it before the Cyprus Court has failed (Besuno). In those circumstances, the Court would consider that a decision which dismisses an application to recognise and enforce an arbitral award is conclusive of the fact that the debt is not existing or recognised by the Cyprus legal order. This, itself, precludes the ability of the creditor to present a liquidation petition, which would otherwise be available if that creditor did not take (unsuccessful) steps to recognise the award.
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