articles | 24 June 2022 | Soteris Pittas & Co LLC

Can English Schemes of Arrangements sanctioned pursuant to the UK Companies Act 2006 be recognized and enforced in Cyprus or create any legal effects in Cyprus?

It is indisputable that over the years England has established itself as a go-to jurisdiction for implementing schemes of arrangements. This is due to inter alia the fact that English law permits overseas companies which are liable to be wound up under the UK Insolvency Act 1986, to take advantage (under certain circumstances) of the English legal regime applicable to schemes (see inter alia Re Rodenstock GmbH [2011] EWHC 1104 (Ch)).

The fact that English law permits Cypriot companies to use (under certain circumstances) this restructuring tool, gives rise to difficult questions relating to the recognition and enforceability in Cyprus of such decisions sanctioning the English schemes, as well as questions whether such sanctioned schemes create any legal effects in Cyprus.

Until now, these questions seem to remain unanswered from the perspective of EU and Cyprus law.

If UK had remained part of the EU, the situation would have become quite more straightforward in light of the adoption of Directive (EU) 2019/1023 on preventive restructuring frameworks, discharge of debt and disqualifications and measures to increase efficiency (Preventive Restructuring Frameworks Directive) and amending Directive (EU) 2017/1132 on certain aspects of company law (codification), which aims to inter alia address such issues to some extent.

Since UK is no longer a Member State of EU, an English Judgment cannot be recognised and enforced in Cyprus, pursuant to the Brussels Recast Regulation or the Insolvency Recast Regulation. Therefore, the only available method for the recognition and enforcement of judgments of courts of the United Kingdom (and in this case of decisions sanctioning English schemes), is through the procedure stated in the Foreign Judgments (Reciprocal Enforcement) Law 1935, CAP. 10 (as amended by Law 130 (1)/2000), which regulates the recognition and enforcement of judgments in civil or criminal proceedings obtained in Superior Courts in the United Kingdom regardless if same do not award any monetary sum.

A judgment of an English Court sanctioning the Schemes of Arrangement will not be enforceable under CAP. 10. This is because a “judgement” for the purposes of CAP. 10 only includes decisions which arise out of adversarial proceedings that resolve a dispute between the parties before it. A judgment sanctioning the scheme does not serve that function, and is not preceded by an adversarial hearing on the rights and liabilities of the parties in relation to the dispute that presently exists between them. Cypriot law (guided by EU law) will make a distinction between a decision culminating out of the court sanctioning a scheme negotiated between debtors and certain creditors, and a decision in which a court deciding on its own authority settles disputes and issues between the parties (see inter alia the case of C-414/92 Solo Klinmotoren GMBH v Boch (ECJ) (1994) ECR I-2237).

Even if such a decision was to be considered as falling within the term “judgement” in CAP. 10, in case the sanctioned schemes purport to relieve companies with their COMI and domicile in Cyprus from their obligations by restructuring their debts, then such a decision would also likely be in breach of Cypriot public policy for inter alia bypassing the exclusive jurisdiction of Cypriot Courts.

In light of the above inability to recognize and enforce such foreign decision in Cyprus, such decision sanctioning the English schemes does not create any legal effects in Cyprus and cannot be relied on within the jurisdiction (see inter alia Interdepartmental Concern OAO Uralmetrom v Besuno Ltd, Civil Appeal No. 269/2009, Decision Dated 20/02/2014).

In parallel with the above, there is available English case law in which it has been argued that Schemes of Arrangement can be recognized pursuant to Articles 3(1) and 12(1)(d) of Rome I Regulation as a matter of substantive law insofar as the facility affected by that scheme is governed by law, giving extinguishing effect to that Scheme.

It is the position of the author that such position is fundamentally incorrect on inter alia the following grounds:

(i) A Scheme of Arrangement which is not accepted /approved by all parties entitled to vote in the context of such scheme, does not fall within the definition of “Contractual Obligations” contained in Article 1 of Rome I, and consequently Rome I does not apply. Holding otherwise would contradict with the interpretations given to the term “Contractual Obligations” by the ECJ and the English and Cypriot courts (see inter alia C-359/14 and C-475/14 ERGO Insurance SE & Another v Gjensidigc Baltic AAS & Another and Base Metal Trading Ltd v Shamurin (2004) EWCA Civ 1316).

(ii) Even if a sanctioned and approved Scheme of Arrangement was to be considered by European Courts as falling within the meaning of the term “Contractual Obligations” as stated in Rome I, there are also good grounds for arguing that Rome I still not applies due to Article 1(2)(f) of Rome I, which provides that matters regulated by the laws of Companies are excluded from the ambit of Rome I.

(iii) Regardless of the above, a Scheme of arrangement purporting to restructure the debts of a company whose COMI or domicile is situated in Cyprus, and which was approved by an English Court, would be likely held by Cypriot Courts as violating mandatory provisions of inter alia Cypriot Companies Laws CAP. 113, including Sections 198-201 of CAP. 113, as well as that same violates the public policy of the Republic of Cyprus.

The content of this article is intended to provide the views of the author on the complicate issues which arise in relation to the subject matter, and same does not constitute a legal advice. Specialist advice should be sought about your specific circumstances.

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