Conflicts and disputes, unfortunately, are unavoidable in every business operation. As it comes to shareholders, issues that relate to, inter alia, the management of the company by the directors, the distribution of profits, the exercise of control, or the service of personal interests that may contradict the company’s affairs usually lead to an escalation of disputes and can interfere with the rights of other shareholders or even place at risk the operation and the best interest of the company itself.
Shareholders, as the owners of a company, have an array of legal rights and obligations in relation to the company, which flow principally from both contract law and statute, under the Companies Law (Cap. 113). The regulation of such rights and obligations, in advance, is the key to eliminating or at least limiting the possibility of any disputes arising between the shareholders. However, in the unlikely event that any conflicts and disputes arise, Cyprus Law provides mechanisms that are available to be enforced before the Cyprus Court to preserve the rights of the respective parties, as described below.
Be proactive – Shareholders Agreements
Before investing or by any other means acquiring any stake in a company it is advisable that the respective rights and obligations of the shareholders should be regulated via a Shareholders Agreement. A Shareholders Agreement, like any other private contract, binds all the parties to its terms of it while the usual remedies for breach of contract will be available if any party breaches its terms. Such Agreements are entered into between the shareholders themselves (the company is not a party to the agreement) and aim to specify, inter alia, how they will behave within their company, what business the company will do, regulate the decision-making power of the shareholders to various aspects of the company as well as, determine issues regarding the transfer or sale of any shares held in the company.
Although many of the aspects that can be determined under a Shareholders Agreement are also included in the company’s Articles of Association, entering into such an agreement can be advantageous for the following reasons:
- Enforceability: Parties may agree to include in a Shareholders Agreement personal rights, i.e. the right of a specific individual to be appointed as a director of the company, which are not included in the Company’s Articles of Association and are not provided under the Law. Therefore, that right becomes contractually enforceable and, in case of any breach, gives the right to the shareholder to seek remedy, which would not otherwise be available.
- Minority protection: Any parties entering into a contract must all agree to amend it. Therefore, each contracting party has an equal say whilst under the Law, shareholders’ power is determined by the proportion of their respective voting rights in the company.
- Confidentiality: As a private agreement, a Shareholders Agreement is a private contract and does not need to be made publicly available, whilst the Articles of Association of a Company must be filed at the Registrar of Companies.
Minority shareholders and their rights
The degree of involvement by shareholders in their company ultimately will vary considerably, depending on the size and the rights attached to their shareholding. Minority shareholders have little direct power within the company as they cannot be certain about the passing of a specific resolution at a general meeting without the backing of other shareholders. Such dependency, many times, leads to the oppression of their rights and their exclusion from the decision-making and management of the company. However, minority shareholders are by no means powerless.
Common Law Derivative Action
A well-entrenched common law principle, as it was determined in the landmark case of Foss v. Harbottle, is that the company, as a separate legal entity, is the correct plaintiff to bring any action for any wrongdoing in its affairs. However, common law has established exceptions to this rule to enable minority shareholders to pursue a claim which would not otherwise have been possible to be launched, due to the wrongdoers’ dominant position and exercise of control over the company, which include the majority shareholders or directors of the company.
Following the common law, Cyprus Courts have adopted and developed the common-law protection and minority shareholders can proceed with such a claim (a Derivative Action), inter alia, provided that the following requirements are met:
- Fraud on the minority – based on the relevant case law, fraud on the minority has been interpreted to include the following circumstances:
- Where the company acts illegally or outside the framework of the Articles of Association (ultra vires);
- Where the rights of a shareholder or a group of shareholders are violated, such as exclusion from the management of the business, exclusion from the payment of any dividends, etc;
- Where the majority are endeavoring directly or indirectly to appropriate money, property, or advantages that belong to the company.
- Control by the wrongdoers – such ground covers the cases where the wrongdoer is the director of the company or the majority shareholders.
Statutory remedy of unlawful prejudice shareholders
Section 202 of Cap. 113 provides the right to any member of a company, which is a registered shareholder for at least 6 months, to file a winding up petition before Cyprus Courts, on just and equitable grounds, including, inter alia, cases where the company’s management is conducted oppressively and fraudulently, where there is abuse or deadlock to the management of the company’s affairs as well as lack of confidence to the company’s procedures and operations. However, in the context of a Winding-up Petition, Court can award alternative remedies if it is of the opinion that the affairs of the company have been conducted in a manner oppressive to the petitioner but to wind up the company would unfairly prejudice the latter, although, based on the facts of the case, it would have been just and equitable to wind up the company.
The alternative remedies that can be awarded under Section 202 of Cap. 113 include the followings:
- An order regulating the conduct of the company’s affairs in the future.
- An order for the purchase of the shares of any member of the company by other members of the company.
- An order for the purchase of the shares of any member of the company by the company and a reduction accordingly to the company’s capital.
In an era where business relationships and financial affairs are extending over national boundaries, there is a need for global legal collaboration between nations in order to preserve the legal rights of parties. One of the main pillars of global legal collaboration is the ability of a judgment creditor to seek the recognition and enforcement of a judgment issued by a foreign court, in another country’s jurisdiction, ensuring that justice is served.
Although there is no unified system for the enforcement of foreign judgments, Cyprus, as one of the EU’s Member States, has adopted the European Council (EC) Regulations on recognition and enforcement, while, on an international level, has entered into bilateral agreements with several countries and has developed different mechanisms for the recognition and enforcement of foreign judgments, via the enactment of legislation and through common law. The statutory regime that should be applied for the recognition and enforcement of a judgment depends on the facts of each case and mainly on the country where the judgment was issued, as explained below.
I. LEGAL FRAMEWORK FOR RECOGNITION AND ENFORCEMENT OF FOREIGN JUDGMENTS
- EU Judgments
The Republic of Cyprus is bound by the following EC Regulations, by virtue of which a judgment issued by a Court of any EU Member State (except Denmark) is recognized and has the same legal effect as if it had been issued by a Cyprus Court:
EC Regulation 44/2001 on Jurisdiction and the Recognition and Enforcement of Judgements in Civil and Commercial Matters (“Brussels I”)
Notwithstanding the fact that the EC Regulation 44/2001, known as “Brussels I”, was repealed by Regulation 1215/2012, it continues to apply to, inter alia, judgments given in civil and commercial matters, issued by the Courts of Member States (except Denmark), before 10/01/2015.
For judgments falling under the scope of this Regulation, the judgment creditor, who seeks to obtain a declaration of enforceability within the jurisdiction of the Republic of Cyprus , must apply ex-parte (without notifying the judgment debtor) to the competent Court to issue such order. Once issued, the certificate of enforceability must be served to the judgment debtor, in accordance with the provisions of the Regulation and the latter will have the right to object to the order, within a specified time period. Provided that no appeal is filed against the issue of the Order, the foreign judgment becomes enforceable within the Republic of Cyprus.
- EC Regulation 1215/2012 on Jurisdiction and the Recognition and Enforcement of Judgements in Civil and Commercial Matters (recast)
Under the scope of EC Regulation 1215/2012 falls any judgment issued by a Court of a Member State (except Denmark) after 10/01/2015. The main aim of the above-mentioned Regulation is to facilitate the recognition process by abolishing the intermediate procedure required for the issuance of a declaration of enforceability from the enforcement Court of the Member State. Specifically, Article 36 of the Regulation provides that a judgment given in a Member State, which is enforceable in that Member State, shall be automatically recognized in the other Member State without any special procedure required. Furthermore, Article 39 provides that a judgment given in a Member State, which is enforceable in that Member State, shall be enforceable in the other Member State without any declaration of enforceability being required.
In that respect, the party who wishes to invoke in Cyprus a foreign judgment given by a Court of any Member State shall produce a certificate of enforceability, issued by the Court of origin as well as a copy of the judgment, stamped and sealed, in accordance with the provisions of the Regulation.
As Brussels I, Regulation 1215/2012 applies to any judgment in civil and commercial matters. However, it does not extend to judgments relating to revenues, customs or administrative matters or to the liability of the State, the status or legal capacity of natural persons, matrimonial matters, wills and succession, bankruptcy and social security, as well as arbitral awards.
- EC Regulation 805/2004 – European Enforcement Order
The purpose of the European Enforcement Order, as established under EC Regulation 805/2004, is to enable judgments on uncontested civil and commercial claims, issued by a Court of a Member State (except Denmark) to be automatically recognized and enforced in any other Member State, without the need of any intermediate proceedings.
- EC Regulation No. 861/2007 – European Small Claims Procedure (ESCP)
The ESCP is addressed to civil and commercial disputes across the EU (except Denmark), where the value of the claim does not exceed €5.000. Aiming to facilitate the recognition and enforcement procedure, any decision issued under ESCP is recognized and enforced in other EU countries (except Denmark) without the need for a declaration of enforceability. For more information please visit our relevant article on the European Small Claims Procedure.
- UK Judgments
Going back to the years when Cyprus was a Crown colony, the Foreign Judgments (Reciprocal Enforcement) Law of 1935 (Cap. 10) was enacted and remains in force until today, providing for the registration in Cyprus of judgments issued in the United Kingdom, within 6 years from the date issued. Therefore, with the exit of the United Kingdom from the European Union and the absence of any relevant provision in the EU-UK Trade and Cooperation Agreement, Cyprus remains unaffected as it comes to the recognition of such judgments by virtue of the provisions of the above-mentioned legislation.
Procedurally, any party interested in registering an English Judgment in Cyprus shall apply, under the provisions of Cap. 10, ex-parte (without notifying the other party) for such order. Following its issuance, the order must be served to the judgment debtor who has the right to dispute the recognition by applying to the Court to set-aside the registration.
- Non- EU Judgments and Judgments issued by countries with which Cyprus has Bilateral Agreements
The Decisions of Foreign Courts (Recognition, Registration and Enforcement) Law of 2000 (Law 121(I)/2000) provides the legal framework for the recognition and enforcement of any foreign judgments issued by any Court or tribunal of a foreign country with whom Cyprus has entered into a bilateral agreement for the mutual recognition and enforcement of judgments.
Cyprus has entered into various Bilateral Agreements and Treaties relating to the recognition and enforcement of foreign judgments with a number of countries, included but not limited to the Russian Federation, Ukraine, Georgia, China, Belarus, Egypt, Serbia etc. Such Treaties provide also for the procedure that needs to be followed regarding the recognition of judgments by both signatory parties. In the absence of such provisions, the procedure through the Court, as indicated under Law 121(I)/2000, shall be followed by any judgment creditor.
- Recognition and Enforcement of a foreign judgment through common law
As regards foreign judgments, which were issued by the Court of a country outside the EU and with whom Cyprus has not entered into any Bilateral Agreement or Treaty or Convention, they can be enforced by the judgment creditor, within the Republic, by initiating fresh proceedings and seeking relief, identical to the relief provided by the foreign judgment. Simultaneously with the filing of the civil action, an interim relief may be sought by the Court, such as a freezing order over any assets of the judgment debtor, to preserve the rights of the judgment creditor until the issue of a final decision.
Once the civil action and/or any interim order issued is served to the judgment debtor/defendant, the judgment creditor/claimant may apply, under the relevant provisions of the Civil Procedure Rules, for a summary judgment, on the ground that the defendant has no defense to the claim.
II. TRACING & PRESERVING JUDGMENT DEBTOR’S ASSETS WITHIN THE REPUBLIC
Although procedures for the recognition and enforcement of a foreign judgment are well-entrenched in our legal system, one of the main concerns of a judgment creditor, before initiating any procedures for the recognition and execution of a foreign judgment, is how the execution will be practically performed. Since information regarding a party’s assets is not publicly available, either for a natural person or a legal entity, tracing assets may be crucial for any further decisions taken by the judgment creditor.
Once identified, any assets held by the judgment debtor has to be preserved, to avoid the risk of alienation or dissipation, pending the completion of any procedures for the recognition and enforcement of a foreign judgment. Disclosure of information and preservation of a debtor’s assets can be performed only through the Court, which is vested with a wide discretionary power to issue interim orders and injunctions, as the followings:
- Tracing/Discovering Order (Norwich Pharmacal Order) – The purpose of such order is to enable the Applicant to obtain any information, as well as trace and preserve assets held by the judgment debtor. Such an Order is commonly addressed to a third innocent party (i.e a bank), who is ordered to provide the required information.
- Freezing Order (Mareva Injunction) – Aiming to preserve the applicant’s rights, a Freezing Order prevents and prohibits the respondent from disposing of, transferring or otherwise alienating his assets specified in the order.
- Chabra Order – Another type of freezing order which is not addressed to the debtor but to a third party who holds assets for the benefit of the first, in his capacity as a trustee or nominee.
III. DOMESTIC EXECUTION MEASURES AVAILABLE
As stated above, once the relevant procedure for the recognition and enforcement of a foreign judgment is completed, it adopts the same legal effect as if it has been issued by a Cypriot Court. Therefore, the following enforcement measures and procedures, as provided under the Civil Procedure Law of 1960 (Cap. 6) are available for the judgment creditor:
- Writ of movable or immovable property of the judgment debtor;
- Registration of a charge over an immovable property through the Land Registry Department (“MEMO”);
- Guarnishee proceedings – a procedure by virtue of which the judgment creditor may seek to freeze the debtor’s bank accounts and payment of the amount awarded under the judgment;
- Provided that the judgment debtor is a Cypriot company, delivery of a statutory demand under the Companies Law (Cap. 113) for payment of the liquidated and undisputed sum within 21 days from the date of its service. In case of failure to comply, the judgment creditor has the right to file a winding-up petition to the Court;
- Appointment of equitable receiver;
- Examination of the judgment debtor in respect of his financial situation and issuance of an order for the repayment of the judgment debt via monthly installments.