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District Court of Limassol Rules that Fraudulent Disposal of Assets of a Ukrainian Company Cannot be Trumped by the "Exclusive Jurisdiction” of Article 22 of the Brussels Regulation

18 May 2012

The District Court of Limassol considered if it had jurisdiction to determine a dispute in relation to fraudulent disposal of assets of a Ukrainian Company where the fraudulent scheme involved a number of Cyprus individuals and companies. The Defendants applied for the dismissal of the action in that the disposal of the assets was made after the same were approved by the general meeting of the Ukrainian Company, and the matter was an internal corporate dispute, as the Plaintiff Company was also a shareholder of the Ukrainian Company, and thus Article 22(2) of the Brussels Regulation applied and required the District Court of Limassol to decline jurisdiction.

Background

Action No. 6273/2010 of the District Court of Limassol, Between PROSCENO TRADING LTD (Prosceno) v OPEN JOINT STOCK COMPANY “SUMY MACHINE-BUILDING SCIENCE & PRODUCTION ASSOCIATION, named after M.V. FRUNZE” (Frunze)
 
Prosceno were principally represented by Soteris Pittas & Co LLC.

The Prosceno filed an action in the District Court of Limassol claiming damages suffered from the implementation of various alleged fraudulent transactions disposing and transferring assets of Frunze to other legal entities owned and controlled by the beneficial owners of the majority shareholders of Frunze.

The Action is a personal action and same was filed in Cyprus before the enactment of Ukrainian legislation regulating the filing of derivative actions by minority shareholders of Ukrainian Companies.

Prosceno alleges that the Defendants, some of which are individual and legal entities based in Cyprus, were part of a fraudulent scheme to defraud the Plaintiff Company though the implementation of sham transactions resulting to the fraudulent assets of the Ukrainian Company in violation of, inter alia, Article 13 of the Ukrainian Civil Code.

The Cypriot Defendants disputed the jurisdiction of the District Court of Limassol to adjudicate on the case, alleging that the Ukrainian Court had an exclusive jurisdiction over all issues raised by the Cypriot action pursuant to Article 22(2) of the Brussels Regulation, because the Cyprus Action constituted proceedings which have as their object the validity of decisions of the organs of Frunze, and in more particular its general meeting. So, the Ukrainian Courts had exclusive jurisdiction. 

Prosceno opposed the above position by alleging, inter alia, that Article 22(2) of the Brussels Regulation did not apply to the case because the alleged fraudulent actions of the Defendants could not be considered as “acts of the organs” Frunze due to the fact that they victimized Frunze.

The Decision 

The President Judge of the District Court of Limassol, Ms Dora Socratous, followed the principles set out by the Court of Appeal in Grupo Torras SA v Al-Sabah (No. 1) [1996] 1 Lloyd’s Rep 7 as to the interpretation of Article 22(2) which provides that:

“The following courts shall have exclusive jurisdiction regardless of domicile:…2. in proceedings which have as their object the validity of the constitution, the nullity or the dissolution of companies or other legal persons or associations of natural or legal persons, or of the validity of the decisions of their organs, the courts of the Member State in which the company, legal person or association has its seat”.

The principles included that, in considering whether or not Article 22(2) issues are raised, the Court must consider the nature of both the claim and any defences, that the question is whether or not the action is "principally concerned" with an Article 22(2) issue, and that the Court should conduct an exercise in "overall classification" to determine whether Article 22(2) is engaged.

The President Judge in the present case dismissed the jurisdictional objection of the Cypriot Defendants and held that Article 22(2) of the Brussels Regulation applies where proceedings ‘have as their object’ the validity of decision of their organs etc., which depends on whether the claim is principally concerned with such a matter(Grupo Torras SA v Al-Sabah (No. 1) [1996] 1 Lloyd’s Rep 7). This requires the Court to undertake an overall classification and make an overall judgment of whether the company law point is more than a preliminary or incidental matter or whether it is what the claim is principally about. On the facts of the present case, the claim was principally about alleged fraudulent transfers of assets of the Ukrainian Company, so did not come within Article 22(2) of the Brussels Regulation.

Comment:

Although a first instance decision, this is a welcome judgment for companies and individuals invested in Ukraine and other CIS countries, through Cyprus, but were defrauded on the foreign level. It is an example of the Cyprus Courts being robust in the face of a defendants’ challenge to Cyprus dispute resolution in favour of foreign courts where the remedies may be ineffective or inadequate. The decision reduces the risk that investors have in Cyprus as they will be able to wrest jurisdiction in favour of Cyprus where the remedies, both interim and final, may be more adequate and effective.


For further information on this topic please contact Mr. Soteris Pittas at SOTERIS PITTAS & CO LLC, by telephone (+357 25 028460) or by fax (+357 25 028461) or by e-mail (spittas@pittaslegal.com).

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