Russia: Application of the New York Convention and liquidation of a debtor
On 29th July 2015 the Supreme Court of Russia reveals the decision on the issue whether or not a court grants the recognition and enforcement of an arbitral award against a debtor who is in the process of liquidation or the arbitral award should be conferred initially in accordance with special liquidation provisions.
Background & rulings of the lower-tier courts
Victorio Shipping Company Ltd., the company domiciled in Cyprus, sought the recognition and enforcement of arbitral awards rendered by ad hoc arbitration (the seat of arbitration is London), against Metall-Market Ltd. (Russia).
The disputes arose out of a contract of the freight containing an arbitration agreement. Within 2010-2014 several arbitration awards have been rendered, namely, on jurisdiction issue, on the obligation to pay compensation under the general average, on the amount of such compensation, on the arbitration costs, on the compensation expenses of the applicant for the storage of cargo.
Since the Russian company refused to execute the arbitral awards the claimant sought the recognition and enforcement of the arbitral awards.
On 18th December 2014 the Arbitrazh court of Kaluga region, in its ruling, granted the recognition and enforcement of the arbitral awards but the court of the cassation, the Arbitrazh Court of the Central region, overturned the ruling and ordered to re-examine the case (the decision dated on 27th February 2015).
The court of cassation’s decision was based on the following. Since Metall-Market Ltd., the defendant, was at the beginning of liquidation procedure, hence special rules should have been applied. Articles 63 and 64 of the Civil Code of Russia provide a creditor has the right to demand monies from a debtor only through a liquidator. The liquidator is responsible for maintaining of the register of claims to the debtor and satisfy those claims in the manner and order prescribed by law. Only if the liquidator neither rejects the demand nor the demand has not been considered within a prescribed time period the creditor has the right to sue the debtor. In other words, the court of cassation said, first and foremost, Victorio Shipping Company Ltd. should have been submitted its demand based on the arbitral awards to a liquidator of Metall-Market Ltd. and only later (if the liquidator did nothing) to seek the recognition and enforcement of arbitral awards.
The Supreme Court’s opinion
The Supreme Court overturns the court of the cassation’s decision and upheld the ruling of the Arbitrazh court of Kaluga region dated on the 18th December 2014.
The Supreme Court underlines the issue of recognition and enforcement an arbitral award should comply with the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and a domestic procedural legislation instead of special rules regarding a liquidation process. The approach of the court of the cassation is wrong.
The Supreme Court ‘s opinion is quite clear
Meanwhile, there is one more conclusion that should be taken into account. The Supreme Court says the issue of recognition and enforcement of an arbitral award deals with public policy. Public policy among other things includes an arbitral award in favour third parties. Consequently, if the recognition and enforcement of an arbitral award affects interest of third parties in the process of liquidation of a debtor a court may refuse the recognition and enforcement of an arbitral award.
Theoretically, a claimant submitting the dispute to arbitration may not even have know about of the interests of third parties. Meanwhile, if such interests do exist they can influence the issue of recognition and enforcement of a further arbitral award.
These Supreme Court ‘s conclusion seems doubtful because as it often happens in Russia a good approach designed to protect of interests of good faith persons may turn against them.
The decision of the Supreme Court of Russia dated 29 July 2015. Case N А23-3876/2014