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Suspension of Arbitral Award Enforcement Because of Financial Hardship

On 3 November a Russian court of appeal set aside the 2-year suspension order of arbitral award enforcement granted  because of financial difficulties of the debtor.

The history of arbitration is as follows. English company Borregaard Industries Ltd operating in Norway successfully applied to the Commercial Court of Saint-Petersburg and Region to enforce an arbitral award rendered by the Arbitration and Dispute Resolution Institute of the Oslo Chamber of Commerce.

The award was rendered against Russian OJSC Vyborg Pulp (‘Vyborgskaya tsellulosa’) on recovery of 4 788 000 USD principal debt with interest until the date of payment, 1 200 000 Norwegian Crones and 100 000 Euro of arbitration expenses. The court granted the enforcement but, upon the debtor’s request, also granted a 2-year suspension of payment under the enforced arbitral award.

The debtor’s reasons endorsed by the court of first instance were as follows:

    • The debtor company was included in the Government-approved list of publicly valuable enterprises in need of state support: in March 2009 it was designated as company requiring preservation and development of industrial and technological capacity damaged by the economic crisis.
    • The debtor is a city-forming enterprise upon which all life-support systems of the Sovietsky township depend. All 8 000 inhabitants of this township are either its employees or their family members. An immediate execution of the award would cause default in payments of wages and the township maintenance and consequent social unrest. The debtor failure to pay wages resulted in strike and the plant take-over by the workers’ committee. The plant was controlled by the workers during a year and went through an armed conflict with an armed task force and court bailiffs. The extent of the corporate conflict was so large that it was even discussed in the State Duma. So a new social upheaval caused by a repeated failure to pay wages can again be mass and grave and have adverse consequences for the whole region.

  • The awarded amount is very significant, whereas the debtor’s money is directed to implementation of a Government-approved investment project which may become the world’s largest of its kind. It will also contribute to regional economic development, create new 212 work places and ensure Russia’s leading role in the pulp product segment. The business plan is expert-approved and provides for a steady growth of profit which will allow discharge of the debt. An immediate execution of the award would deprive the company of vitally needed circulating assets, then the execution will have to be levied on its fixed assets and as result suspend the production.
  • Apart from the debt to the English company, the plant owes other indebtednesses in the amount of more than 1 200 000 000 roubles (some 30 000 000 Euro), including about 50 mln rubles of tax debts.
  • The investment project provides for budget allowances and tax deferrals, and immediate recovery of debt in favor of the English company would place it in a privileged position towards state budget. Also, the recovery would thus in fact be made from the budget funds allocated to the debtor.


The lower court found these reasons legitimate and granted the postponement. However, the Court of Appeal set the judgment aside reasoning that where the debtor requests payment at a later date arguing that he is involved in a potentially profitable investment project, it is necessary to demonstrate serious commitment. It is important to show that the debtor has already  contributed its own money to the project.

A business plan and expert opinion do not constitute such proof, but only evidence of the debtor’s intent to such effect; budget allowances to the company do not justify the postponement of the debt payment. Furthermore, the accounting statement shows sufficient profit to pay the debt. It also follows from the debtor’s corporate website that the investment project is already underway and successful. Thus the execution of the arbitral award is unlikely to cause insolvency of the debtor.

The danger of social upheavals and armed conflicts, discussions in State Duma, privilege of the foreign company towards “interests” of the state budget should be disregarded, said the Court of Appeal, as they have nothing to do with legal argumentation and thus unproven and irrelevant in a court case.

The court explained that postponement of execution of a judgment is an exceptional measure applicable only where there is a good cause or unfavourable circumstances impeding such execution, which must be proven by the debtor. In this case a postponement was regarded by the court as unsubstantiated.

It appears that the debtor’s line of conduct in relation to Russian courts and to the English debtor can be interpreted as a sort of ‘blackmail’ or a manipulative tactics: if the court obliges, and the creditor presses it to pay its debt now, then the responsibility for endangering life and welfare of a township and threatening a national development project lays with them, and not with the debtor. So according to the debtor’s logics the said threats would be through their fault rather than through its own failure to meet its business and social duties.

Hopefully such wise approach of the appeal court will be uphold by higher court and contribute to enhance trust of foreign businesses to the debts enforceability with Russian state-related companies and to the Russian judicial system.

Dmitry Davydenko

Muranov, Chernyakov & Partners


About the Author:

Professor Yarik Kryvoi, is the founder and co-editor of the CIS Arbitration Forum. He is the Senior Fellow in International Economic Law and Director of the Investment Treaty Forum at the British Institute of International and Comparative Law (BIICL). He holds law degrees from Harvard, Moscow and St Petersburg. Before moving to academia, he practiced law with Freshfields Bruckhaus Deringer, Morgan Lewis & Bockius and Baker & McKenzie in England, the United States and Russia. See full profile at

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