After hours of investigation and trying anything google can offer including system repair, reinstallation of NET frameworks, using MS .NET repair utility, rebuilding .NET cache and others, the problem turned out to be the incompatibility of the latest NET 4.5 with NET 2.0 which was used by Beth.
Thanks to IBM for a hint
http://www-01.ibm.com/support/docview.wss?uid=swg21626268

Uninstalling NET 4.5 was not an option for me since it is used by other applications I have. The workaround solution is to create PapyrusCompiler.exe.config text file next to PapyrusCompiler.exe

Leaving it here just in case for others with the same trouble.