10-12-2012

Company Liquidation Process In Cyprus

Authors

  • Christos A. Neophytou, PgDL (Law), Barrister-At-Law
    Partner at Neophytou & Neophytou LLC Law Chambers
    Aphrodite Loucaides, LLB (Hons), LLM (Criminal Justice Law)
    Litigation Department Lawyer at Neophytou & Neophytou LLC Law Chambers
    Neophytou & Neophytou LLC - Advocates, Legal Consultants

In which Cyprus law are the Articles relating to the Liquidation of a company included, what regulations are used in the liquidation process and what jurisprudence supports the correct conditions for the preparation and submission of requests for Liquidation? 

Articles relating to the winding up of a Company are included in the Companies Act known as Chapter 113, as amended, and is indistinguishable from the Companies Act 1948 in England, in which it relies. Case-based primarily on English law and Cyprus and other countries that have variants of English Law for companies, as well as on writings such as Applications to Wind Up Companies (Second Edition-Derek French – Oxford University Press-2008). Also the companies (winding-up) Modal Regulations 1933-1999, special regulations.

What are the ways that company may be liquidated/ wound-up? 

Article 201 of the Companies Act (CAP.113) stipulates that an organization may be liquidated/wound up in the following ways

(a) by the Court (b) voluntary (c) under the supervision of the Court. In General lines, how can someone apply for the winding up of a Company by the Court? When the liquidation of a Company is made through a Court Application, then a relevant

Court Application must be submitted in Court which must be in drafted in a specified way, which is called a Petition, and must be submitted in the District Court of the District in which the registered office of the company existed at least six months preceding the date of the Court Petition.

What are the cases that can support the Winding-Up/ Liquidation Application in Court? 

Article 211 of the Companies Act (CAP113) sets out the circumstances under which the company may be liquidated by the Court. An application for liquidation of the Court should specify which of the criteria of Article 211 is based upon:

The criteria are:

  • the company has decided by passing a Special Resolution that the company is liquidated by the Court
  • by an omission to submit a customary annual report to the Cyprus Registrar of Companies, or by an omission to call an Annual General Meeting  of the Company.
  • the company has not commended operations within a time span of one calendar year from the date of its incorporation, or it has ceased, or suspended its operations for a period of one year, or more. 
  • the number of members (shareholders) falls below seven (7) in the case of a public company. The Court grants to the company sufficient time for taking all necessary measure in order to increase its members and only proceeds with the dissolution of the company only if either the company declares from the outset that it is incompetent to increase its members to at least sever (7), or is not able to achieve the increase of its members within the prescribed period set out by the Court.  
  • the Company is unable to repay its debts to its Creditors
  • the Court is of the opinion that it is fair and consistent with the law of equity to dissolve the company; 
  • the European Public limited liability company, or Societas Europaea “SE” fails to correct the situation, in accordance with article 64 of Regulation (EC) No. Council Regulation (EC) No 2157/2001 of 8 October 2001, regarding the Memorandum of the European company (SE).

What are the specific criteria which specify the inability of a company to pay off its debts? 

The specific criteria of any company’s inability to pay off its debts are defined in Article 212 of Companies ACT CAP113, namely:

  • If a Creditor, by assignment or otherwise, who is being owed by any company an amount which exceeds €899.- Euros, has served to the company’s registered office, a signed formal written demand for payment which requires from the company to pay off the amount due within a time span of three weeks from the time of the serving of the formal notice and the company neglected to pay off the amount or to secure the Creditor or to settle the debt in a reasonably satisfactory way for the Creditor or
  • If the formal Court execution of a Court Order against a company, or any other formal Court proceedings taken in order to execute a Court Order Decree of any Court for the benefit of a Creditor of the company is totally or partially unsatisfied or
  • if it is proved to the satisfaction of the Court that the company is unable to pay its current debts and, in the Court’s discretion, the criteria used by the Court to determine the inability of the Company to pay its current debts may also extend also to take into consideration any potential and/or future obligations of the company.

What are the main provisions of the legislation when a winding up decree is issued?

The key provisions of the legislation when a winding up decree is issued are the following: When a winding up decree is issued, it is customary to Order that the expenses are to be paid out of the company’s property and a copy of this Order must also be sent to the Company Registrar and Official Receiver. The Official Receiver, due to his post, becomes the Provisional Liquidator and continues to act as such until he or another person becomes the Liquidator and is capable of acting as such.

If during the winding up of a company from the court, a person other than the Official Receiver is appointed, that person is not capable of acting as a Liquidator until he informs the Company Registrar about his appointment and provide security to the specified type in order to meet the Court’s satisfaction criteria.

The Official Receiver convenes separate meetings of the company’s Creditors and contributors in order to decide whether to submit an application to the Court for the appointment of a Liquidator instead of the Official Receiver.

The Court may make any appointment and issue a decree that is required for making such a decision and if on the above-mentioned subject there is a difference between the decisions of the Creditors and contributors taken at the general meetings, then the Court decides about the fate of that difference and issues a decree as the Court considers fair.

If no Liquidator is appointed by the Court or the Liquidator’s job position is vacant, then the Official Receiver takes on as the Liquidator.

What are the duties of the Provisional Liquidator?

According to Article 231 of the Companies Act, the Provisional Liquidator shall control or safe keep all property and things in action which the company is entitled to or appears to be entitled to. Moreover, according to Article 220 when an interim Liquidator is appointed, no legal action or procedure continues or starts against the company unless Court permission is issued.

The main objective of appointing a Provisional Liquidator is to maintain the status quo of the company’s assets, and to prevent anyone from having priority as a Creditor.

In case that no Provisional Liquidator is appointed until the issue of the Liquidation Decree and the appointment of a Liquidator, what other possibility exists in legislation, for securing Creditors’ interests and protecting the company’s assets?

Article 216 provides: In a winding up of a company by the Court, any disposition of the property of the company, including things in action, and any transfer of shares, or alteration in the status of the members of the company, made after the commencement of the winding up, shall, unless the Court otherwise orders, be void. According to Article 218 (2) of the same Act the winding up of a company by the Court shall be deemed to commence at the time of the submission of the Liquidation Application. The purpose of this Article is to prevent company officials, following the presentation of the petition for the winding up, from isolating company’s assets. This is achieved by cancelling their procedures, except if relevant permission is asked and given to them by the court. Article 215, enables the Creditor to submit an Application to the Court in order to stay, restrain or prevent any pending proceeding against the company.

What are the duties and the role of the Liquidator?

Section 1 of Article 233 of the Companies Act, Chapter 113 of the relevant amendments, provides a detailed description of the powers possessed by a Liquidator during the company’s Liquidation by the Court. Some of these are:

  • to bring or defend any action or other legal proceeding in the name and on behalf of the company
  • to carry on the business of the company so far as may be necessary for the beneficial winding up thereof; 
  • to pay any classes of Creditors in full;
  • to make any compromise or arrangement with Creditors or persons claiming to be Creditors, or having or alleging themselves to have any claim, present or future, certain or contingent, ascertained or sounding only in damages against the company, or whereby the company may be rendered liable.

Section 2 of Article 233 reports further authorities possessed by the Liquidator during the Liquidation proceeding undertaken by the Court. Among other things is to do all acts and to execute, in the name and on behalf of the winding-up company, all deeds, receipts and other documents, and for that purpose to use, when necessary, the company’s seal.

Based on Article 231, the Liquidator shall take into his custody or under his control all the property and things in action to which the company is or appears to be entitled. After obtaining a Court Decree, all or any part of the property of whatsoever description belonging to the company or held by trustees on its behalf, shall vest in the Liquidator under his official title, and thereupon the Liquidator shall bring or defend under his official title any action or other legal proceeding which relates to that property and which it is necessary for the purpose of effectually winding up the company and recovering its property (Article 232).

The Liquidator does not act as a Trustee for Creditors or contributors but merely represents the winding-up company. The purpose of the Liquidator is the proper management and distribution of the company’s assets among Creditors, provided that any due amounts that debtors may have were already collected. The Liquidator always acts for the beneficial winding-up of the company.

The Liquidator has the exclusive responsibility of managing the winding-up company’s assets and affairs. Among others, he acts on behalf, and for the account of the winding-up company, to compromise any financial disputes arising between the company and Creditors or other persons claiming to have financial rights.

After all, it would not be reasonable nor legally correct for the Liquidator to represent both the interests of the winding-up company and those of the Creditors since there is always the risk of conflict of interests at some point.

Based upon legislative provisions, the Liquidator receives in every liquidation proceeding, the management of the company’s assets. He manages and safeguards those assets and in the case of cancellation of the Liquidation decree, he will deliver them back to the company and not to the shareholders, Creditors or contributors.

Can a Creditor take legal action against the Liquidator or activate legislation provisions in order to control acts or omissions of the Liquidator?

If the Creditor believes that the Liquidator has any personal responsibility for the outcome of a particular asset’s ownership, or if he feels that the Liquidator had any reprehensible behavior affecting the fate of a particular property or of any other company’s asset, either through his acts or omissions, or even if he believes that the Liquidator abused his powers, then he can personally, if he wishes, turn against the Liquidator demanding compensation for any damage suffered as a result of his acts, omissions and general attitude and behavior.

Article 233(3) supports the above mentioned position: The exercise by the liquidator in a winding up by the Court of the powers conferred by this section shall be subject to the control of the Court, and any Creditor or contributory may apply to the Court with respect to any exercise or proposed exercise of any of those powers. The Creditor can intervene in the Company’s Liquidation process and ask for its suspension along with any other additional legal steps he deems necessary if he believes that this will improve the situation who claims to be wrong, irregular, illegal and contrary to the interests of justice administration. According to Article 243(1) The Court may at any time after an order for winding up, on the application either of the liquidator or the official receiver or any Creditor or contributory, and on proof to the satisfaction of the Court that all proceedings in relation to the winding up ought to be stayed, make an order staying the proceedings, either altogether or for a limited time, on such terms and conditions as the Court thinks fit.

Article 234(5) provides, through the relevant application, a proceeding through which any act or decision of the Liquidator may be challenged by any person. Under the concept provided by this Article, I classify any Creditor in the category of “person”. Specifically, this Article explicitly points out the following:

If any person is aggrieved by any act or decision of the Liquidator, that person may apply to the Court, and the Court may confirm reverse or modify the act or decision complained of, and make such order in the premises as it thinks just.

Is the initiation of a procedure targeting the Liquidation of a Cyprus-based company possible when the Creditor is located in another EU country?

Yes, this is possible. The European Regulation 1346/2000 endorses the insolvency proceedings with consequent cross-border (inter-communal) effects which can also be applied to Cyprus due to its EU membership.

This regulation establishes a common EU frame board regarding insolvency proceedings. The purpose of harmonizing provisions relating to these proceedings is to prevent the transfer of assets or legal disputes from one EU country to another, in an attempt to improve legal status versus the Creditors. Exception to the above is insurance companies, credit institutions, investment companies that provide services involving the holding of funds or of third-party securities, and for organization’s undertaking collective investments.

The main insolvency proceeding has a universal validity and hence, endorses all of the debtor’s EU assets. The purpose of this procedure is to consolidate and liquidate debtor’s assets.

Internationally responsible for the initiation of the main insolvency proceeding is, according to national law, the locally-responsible court of the EU member-state where the debtor has based his major interests. For companies and legal persons is presumed, until proven otherwise, that the centre of main interests is the location of the registered office. With respect to the assets of one and the same debtor only a single major insolvency proceeding can be carried out within the EU.

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