The Cypriot corporate insolvency framework has undergone an overhaul over the past years. We set out below an overview of the main insolvency procedures, ranging from arrangements and reorganisations, examinership and receivership, to winding-up.
The insolvency procedures summarised below are generally available to companies incorporated in Cyprus, except for certain regulated entities, such as credit institutions and insurance companies, to which specific insolvency frameworks apply.
Company arrangements and reconstructions
Arrangements and reconstructions are generally used to achieve a compromise or arrangement between a company and its creditors, or between a company and its members or any class of them. The term ‘arrangement’ refers to any reorganisation of the share capital of a company by the consolidation of different classes of shares, or by the division of shares into shares of different classes, or a combination of both methods. An approved compromise or arrangement is binding on all creditors or members and on the company. If a company is being wound up, an approved compromise or arrangement is also binding on the liquidator and contributories of the company.
This procedure is initiated by the company, a creditor, a member or, if a company is in the process of being wound up by a liquidator, through a summary court application seeking an order to convene a meeting of the creditors or members of the company to consider the proposals. The court maintains wide discretion regarding the terms and form of the order and may summon the meeting in the manner that it chooses.
Where a meeting of creditors or of members (or any class of them) is summoned as set out above, certain information must be provided with every notice summoning the meeting. This includes a statement explaining the effects of the proposals, which must identify any interests of the directors and the effect of the proposals on those interests.
For a compromise or arrangement to be binding it must be approved by a majority in value of the creditors or members present and voting at the meeting of creditors or members. The approval of the court is required both for the convening of meetings and for the terms of the proposals. A copy of the relevant court order must also be filed with the Registrar of Companies in order to take effect and a copy must also be annexed to every copy of the memorandum of the company issued after the order has been made. As there is no statutory protection from creditors during the reorganisation procedure it is important to keep creditors informed and cooperative. As to the length of the procedure, it is relatively quick, and may be completed within weeks.
The concept of examinership was introduced into the Cyprus insolvency framework in 2015, predominantly based on the concept of examinership existing in Irish legislation. It effectively places a company under the court’s protection while a court-appointed insolvency practitioner assesses the company’s affairs within a specified time frame and puts together a restructuring proposal for a compromise or scheme of arrangement (or both) with shareholders or creditors of the company (or both).
The process begins with a petition for the appointment of an examiner. This petition may be submitted by the company itself, a creditor, a member holding not less than 10 per cent of the paid-up voting share capital or a guarantor of the company’s obligations. The petition must be accompanied by the report of an independent expert (either the auditor of the company or a person who is qualified to be appointed as an examiner of the company) demonstrating that the company has a viable future and outlining a recovery plan. The contents of the expert’s report are prescribed by law.
For the court to order the appointment of an examiner, certain tests must be met. These include that the company must be unable or likely to be unable to pay its debts, that no resolution has been passed for the winding-up of the company and that no order has been made for the company to be wound up. In addition, there must be a reasonable prospect of survival of both the company and the whole or any part of its undertaking, as a going concern.
Upon hearing the petition, the court can make the order requested, dismiss the petition, adjourn the hearing conditionally or unconditionally, or make any interim order or any other order it thinks fit.
The examiner’s powers, which include the power to put forward proposals to rescue the company and, in the meantime, to manage the company to facilitate the rescue of the company, are subject to the court’s supervision. Generally, while a company is placed under examinership, the disposal of the assets or business of the company is not permitted and the whole or part of the company’s undertaking must remain with the company. An examiner shall, where so directed by the court, have power to ascertain and agree claims against the company to which he or she has been appointed. An examiner may apply to the court to determine any question arising in the course of his or her office.
During an examinership, the company is under the court’s protection; no petition or resolution can be presented or passed for the company to be wound up, no legal action can be taken against the company to recover any debt or to repossess goods in the company’s possession. No proceedings can be commenced against any guarantor of the company’s debts and no receiver can be appointed during an examinership.
The initial period of court protection is four calendar months from the date of presentation of the petition, which may be extended by a further 60 days by an order of the court. By the end of this period, the examiner must prepare and present the court with its proposals for a compromise or scheme of arrangement.
Once the examiner has formulated his or her proposals, he or she will convene a meeting of the members and creditors of the company affected by the proposals. The court may direct that the proposals include whatever other provisions it deems fit. Proposals shall be deemed to have been accepted by a meeting of creditors or of a class of creditors when a majority in value of creditors or class of creditors represented at that meeting have voted in favour of the resolution for the proposals.
Once the court confirms the proposals of the examiner, they become binding on the company and its members and creditors.
Where an examiner concludes that he or she is not able to put forward proposals, he or she can apply to the court for directions. The court, in turn, may give directions or make an order as it deems fit, including an order for the company to be wound up.
The main objective of appointing a receiver is to recover a secured creditor’s debt; it does not bring the existence of the corporate debtor to an end in the same way that liquidation does. Typically, an instrument creating a charge affords a creditor with a right to appoint a receiver on a default of a debtor’s repayment obligations to realise the asset subject to the charge and discharge the debt out of the proceeds of sale of this asset. Creditors of a company can also apply to court seeking an order for a receiver to be appointed if their interests warrant protection by the appointment of a receiver.
Where the charge is a floating charge over the assets of the undertaking the creditor can appoint a receiver and manager over the assets on which the floating charge crystallises at the time of default.
During the period in which a receiver is appointed, the directors’ inherent powers of management over the charged assets cease and the receiver is vested with powers to manage the charged assets. Within seven days of the appointment of a receiver, the appointer must notify the Registrar of Companies.
If the appointment is under a floating charge covering substantially all the assets of the company, the receiver must notify the company of their appointment. The company must then provide to the receiver, within 14 days, a statement of affairs of the company including a register of all its assets and liabilities. Based on this information, the receiver will decide whether to dispose of assets individually or as a whole.
A receiver controls the assets over which they have been appointed, for the duration of their appointment. The extent of the receiver’s powers and any relevant restrictions relating to their appointment are determined by the instrument under which they are appointed or in the court order pursuant to which they are appointed.
In relation to the duration for which a receiver is appointed, this will also depend on how successful the receiver is in realising the charged assets and recovering the sums due to the creditor; the process can be completed within several months or may take years. If the appointment lasts for more than a year, the receiver must comply with certain compliance requirements, including the submission of annual accounts of receipts and payments to all parties concerned at each anniversary.
On termination of the receiver’s appointment, the receiver must notify the Registrar of Companies that they have ceased to act.
Winding-up by the court (compulsory liquidation)
Compulsory liquidation is a drastic sanction that may be taken by a creditor in certain circumstances. A company placed under compulsory liquidation immediately ceases to trade, its assets are realised and distributed, and its existence ultimately comes to an end.
A petition for the winding-up of a company can be presented by the company itself, any creditor (including a contingent or prospective creditor), a contributory or a member. The court may also order a winding-up on the petition of the official receiver against a company being wound up voluntarily where the court is satisfied that the voluntary winding-up cannot be continued, considering the interests of the creditors or shareholders. A provisional liquidator may be appointed, on the presentation of a winding-up petition, to protect the company’s assets.
On hearing the petition, the court may either dismiss it, adjourn it or make any order that it deems fit. The court has complete discretion in deciding whether to make a winding-up order, and if the order is made, the liquidation will be deemed to have commenced at the time of presentation of the petition, unless a resolution has previously been passed for a voluntary winding-up, in which case the liquidation will be deemed to have begun with the passing of that resolution.
The court can wind up a company in certain other circumstances including where:
- the company has resolved, by special resolution, to be wound up by the court;
- default is made in delivering the statutory report to the Registrar of Companies or in holding the statutory meeting;
- the company does not commence its business within a year of its incorporation or suspends its business for a whole year;
- the number of members is reduced to fewer than seven in the case of a public company;
- the company is unable to pay its debts; or
- the court is of the opinion that it is just and equitable that the company should be wound up.
On the making of a winding-up order, the company can no longer trade, except where it obtains the approval of the court (or the committee of creditors, if there is one). No action can be proceeded with, or commenced against the company, except by leave of the court and subject to such terms as the court may impose. 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 be void unless the court orders otherwise.
All the company’s assets vest in the official receiver, who is responsible for realising them and distributing the proceeds among the creditors. The directors are required to provide the official receiver with a statement of affairs, verified by an affidavit, detailing all the company’s assets and liabilities, including prospective and contingent assets and liabilities. The contents of this statement are prescribed by law. The official receiver (or liquidator appointed to act in his or her place) will then realise the assets, determine the number of individual claims and distribute any funds in accordance with certain priorities (as discussed below).
The liquidator has extensive powers to realise assets and determine claims, including the right to bring and defend actions on the company’s behalf, to continue to trade for the beneficial realisation of assets, to borrow on the security of the company’s assets and to do anything else it deems necessary for the purposes of the winding-up. Certain of these powers require the approval of the court (or the committee of creditors, if one has been appointed) and are subject to the control and supervision of the court. Any creditor or contributory can apply to the court in respect of the exercise of the liquidator’s powers.
Liquidators in compulsory liquidations are granted extensive powers to investigate the conduct of persons involved with the company, including the power to apply to the court for the public examination of any officer of the company. The official receiver or appointee supervises the procedure under the ultimate supervision of the court.
The court, at any time either before or after making a winding-up order, on proof of probable cause for believing that a contributory is about to leave Cyprus or otherwise abscond, remove or conceal any of his or her property for the purpose of evading payment of calls or avoiding examination respecting the affairs of the company, may cause him or her to be arrested and his or her books and papers and movable personal property to be seized and safely kept until such time as the court may order.
Where a winding-up order has been made or a provisional liquidator has been appointed, no legal action or proceeding can be continued or commenced against a company except with the court’s leave and subject to the terms that the court may impose. A creditor who has issued execution against a company’s property or has attached any debt due to the company after commencement of the winding-up, cannot retain the benefit of the execution or attachment against the liquidator in the winding-up, subject to the court ordering otherwise.
In relation to the length of compulsory liquidation proceedings, these generally take several years to complete.
Once the assets have been realised and funds have been distributed, the liquidator can apply to the court to dissolve the company and upon obtaining the court order, the company is dissolved with effect as from the date of the order. The liquidator must send a copy of the order to the Registrar of Companies.
A company’s voluntary liquidation can be initiated either by members of a company or by creditors of a company. All activities of the company cease on the commencement of the voluntary winding-up, except where the continuance of its activities benefit the process of liquidation. The company maintains its legal personality throughout the voluntary winding-up period and ceases to exist upon completion of the liquidation process, which leads to the dissolution of the company.
Members’ voluntary winding-up
A members’ voluntary liquidation is the means of ending the existence of a solvent company that is no longer required and distributing its assets among the members. It is frequently undertaken as a housekeeping measure in the context of group reorganisations. The effect of liquidation is to vest the assets in the liquidator as trustee and the company can no longer trade except to the extent required to realise its assets.
The company’s directors must make a statutory declaration of solvency, which must include a statement of the company’s assets and liabilities and provide that, having enquired fully into the affairs of the company, the directors consider that the company can pay its debts in full within a maximum of 12 months.
The ability of the company to pay debts in full within a year of liquidation is of pivotal importance. If the directors are unable to make a statutory declaration of solvency or if, having been appointed, the liquidator forms the opinion that the company will not be able to pay its debts, the liquidation must be undertaken as a creditors’ voluntary liquidation. The statutory declaration must be made five weeks before the date of the proposed resolution to wind up and delivered to the Registrar of Companies before that date.
The liquidation is initiated by the passing of the members’ resolution to wind up the company following the delivery of the statutory declaration to the Registrar of Companies.
The liquidator in a voluntary liquidation has the same powers as in a compulsory liquidation and can exercise these powers as necessary to achieve a beneficial winding-up. Approval of the court or of the supervisory committee of inspection (if any) is necessary to settle any category of claims in full or to make compromises of claims. The liquidator can also apply to the court to determine any issue or to exercise any of the powers available to the court in a compulsory liquidation.
Creditors in a members’ voluntary liquidation must be paid in full within a year of commencement of the liquidation. Realisation and distribution of residual assets to members and formal conclusion of the winding-up may take longer. If the liquidation continues for more than one year the liquidator must convene annual meetings of members and present accounts. The conclusion of a members’ voluntary liquidation requires, in summary, the following:
- The liquidator must convene a final meeting of members (publicised with a month’s notice in the Official Gazette) to present an account of payments following the realisation of the company’s assets, the discharge of liabilities and the distribution of residual assets to members.
- The liquidator must file a report to the Registrar of Companies reporting on the business meeting, together with the account of payments, within a week of the meeting having taken place. The company is deemed to be dissolved three months after the filing of the liquidator’s report to the Registrar of Companies, subject to the right of the liquidator or any interested person to apply to the court for an extension.
Creditors’ voluntary winding-up
The purpose of a creditors’ voluntary liquidation is to distribute the available assets of an insolvent company among the creditors and bring the company’s existence to an end. As with compulsory liquidation, this may involve investigation into the conduct of persons involved in the company to ascertain the reasons for its demise and their role in it. The first step in a creditors’ voluntary liquidation is to convene separate meetings of members and creditors as described below.
In relation to the members’ meeting, its purpose is to pass a resolution to wind up the company and appoint a liquidator. A creditors’ voluntary liquidation can be initiated by passing a special resolution or an ordinary resolution, if the company’s articles of association provide for a fixed period for the duration of the company or specify that a certain event should occur for the winding-up. However, creditors’ voluntary liquidations are usually initiated by passing an extraordinary resolution that requires a 75 per cent majority of votes cast at a general meeting to the effect that the company cannot, by reason of its liabilities, continue its business and it is advisable to wind up.
The purpose of the creditors’ meeting is to:
- present creditors with a statement of the company’s financial position and a list of creditors’ claims;
- nominate a liquidator to act in place of the liquidator appointed by the members; and
- appoint a committee of inspection of up to five persons to assist and oversee the liquidator and fix his or her remuneration. If the creditors and members nominate different people to act as liquidator, the creditors’ nomination will prevail, subject to the right to apply to the court.
The creditors’ meeting must be convened for the same day as the members’ meeting or the following day, and notice of the meeting must be posted to creditors simultaneously with the notice to members and advertised in the Official Gazette and two local newspapers.
Supervision and control of the procedure for a creditor’s voluntary winding-up and the ensured protection from creditors is as described above for a members’ voluntary liquidation. The conclusion of a creditors’ voluntary liquidation is the same as for a members’ voluntary liquidation, except that the liquidator must also convene a final meeting of creditors.
Creditors’ voluntary liquidations are often prolonged as realisation of assets, agreement of claims and completion of investigations can take years. If the liquidation exceeds one year, separate annual meetings of members and creditors must be held within three months of each anniversary to consider the conduct of the liquidation, the liquidator’s receipts and payments account.
Certain pre-insolvency transactions may be challenged and set aside in certain circumstances. These include:
- a charge that has not been properly registered is not perfected and is void against the liquidator and any creditor of the company;
- a transaction may be deemed to be a fraudulent preference against its creditors where the dominant intention of the transaction was to provide a preference to one creditor over another. This transaction must have occurred within six months prior to commencement of the winding-up and at a time when the company was insolvent; and
- a floating charge on the undertaking or assets of the company created within 12 months of the commencement of the winding-up shall generally be invalid, unless it is proved that the company, immediately after the creation of the charge, was solvent.
As mentioned at the beginning of this chapter, the Cypriot corporate insolvency framework has been extensively reformed over the past few years. This chapter provides an overview of the main insolvency procedures, ranging from arrangements and reorganisations, examinership and receivership, to winding-up. A thorough assessment of the circumstances having an impact on the financial position of the company is always required to determine the precise procedure available under law and the rights and ranking of any creditors.