Corporate Insolvency and Restructuring Legal Framework in Cyprus: A Shift Towards a Rescue Culture
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This article outlines the procedures and tools currently available under the applicable corporate insolvency and restructuring legal framework in Cyprus. It further presents certain recent amendments thereto, in the context of transposition of Directive (EU) 2019/1023 (the ‘EU Restructuring Directive’) into national legislation and discusses their anticipated implications
- Overview of liquidation procedures
- Other insolvency and corporate debt restructuring tools
- Examinership regime and recent amendments thereto pursuant to the EU Restructuring Directive
Referenced in this article
- Companies Law, Cap. 113
- Directive (EU) 2019/1023 – EU Restructuring Directive
- Companies (Winding Up) Rules 1933–2013
- Bankruptcy Law, Cap. 5
- Bankruptcy Rules
- Civil Procedures Rules
- Law 64(I)/2015 – Insolvency Practitioners Law
- Law 68(I)/2020 – Insolvency Department Law
- Regulation (EU) 2015/848 – Insolvency Regulation.
The Cypriot corporate insolvency and restructuring legal framework is primarily regulated by the Companies Law, Cap. 113 and supplemented by the Companies (Winding Up) Rules 1933-2013 and Civil Procedure Rules. Certain provisions of the Bankruptcy Law, Cap. 5 and the underlying Bankruptcy Rules, which relate to individuals, also apply to companies undergoing liquidation proceedings. The aforementioned legal framework applies to all companies registered in Cyprus, with the exception of certain sector-specific instances such as credit institutions, insurance companies and alternative investment funds, in relation to which separate and/or supplementary legislation applies.
The Companies Law, Cap. 113, which upon its adoption closely mirrored the English Companies Act 1948, established what can be considered a ‘traditionally creditor-friendly’, rather than ‘debtor-friendly’ regime. It provided for two main procedures for dealing with corporate insolvency: liquidation and receivership, with the emphasis being on liquidation as the main tool addressing corporate insolvency.
The 2013 banking crisis in Cyprus and the resultant heightened level of non-performing debt highlighted the need for a shift in mentality. In 2015, several amendments of the Companies Law as well as new pieces of legislation were introduced with a view to modernising and streamlining the corporate insolvency and restructuring framework, and bringing it more in line with international best practices. The key objective was to provide more tools for restructuring corporate debt at an earlier stage, thus increasing the chance of survival and avoiding insolvency and liquidation and generally, to make the system more debtor-friendly.
A new examinership regime modelled on the equivalent Irish insolvency tool was introduced, which allows companies to petition the court for protection from their creditors while they restructure their debt and operations. The intention was to give companies a better chance of survival by availing them a window to negotiate with their creditors and stakeholders without the threat of immediate legal action being undertaken against them.
Another significant legislative development was the introduction of the Insolvency Practitioners Law of 2015, which established a framework for the licensing and supervision of professionals who provide insolvency services in Cyprus. This law sets out the qualifications and requirements for becoming a licensed insolvency practitioner, as well as the ethical and professional standards that must be adhered to. It is considered a significant step towards the professionalisation of the insolvency industry in Cyprus, as, previously, any person could be appointed as a liquidator, trustee in bankruptcy or receiver manager, provided merely that they had not been declared bankrupt.
In 2020, a law establishing the Insolvency Department was adopted. Until then, the administration of the insolvency system and regulation of insolvency practitioners was carried out by a sub-department of the Department of Registrar of Companies and Official Receiver (as it was called at the time) of the Ministry of Energy, Commerce and Industry. The establishment of a separate, specialised Insolvency Department was a further step strengthening the insolvency industry in Cyprus.
In December 2022, the EU Restructuring Directive was transposed into national legislation by a further amendment of the Companies Law. The EU Restructuring Directive aims to harmonise insolvency and restructuring procedures across EU Member States and to offer a more attractive and flexible restructuring scheme.
This article provides an overview of the insolvency and restructuring tools currently available to Cypriot companies facing financial difficulties and the amendments introduced to the legal framework in the context of transposition of the EU Restructuring Directive.
Under the Companies Law, Cap. 113, a Cypriot company may be wound up (i) voluntarily by its members or by its creditors, (ii) by the court, in the context of compulsory winding up proceedings or (iii) through a court-supervised (voluntary) winding up process.
Voluntary winding up
Voluntary winding up is an out-of-court process which, depending on whether a company is solvent at the start of the process or not, may be commenced either by the members of the company or by its creditors.
Voluntary winding up by members
In order for a company to be placed under a members’ voluntary winding up process it must be considered solvent, meaning that it must be in a position to settle its debts within a period not exceeding 12 months from the date of commencement of its winding up. To this effect, the directors of the company must make a statutory declaration of solvency confirming the ability of the company to pay its debts within the said time frame. The declaration of solvency must be made during the five weeks preceding the date of adoption by the members of the special resolution required for placing the company under a members’ voluntary winding up process and for appointing a liquidator.
Upon appointment of the liquidator, the powers of the company’s directors cease and the liquidator is granted extensive powers to settle any liabilities, distribute the assets of the company and complete the winding up process. In certain instances, the exercise by the liquidator of his or her powers in the context of a members’ voluntary winding up process is subject to the sanction, by way of special resolution, of the members of the company, such as, for example, in cases where the liquidator seeks to settle any claim with the company’s creditors or proceed with a compromise.
Once the affairs of the company have been wound up, the liquidator prepares final accounts indicating how the winding up was conducted and how the assets of the company were distributed. The final accounts are presented to the members of the company in a final general meeting and are then filed, together with a return of the meeting, with the Insolvency Department. The winding up process is concluded and the company is wound up following the lapse of three months from the date of the said filings.
If the members’ voluntary winding up process has not been completed following the lapse of 12 months from the date of its commencement, the process must then continue as a creditors’ voluntary winding up.
Voluntary winding up by creditors
In cases where the directors of a company are not in a position to make a statutory declaration of solvency, as described above, the company can be placed under a creditors’ voluntary winding up process. In practice, the success of the relevant process presupposes, and largely depends on, the cooperation of the creditors and the members of the company involved.
The process entails holding both a members’ meeting and a creditors’ meeting, the latter of which may be summoned for the day, or the day following the day, on which the members’ meeting will be held. The company is required to send a notice of the creditors’ meeting to each of its creditors by post, simultaneously with the sending of the notices for the members’ meeting. Additionally, the company is required to publish the notice of the creditors’ meeting in the Gazette and in at least two local newspapers circulating in the district where the registered office or principal place of business of the company involved is situated.
The aim of the members’ meeting is to adopt a special resolution for the winding up of the company and for the appointment of a liquidator. At the creditors’ meeting, the directors of the company must present a statement setting out details of the company’s financial position, a full list of its creditors and the estimated amount of their claims and the creditors must nominate a liquidator. Should the nominee of the members and the nominee of the creditors differ, the creditors’ choice shall prevail and if there is a dispute, the matter may be resolved by the court. Finally, if the creditors so deem appropriate, they may also appoint a committee of inspection, consisting of up to five persons, for the purpose of providing supervision and assistance to the liquidator and fixing his or her remuneration.
As in the case of a members’ voluntary winding up process, once the liquidator is appointed, the powers of the company’s directors cease and the company’s assets pass to the possession of the liquidator, who is granted extensive powers to carry out and complete the winding up process. In certain instances, the approval of the inspection committee or the court is required, such as for example, if the liquidator seeks to settle a claim of a creditor or proceed with a compromise.
Once the liabilities of the company have been settled and any remaining assets of the company have been distributed, the liquidator makes an account of the winding up and presents the same at separate meetings of the company’s creditors and members. The liquidator then files with the Insolvency Department a copy of the accounts of the winding up and the returns of the meetings. The creditors’ voluntary winding up process is completed, and the company is dissolved following the lapse of three months from the date of the relevant filings.
Compulsory winding up by the court
This process commences with the filing of a winding up petition at the district court where the registered office of the company involved is located. The winding up petition may be filed, among others, by the company, its creditors, its contributories, an examiner or an insolvency practitioner of a different EU Member State in accordance with the provisions of Regulation (EU) 2015/848 on insolvency proceedings.
A company may be wound up by the court if, inter alia:
- its members have resolved, by special resolution, that the company be wound up by the court;
- (where applicable) it fails to deliver the statutory report to the Department of Registrar of Companies and Intellectual Property of the Ministry of Energy, Commerce (the ‘Registrar of Companies’) or to hold the statutory meeting;
- it does not commence business within a year of its incorporation, or it suspends its business for an entire year;
- the number of members is reduced to below one, in the case of a private company, or below seven, in the case of any other company;
- it 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.
According to the Companies Law, Cap. 113, a company is considered unable to pay its debts if:
- it is indebted with a total sum exceeding €5,000, the concerned creditor has served the company with a written notice demanding payment of the incurred debt due and the company has failed to pay the sum owed within three weeks from the date on which the written notice was served;
- following the issue of a judgment against a company’s property, the execution thereof fails to settle the debt wholly or in part;
- the court is satisfied that the company is unable to pay its debts when due, having taken into consideration, for the purpose of reaching this decision, the prospective and future liabilities of the company; or
- the court is satisfied that the value of the assets of a company is less than its liabilities, taking into consideration its prospective and future liabilities.
From the moment of issue of a winding up order, the Official Receiver acts as the default liquidator of the company, unless the creditors and members of the company appoint another individual as liquidator. As in the case of a creditors’ voluntary winding up process, in the event of disagreement, the choice of the creditors prevails. The creditors and the members of the company may also give instructions to the liquidator on how to manage the company’s affairs and the liquidator is obliged to call relevant meetings of the creditors and members, if so requested in writing by at least one tenth in value of the creditors or members.
After a winding up order has been issued the company can no longer trade, except with the approval of the court (or the committee of creditors, if any), for the realisation of available assets. The order operates to the benefit of all creditors of the company and no pending action can be continued, or commenced against, the company by an individual creditor, except by leave of the court and subject to such terms as the court may impose. Any disposition of the company’s property that takes place after the commencement of winding up (i.e., after the filing of the winding up petition) and any transfer of shares or alteration in the status of the members of the company after the commencement of winding up, is void unless the court otherwise orders.
Within 30 days from the date of the winding up order, the directors and the secretary of the company submit with the Official Receiver (or any other liquidator appointed) a statement of affairs verified by affidavit, setting out in detail the assets, liabilities and creditors of the company. On the basis of this, the Official Receiver (or other liquidator) submits to the court a preliminary report containing information regarding the capital of the company, its assets and liabilities and whether, in his or her view, further inquiry must be made into the affairs of the company. Any liquidator appointed is obliged to also submit to the Official Receiver and the court from time to time, but at least twice a year, audited accounts of the receipts and payments made.
The assets of the company are distributed in accordance with the following sequence of priorities:
- costs of the winding up, including the remuneration of the liquidator;
- payments to employees, if any;
- local rates, government taxes and duties payable by the company, which have become due and payable during the 12 months preceding the date of commencement of its winding up;
- proven claims of secured creditors;
- claims of unsecured creditors;
- capital paid-in by shareholders.
The debts of each class rank equally among themselves and must be paid in full, unless the assets of the company are insufficient to meet them, in which case they abate in equal proportions.
Once all outstanding matters are settled, the liquidator applies to court for the issue of a dissolution order.
Court-supervised winding up
Court-supervised winding up constitutes a combination of the voluntary and compulsory winding up processes. Specifically, following the adoption of a resolution for the placing of a company under a members’ voluntary winding up or a creditors’ voluntary winding up, the court may issue an order (for example, following a petition to this effect by a creditor) for the continuation of this procedure under its supervision.
If such an order is issued, the exercise by the liquidator of his or her powers becomes subject to the supervision of the court and, in certain instances, requires the sanction of the court. The court may also, if deemed appropriate, appoint an additional liquidator to act alongside the liquidator appointed voluntarily by the members and/or by the creditors.
Receivership is a debt-recovery process that entails the appointment of a receiver to take control of, and manage, the whole or any part of the assets of a company in financial distress. It is often used by secured creditors under floating charges as an alternative to insolvency proceedings, offering greater efficiency and a swifter resolution of their claims. The appointment of a receiver can be made either by court order or out-of-court, through the exercise by a secured creditor of a power of appointment contained in a security document.
The receiver is usually granted wide powers, specified in the security document forming the basis for his or her appointment, to manage the assets of the company which are subject to the security and to realise the same for the purpose of discharging the secured debt. Such powers include the power to sell assets, collect debts and take legal action on behalf of the company. While a company is under receivership the powers of its directors do not cease, but they are limited to the extent of the power and control granted to the receiver.
Placing a company under receivership has no moratorium or stay effect. The company remains bound to comply with its contractual obligations and its creditors may enforce any available legal or contractual remedies which they have against the company or file a winding up petition at court, while the receivership is ongoing.
The receiver acts as agent for his or her appointee, towards whom a primary duty of care is owed. Receivers are, however, also generally required to act diligently as regards the interests of the remaining creditors of the company and any assets of third parties coming to their possession in the context of exercise of their role. The receiver may apply to court for directions on any matter arising in connection with the performance of his or her duties.
Any realisations made by the receiver are paid in the order of priorities described above as regards compulsory winding up processes by the court. Provided that any surplus remaining after settlement of the claims of secured creditors remains with the company. Claims of unsecured creditors are not settled by the receiver and survive the receivership.
Once the receiver settles the debt owed to the secured creditor who appointed him or her or concludes that it is uneconomical to continue the receivership, the receiver resigns, accounts for actions taken to the company and notifies the Registrar of Companies accordingly.
Schemes of arrangement
A scheme of arrangement is a court-approved procedure that may be used inter alia as a tool for restructuring corporate debt, as it allows a company to reach a compromise or arrangement with its creditors or members or any class of them. The process may also be employed in the context of a winding up.
A scheme of arrangement may be pursued by the company under distress, by any creditor or member of the company or, in the event that the company is undergoing a winding up process, by the liquidator of the company. The process entails submission by the interested party of an application to court for the issue of an order calling meetings of the creditors or members or any class of them to consider the proposal. If the majority in value of the creditors or the members, or class thereof, present in person or by proxy and voting at the relevant meetings, votes in favour of the proposed compromise or arrangement, an application is made to court to sanction the proposal. Once the court has issued an order sanctioning the same, the compromise or arrangement becomes binding on all of the creditors and members of the company, or any class of them, as the case may be, irrespective of whether they voted in favour of the scheme or not.
Pursuing a scheme of arrangement does not offer protection against action from any of the creditors of the company. It is therefore important for its success that creditors generally be kept informed and involved in the process and that, to the extent possible, their consent is obtained in advance. The mechanism can overall, however, serve as an effective restructuring tool enabling companies to avoid liquidation and continue on a going concern basis as (1) it offers a flexible, simple and, if creditors and the members of the company cooperate, swift mechanism for restructuring corporate debt, and (2) it is cost-effective, to the extent that costs that would have been incurred in the context of a winding up or examinership process are avoided.
Examinership – overview and recent amendments to the framework
As indicated above, examinership is the most recent debt restructuring and corporate rescue tool incorporated into Cypriot legislation. It is intended to grant insolvent companies, or companies that are likely to face insolvency, a period of protection from their creditors, with a view to facilitating the restructuring of their debt and operations and enabling their survival as a going concern. The relevant framework was amended and finetuned further in December 2022, in the context of transposition into national legislation of the EU Restructuring Directive.
Under the examinership regime, a distressed company, a creditor, a member of the company holding not less than one tenth of the company’s voting shares or a guarantor of the company, can apply to court for the appointment of an examiner to assess the company’s financial position and to develop a restructuring plan. The application must be accompanied by a report prepared by an independent expert including, inter alia (1) a statement of affairs of the company, (2) whether, in the expert’s opinion, the company has a reasonable prospect of survival as a going concern and (3) a statement of the conditions that are considered essential to ensure such survival.
The court may issue an order appointing an examiner if the following requirements are collectively met:
- the company involved is unable or pay its debts or is likely to be unable to pay its debts;
- no winding up order has been issued by a court and no resolution has been adopted placing the company under a voluntary winding up process; and
- the company has reasonable prospects of survival of its business as a going concern, either in whole or in part.
An appointed examiner is vested with the rights and powers of an auditor, thus enabling him or her to formulate proposals for saving the company. The appointment of an examiner has no effect on the powers and management rights of the directors, unless the court orders that some or all of the powers of the directors should be exercised by the examiner and/or that the examiner should be granted powers of a liquidator.
Once an application for the appointment of an examiner has been filed (and irrespective of whether the court has or will proceed to appoint an examiner), the company is placed under the protection of the court for four months. The said period may be extended under certain circumstances, provided that the maximum period for which the company is under the protection of the court cannot exceed 12 months.
The possibility for extension of the relevant period of protection to a period of up to 12 months constitutes one of the recent amendments introduced, as previously the maximum period for which a company could be placed under the protection of the court was six months from the date of the application for appointment of an examiner. This extension is considered a significant improvement of the process, as practice has shown, for the reasons explained in more detail in the Final Remarks section below, that a six-month period proved too short of a time frame for enabling the successful adjudication of an examinership application.
During the period for which a company is placed under the protection of the court, inter alia, (1) no winding up orders can be issued against the company, (2) the company cannot be placed under a voluntary winding up process, (3) no receiver can be appointed, (4) no execution or enforcement measures can be taken against the company without the consent of the examiner, if one has been appointed, and (5) no action can be taken to liquidate assets of the company secured under a mortgage, pledge or charge without the consent of the examiner, if one has been appointed. In addition, the company cannot proceed to settle any debt that was created prior to the date on which it was first placed under the protection of the court, unless settlement of the relevant debt is recommended by the report of the independent expert that accompanied the application for appointment of an examiner, or unless approved by the examiner, if one has been appointed.
The recent amendments to the examinership framework introduced certain additional debtor-friendly elements. These are designed, on the one hand, to provide further ‘breathing’ space to a company in financial distress to settle its debts and, on the other hand, to increase the likelihood of approval of the restructuring plan to be formulated by the examiner and, as a result, the likelihood of survival of a company utilising this debt restructuring tool.
One such amendment is a newly introduced limitation of the rights of reaction that creditors affected by the placing of a company under the protection of the court have. More specifically, affected creditors are not permitted to terminate, accelerate, withhold performance or otherwise modify essential executory contracts to the detriment of a company that is under the protection of the court, solely by reason of the fact that they were not paid for debts which arose prior to the placing of the company under such protection. Essential executory contracts are defined as contracts that are essential for the continuation of the day-to-day activity of the company, including utility and supply contracts. Creditors are also not permitted to rely on any contractual provisions granting them the right to terminate, accelerate, withhold performance or negatively modify contracts merely by reason of the fact that a company has applied for, or has been placed under the protection of the court or an examiner has been appointed.
Another significant amendment is that, whereas previously all creditors of a company were entitled to vote on a proposed restructuring plan, this right is now only granted to creditors, or classes thereof, who are affected by the proposals. Such right has now also been granted to members, or classes thereof, who are so affected and, whereas the default requirement is for all classes of affected creditors and members to approve a restructuring plan, the court is now granted the power, under certain circumstances, to approve such plan even if this has not been so approved by all classes of affected creditors or members.
Once approved by the court, a restructuring proposal binds all members and creditors of a company. If a proposal is rejected by the court or the examiner concludes that it has not been possible to reach agreement on a proposed proposal, the court may make any order it deems fit, including an order to wind up of the company involved.
In the years following the 2013 banking crisis, a number of amendments were introduced to the corporate insolvency and restructuring legal framework of Cyprus. These were aimed, on the one hand, at strengthening the regulation of the insolvency industry and profession and, on the other hand, at promoting a rescue culture in lieu of liquidation, through the adoption of new tools for the restructuring of corporate debt at an early stage.
The main tool, examinership, has unfortunately not proven successful to date as a means for rescuing companies as a going concern. Whereas several applications for the appointment of an examiner have been made to Cypriot courts since the introduction of the regime, there have been no successful appointments of examiners to date. This is partly the result of the great number of applications being submitted to courts by creditors and other interested parties opposing the proposed appointment of examiners that delay the process and lead, in practice, to the hearing date of the applications for appointment of an examiner to be set following the lapse of the four month (or, if extended, maximum six month) period for which, up until recently, a company could remain under the protection of the court.
It remains to be seen whether the extension, under certain circumstances, of the relevant period of protection to up to 12 months, will enable this procedural impediment to be overcome and the examinership regime, as this has been finetuned and further improved following its recent amendment, to be utilised effectively as a second chance mechanism.