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Information for Cyprus Expats on the Insolvency Law in Cyprus
In Cypriot law, insolvency refers to the procedure by which a legal entity or a company which has incurred debts and is unable to pay them, is wound up, and the insolvency administrator uses the liquidated assets of the legal entity or company for the benefit of it's creditors. This article outlines the function of the relevant legislation and describes it's practice.
The legislation and the procedure are set out in the Companies Law, CAP. 113, sections 203 to 344. Unlike in other legal systems and jurisdictions, these sections are only used in the winding up of legal entities. The bankruptcy of natural persons, i.e. individuals, is covered by seperate legislation in Cyprus.
Under section 203 there are two types of insolvency procedure:
1. Compulsory liquidation by the court.
2. Voluntary liquidation by the company or it's creditors.
Compulsory Liquidation
The competent court is that of the district in which the legal entity has it's registered office (section 209). The procedure starts with the filing of an insolvency petition by the creditor(s) or the company. The Cypriot legislation in general follows the Anglo - Saxon law tradition and a legal entity has the power to file a petition or an action through it's lawyer, whereas under continental law, the involvement of a representative is necesary.
The insolvency procedure may be initiated in any of the following situations:
1. The members of the company decide by means of a special resolution that the company should be wound up by the court.
2. Default is made in delivering the statutory report to the Registrar of Companies or in holding the statutory meeting.
3.The company has not started it's business within a year from it's incorporation or suspends it's business for a whole year.
4. The number of members is reduced, in the case of a private company below two, or in the case of any other company below seven (subject to Law 2(1) of 2000, which enables a company to be formed with only one shareholder)
5. The company is unable to pay it's debts.
6. The court is of the opinion that it is just and equitable that the company should be wound up.
A decision of the court to start the procedure must be conveyed to the company and the Registrar and applied for the benefit of the creditors (section 219). After the decision has been made, any proceedings may be instituted (section 220)
The consequences of initiating compulsory liquidation proceedings are that:
1. Every disposition of the company's assets, including it's rights of action, and every transfer of shares of the company is invalid, unless the court decides otherwise.
2. Every garnishment or confiscation or any enforcement of a court decision against the company's assets, are invalid.
The court appoints the liquidator of the company (section 226). The liquidator has the following powers, subject to the approval of the court (section 233/1).:
1. To file an action in the name of and behalf of the company or to start any similar legal procedure.
2. To continue the business of the company as long as it is necessary for the favourable liquidation of the company.
3. To appoint a lawyer for the liquidation of the company.
4. To satisfy fully any ranking of creditors.
5. To reach a compromise with the creditors.
6. To compromise every claim, wether present or future, ascertained or unascertained, and every duty that can become a debt.
The liquidator also has the following powers (section 233/2)
1. To sell the assets and the actionable rights of the company by private contract or public auction.
2. To act in the name of and on behalf of the company and to sign every contract, bill and document on behalf of the company.
3. To file a bankruptcy petition against natural persons (under the Bankruptcy Law, Cap.5) or an insolvency petition against legal entities, to be present as a creditor and to receive the appropriate proceeds.
4. To issue, accept, write out or endorse bonds or bills of exchange in the name of and on behalf of the company.
5. To accept necessary funds which may be guaranteed by the assets of the company.
6. To appoint a representative to undertake the activities which he cannot perform.
7. To do any acts necessary for the liquidation of the company and the distribution of it's assets
The performance of the liquidator's powers are under the control of the court (section 233)
When the liquidation of the assets of the company and the settlement of every matter is complete, the liquidator files a petition for the final winding up of the company in the competent court, leading to a decision which confirms the end of the existence of the company (section 260)
Voluntary Liquidation
Under section 261 voluntary liquidation is acceptable when:
1. A statutory period come to an end or a statutory event occurs and as a consequence a company approves a winding up resolution in a general meeting.
2. The company votes for liquidation on a special resolution.
3. The company votes for liquidation on an extraordinary resolution because it is impossible to continue it's business due to it's debts.
If the company approves the voluntary winding up resolution, it is obliged to publish it in the Official Gazette of the Republic of Cyprus within 14 days (section 261). The insolvency procedure begins on the day of the approval of the resolution (section 263)
The consequences of a voluntary winding up are:
1. The company cannot perform any activities except those necessary for it's favourable liquidation (section 264)
2. Any change in the membership of the company or any sale of the company's shares without the approval of the liquidator is invalid (section 265)
The liquidator has the following powers, subject to the approval of the court or the passing of an exceptional resolution of the company (section 286(1)(a)).
1. To satisfy fully any ranking of creditors.
2. To reach a compromise with the creditors.
3. To compromise ever claim, wether present or future, ascertained or unascertained, and every duty that can become a debt
Furthermore, section 286(1)(a) gives the liquidator the same powers as those given to a liquidator in a compulsory insolvency under section 233(2).
After the completion of all business relating to the company, a bill and a report about the winding up and the liquidation of the company's assets will be prepared by the liquidator. A meeting of the shareholders will then be called, so that the report can be read and any explanations can be given. One week after the shareholders' meeting, the liquidator must file the bill and the report with the Registrar of Companies. The registrar should register these without delay and three months after registration, the existence of the company is deemed to be at an end (sections 273 and 283)
General Provisions
Sections 298 to 333 set out the procedure for the identification of claims and their ranking for insolvency purposes, which is to be enforced in any company liquidation, wether compulsory or voluntary.
Every type of claim, including those subject to a condition, due, future or unascertained, amy be adnitted by the liquidator (section 298). In practice an auditor is appointed by the liquidator for this activity.
The order of priority of claims is as follows:
1. The costs of winding up, including disbursements, and the fees of the liquidator and any appointed persons (e.g. auditors)
2. The prefeferential debts, which are:
Every local tax due within the twelve months before the start of the insolvency
Every Government tax due within twelve months before the start of the insolvency.
Any unpaid wages and social security contributions for the employees
Any unpaid compensation for personal injury during working hours.
3. The secured creditors, namely those who have a mortgage or similar security. There is no specific provision for them in the Companies Law, but it is a presumption derived from Cypriot legislation as a whole.
4. The unsecured ordinar creditors.
5. The deferred debts, e.g. sums due to members of the company such as dividends declared but unpaid.
© Andreous Neclous & Co LLC website
Updated 30 April 2012
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