Insolvency 2019 Second Edition

Last Updated November 20, 2019

Cyprus

Law and Practice

Authors



Patrikios Pavlou & Associates LLC is a leading law firm based in Cyprus with over 55 years of experience in the local and international legal market. The team specialises in cross-border restructurings and complex insolvencies, including planning, counselling and litigation as well as transactional matters. The lawyers provide comprehensive advice in financial transactions involving securities and corporate law, litigation, liquidations, insolvencies, M&As, reorganisations and restructurings in Cyprus and abroad. Clients include local and international corporations, credit-providers, investors, high net worth individuals, financial institutions, committees, trustees and many others, varying from SMEs to the largest multinationals. Amongst others, the firm is currently advising a major Russian financial institution on the recovery of over USD1.5 billion in assets through liquidation and other out-of-court enforcement measures, in order to ensure asset recoveries for debt repayment.

In accordance with the records kept by the Department of Registrar of Companies and Official Receiver (ROC) there was an increase in relation to the Voluntary Liquidation (VL) proceedings from 1,144 in 2012 to 2,947 in 2017, followed by a decrease to 1,322 in 2019. Within the same period (2012 –2019), Involuntary Liquidation (IL) proceedings were decreased from 133 to just 36. Moreover, there was a limited number of applications filed seeking the appointment of an Examiner into the affairs of a company. Examinership is a rescue procedure for distressed companies (see 2.1 Overview of Laws and Statutory Regimes).

The Insolvency Service of Cyprus was established in 2015 with the aim to support the new insolvency regime.

Moreover, the Legal framework was updated in order to deal with the needs of the new reality brought by the crisis. To this end, amendments were made to the Companies Law, Cap 113 (Cap 113) and the Bankruptcy Law, Cap 5 and the following new laws were introduced:

  • Law on the Insolvency of Natural Persons (Personal Repayment Plans (PRPs) and the Debt Relief Order (DRO) L.65(I)/2015, as amended by L.85(I)/2018;
  • Procedural Rules on the Insolvency of Natural Persons (PRPs) and DRO) of 2016; and
  • The Insolvency Practitioners Law (L.64 (I) / 2015);

The latest amendments of Cap 113 introduced the concept of examinership in Cyprus Law. Examinership is a process providing for the financial reorganisation of a viable company with liquidity problems. Its aim is to keep the business alive and to give the company time to reorganise its financial affairs.

Examinership

The court may appoint an examiner in the event that the company fulfils the following criteria:

  • the company is or will more likely be unable to meet its debts;
  • no resolution as to the liquidation of the company has been passed and published in the Official Gazette of the Republic of Cyprus (Gazette); and
  • no court order has been issued for the liquidation of the company;

With the submission of an application for the appointment of an examiner the company is entering under the court protection (moratorium) for a period of four months which can be extended under certain circumstances. During this period no proceedings can be promoted against the company without the permission of the court. Moreover, a receiver cannot be appointed and the company cannot be placed under liquidation. 

An Examinership Order can be issued by the court only if the company as a whole or a part of its business has a reasonable prospect of survival as a "going concern".

The application for Examinership can be filed by the following:

  • the company itself;
  • any creditor or future creditors;
  • members of the company who, at the time of the application, hold no less than 10% of the paid-up capital of the company that have voting rights;
  • a guarantor of the company.

Schemes of Arrangement (Scheme)

Moreover, Cap 113 provides the option of a Scheme as an attractive alternative for court-sanctioned debt restructurings. The latest legislative amendments have reduced the required statutory threshold for approving a Scheme to a simple majority in value of the creditors present and voting, instead of securing a special majority of 75% both in value and in number of the creditors present and voting.

Following the approval of a Scheme by the required statutory majority, the arrangement may be brought before a judge for sanctioning, and upon its sanctioning it becomes binding on all parties involved.

Receivership

A debenture-holder may proceed with the appointment of a receiver/manager upon the crystallisation of the floating charge in accordance with the provisions of the floating charge. A receiver may also be appointed by the court following a relevant application by the debenture-holder or other creditors. His role is to seize assets and then resign once these assets have been sold for the benefit of the debenture-holder.

Liquidation

In Cyprus, the winding-up of a company may be either –

  • by the court; or
  • voluntary (members or creditors);
  •   under the supervision of the court.

A company may be wound up by the court if:

  • the company has by special resolution resolved that the company be wound up by the court;
  • default is made in delivering the statutory report to the ROC or in holding the statutory meeting;
  • the company does not commence its business within a year from its incorporation or suspends its business for a whole year;
  • the number of members is reduced, in the case of a public company, below seven;
  • the company is unable to pay its debts;
  • the court is of the opinion that is just and equitable that the company should be wound up;
  • the Statute of the European Company (SE) fails to remedy the situation in accordance with Article 64 of Regulation (EC) No Council Regulation (EC) No 2157/2001 of 8 October 2001 on the SE.

Any creditor may apply to the District Court where the debtor is located in order to apply for the liquidation of the debtor. In order to successfully place the debtor in liquidation, the creditor must prove to the court that the debtor is unable to pay its debts.

A company shall be deemed to be unable to pay its debts:

  • if the company fails to settle or secure a liquidated debt or obligation in excess of EUR5,000 within 21 days from receipt of a written demand from a creditor delivered to the registered address of the company requesting that the outstanding amount owed be settled;
  • if an order for execution or any other proceeding is issued by a court on any judgment, decree or order in favour of a creditor of the company and that order is returned either fully or partially without being satisfied; or
  • if to the satisfaction of the court it is proven that the company is unable to pay its debts at the time these fall due (at the time they are payable) and, in determining whether a company is unable to pay its debts as they fall due, the court shall take into account the contingent and prospective (future) liabilities of the company; or
  • if to the satisfaction of the court it can be proven that the value of the assets of the company is less than the value of its liabilities, taking into account the contingent and prospective (future) liabilities of the company.

A company may also be wound up voluntarily:

  • when the period, if any, for the duration of the company as stated by the articles expires or the event, if any, occurs, on the occurrences of which the articles provide that the company is to be dissolved, and the company in a general meeting has passed a resolution requiring the company to be wound up voluntarily;
  • if the company resolves by special resolution that the company be wound up voluntarily;
  • if the company resolves by an extraordinary resolution to the effect that it cannot by reason of its liabilities continue its business and that it is advisable to wind it up.

Liquidation under Court’s Supervision

Where a company has passed a resolution for VL, the court may issue an order that the liquidation shall continue under its supervision, and with a right for creditors, contributors or others to apply to the court, and generally under such conditions as the court deems to be fair.

Please see 2.1 Overview of Laws and Statutory Regimes.

There are no mandatory Cyprus law provisions that compel a company to initiate formal liquidation proceedings within specified times.

Although a company is not itself obliged to commence formal insolvency proceedings, under Cap 113, it is likely that creditor pressure may cause the company to consider its procedural options, such as deciding to place the company under voluntary liquidation by its creditors (CVL) or to apply for the appointment of an examiner.

Please see 2.1Overview of Laws and Statutory Regimes.

In relation to VL Proceedings, what is vital is not whether the company is insolvent but whether a declaration of solvency can be issued by the directors. A Members’ Voluntary Liquidation (MVL) is only possible when the company makes a declaration of solvency; otherwise, the voluntary winding-up is considered as a CVL.

Once the director has conducted the full due diligence on the company, the director shall convene a board meeting where, if satisfied with the due diligence results, they shall issue a declaration of solvency confirming that the company is in a position to pay its debts within a period not exceeding twelve months from the commencement of the winding-up procedure.

It is important to note that if the liquidator is at any time of the opinion that the company will not be able to pay its debts in full within the period stated in the declaration of solvency he or she shall forthwith summon a meeting of the creditors, and shall lay before the meeting a statement of the assets and liabilities of the Company in which case the MVL procedure will be converted to a CVL procedure.

As to IL Proceedings, insolvency is one of the circumstances under which the company may be wound up by the Court (see 2.1 Overview of Laws and Statutory Regimes).

Under the relevant legislation, there is no exclusion of any entity, corporate or personal, from insolvency proceedings, other than the Central Bank of Cyprus (CBC), which is established constitutionally. Special arrangements apply to the resolution of banks and other financial institutions.

Cyprus had implemented the Resolution of Credit and Other Institutions Law 17(I)/2013 (Resolution Law) that allowed the Resolution Authority of Cyprus, comprising the CBC, to take steps in order to maintain stability in the banking and financial services industry. The Resolution Law was implemented ahead of the EU Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 (as amended) (BRRD) due to the difficulties faced by Cypriot banks in 2013. The Resolution Law was replaced by legislation enacted on 18 March 2016, Law No 22(I)/2016 for the purposes of harmonising the measures available under Cyprus law with those set out in the BRRD.

No examiner can be appointed in respect of any credit institution to which the Business of Credit Institutions Law applies, nor in respect of any insurance undertakings to which the insurance services and other related issues law applies.

Government-owned enterprises (such as the Cyprus Telecommunications Authority, the Cyprus Electricity Authority, the Ports Authority, etc) are incorporated based on a separate law that is enacted for each such organisation. Normally, there are no provisions in the law regarding the liquidation of such organisations. In the event that the enterprise must for whatever reason be liquidated, the specific law relating to such an enterprise is amended and special provisions for liquidation are introduced therein.

In 2015, the revised Directive on Arrears Management was issued by the CBC regulating the arrears management framework and establishing a Code of Conduct between Authorised Credit Institutions (ACIs) and borrowers.

The purpose of this Directive is the application by all ACIs of efficient and effective strategies, policies, structures, procedures and mechanisms for the management of arrears and the attainment of fair and sustainable restructurings of credit facilities of borrowers with financial difficulties.

Recent amendments to Cap 113 introduced the Examinership procedure (see 2.1Overview of Laws and Statutory Regimes) which is essentially a rescue process allowing viable companies in financial distress to restructure and continue to trade rather than having to enter into liquidation.

A popular method of restructuring the liabilities of distress companies is that of a Scheme (see 2.1Overview of Laws and Statutory Regimes). Under a Scheme companies are able to promote an arrangement between their creditors and/or members (or any class of them) that, if agreed to by a majority in value in the case of creditors, or a majority in number in the case of members, as the case may be, and is subsequently sanctioned by the Court, will bind all creditors and/or members whether they consented to the arrangement or not.

A Scheme and the appointment of an examiner by a company can be considered as the typical procedures used for consensual restructuring. As already explained (see 2.1Overview of Laws and Statutory Regimes) a reorganisation plan is agreed based on the compromises made by both the company and its creditors, and it is subject to implementation. 

The restructuring regime of Cyprus has undoubtedly been modernised with the introduction of the Examinership concept, whilst Schemes are a popular tool which can be used for reaching objectives even outside a pure restructuring.

Insolvent companies cannot enter into transactions following the issuance of a winding-up order (unless they exit liquidation following an arrangement with their creditors). The liquidator may receive any necessary money using the assets of the company as security. Under Examinership further credit may be injected, under certain circumstances, if it is important for the successful implementation of the rescue plan. The examiner has the ability to certify certain new expenses as “expenses which have been duly incurred”. Creditors who have granted such facilities to the company are to be repaid before all other creditors (except creditors who have fixed charges).

New money can also be injected under a Scheme, depending on whether that further credit is vital for the continuation of the company and settlement of existing obligations.

A secured creditor, within ten days from the date of publication of the appointment of the examiner in the Gazette, submits to the examiner, the company and, where applicable, to a guarantor, a preliminary evaluation of the market value of the property that is subject to security.

Please see 2.1Overview of Laws and Statutory Regimes and 3.1 Restructuring Market Participants.

The most common type of security that is taken on immoveable (real) estate is the mortgage. Mortgages allow the secured creditors to sell, repossess the property or to proceed with a foreclosure procedure.

A common type of security taken over shares is a pledge. A pledge can also be taken on depositary receipts of companies.

A lien can also be taken on book debts of the company, calls made but not paid, on a ship, on goodwill, on a patent or a licence under a patent, on a trade mark or on a copyright or a licence under a copyright.

Retention of title is also used, ensuring that the title to the goods remains vested in the seller until certain obligations, usually payment of the purchase price, are fulfilled by the buyer.

Goods, equipment and company assets are most commonly secured by a floating charge, that is to say, a security interest that "floats" until an event of default occurs or until the company goes into insolvent liquidation, at which time the floating charge is said to "crystallise" and attaches to all the relevant assets. The floating charge has the advantage of allowing the debtor to deal with the assets in the ordinary course of business. In practice, floating charges are created over the whole business and undertaking of a company, present and future.

It is generally possible for the relevant security agreement to be enforced judicially and a judgment for the sale of the secured assets to be obtained. A mortgagee may sell, repossess the mortgaged property or proceed with a foreclosure procedure.

A debenture-holder may proceed with the appointment of a receiver/manager upon the crystallisation of the floating charge in accordance with the provisions of the floating charge.

Where either a receiver is appointed on behalf of the holders of any debentures of the company secured by a floating charge, or possession is taken by or on behalf of those debenture-holders of any property comprised in or subject to the charge, then, if the company is not at the time in the course of being wound up, the debts which in every winding-up are under the provisions relating to preferential payments to be paid in priority to all other debts shall be paid out of any assets coming into the hands of the receiver or other person taking possession as aforesaid in priority to any claim for principal or interest in respect of the debentures.

Where a property is disposed, the holder of the security shall have the same priority in respect of any property of the company directly or indirectly representing the property disposed of as he or she would have had in respect of the property subject to the security. The preferential creditors shall have no right or priority in respect of the proceeds emanating from the disposal of the secured property which shall be made of use for the repayment of the amounts secured by the charge but shall have a priority right with respect to any surplus.

Moreover, for as long as the company is under the protection of the court, under the provisions relevant to Examinership, where any claim against the company is secured by a mortgage, charge, lien or other encumbrance or a pledge of, on or affecting the whole or any part of the property, effects or income of the company, no action may be taken to realise the whole or any part of that security, except with the consent of the examiner. Similarly, no steps may be taken to repossess goods in the company’s possession under any hire-purchase agreement, except with the consent of the examiner.

Each charge must be delivered to the ROC for filing within 21 days after the creation of the charge or its assignment or its amendment or the change in its particulars.

A secured creditor within ten days from the date of publication of the appointment of the examiner in the Gazette, submits to the examiner, the company and where applicable, to a guarantor, a preliminary evaluation of the market value of the property subject to security.

Similarly, in relation to liquidation, a secured creditor within ten days from the date of publication of the winding-up order in the Official Gazette of the Republic of Cyprus, shall submit to the official receiver or the liquidator a preliminary evaluation of the value of the property subject to security. 

There is no distinction between foreign and domestic creditors under Cyprus Law.

The liquidator may sell assets that are not used as security for creditors. However, based on the recent amendments to Cap 113 in 2015, the liquidator has the power to dispose any secured property under certain circumstances as specified under the relevant provisions of Cap 113. Where a secured property is disposed, the holder of the security shall have the same priority in respect of any property of the company directly or indirectly representing the property disposed of as he or she would have had in respect of the property subject to the security.

In a winding-up, claims will rank in priority over any other unsecured claims save for preferential debts, which are mandatorily preferred by law and the order for the distribution of the assets will be as follows:

  • the costs of winding up, including disbursements and the fees of the liquidator and any other appointed persons;
  • the preferential debts as they are outlined in section 300 of Cap 113 (local and government taxes due within the 12 months before the insolvency, any unpaid wages and social security contributions for the employees and any unpaid compensation for personal injury during working hours);
  • the amounts secured by a floating charge;
  • the unsecured ordinary creditors;
  • the deferred debts (for example, sums due to the members of the company, such as dividends declared but not paid); and
  • any surplus will be distributed among the members of the company.

Secured creditors are payable out of the proceeds of sale of the assets subject to the charge. If the charge is a floating charge, the charge-holder ranks behind the preferential debts as shown above. If there is a surplus from the sale of the assets subject to the charge, that surplus becomes part of the general pool of assets. If there is a shortfall, the creditor concerned will have an unsecured claim for the shortfall.

In respect of any money paid under any such a charge, the landlord or other person shall have the same rights of priority as the person to whom the payment is made.

No payment may be made by a company, during the period it is under the protection of the court, unless it is recommended by the independent expert or authorised by the examiner, provided that the payment will be made for the purpose of keeping the company as a going concern. Utility service-providers (eg, electricity/telephone/water/internet) are paid for any expenses that are incurred during the protection period.

The liquidator may summon general meetings of the creditors or contributories for the purpose of ascertaining their wishes, and it shall be his or her duty to summon meetings at such times as the creditors or contributories, by resolution, either at the meeting appointing the Liquidator or otherwise, may direct, or whenever requested in writing to do so by one tenth in value of the creditors or contributories, as the case may be. The liquidator may apply to the court for a public examination of any person if requested by one half in value of the creditors of the company.

Any arrangement entered into between a company about to be, or in the course of being, wound up and its creditors shall, subject to the right of appeal, be binding on the company if sanctioned by an extraordinary resolution and on the creditors if acceded to by three fourths in number and value of the creditors.

Furthermore, in a VL procedure the liquidator may summon general meetings of the creditors or contributories for the purpose of ascertaining their wishes, and it shall be his or her duty to summon meetings at such times as the creditors or contributories, by resolution, either at the meeting appointing the liquidator or otherwise, may direct, or whenever requested in writing to do so by one tenth in value of the creditors or contributories, as the case may be.

The creditors’ right to vote is related to the value of their claims. Therefore, if they gather the necessary majority, they will have the power to lead the course of the proceeding.

Any creditor can promote legal proceedings against a debtor for debt recovery. Moreover, if the creditor has reason to believe that the assets may be disposed by the debtor in order to avoid debt recovery, an injunction may be sought in order to freeze the assets. No other pre-judgment procedures exist.

Creditors who wish to retrieve their debts must serve written proof of debt upon the liquidator within 35 days from the date of publication of the winding-up order in the Gazette of Cyprus. Such proof of debt sets out whether the creditor is or not a secured creditor. A secured creditor within ten days from the publication of the winding-up order shall submit to the official receiver or the liquidator (and where applicable to the guarantor) a preliminary evaluation of the secured property.

Where a creditor does not submit or serve a proof of debt within the prescribed period, he or she shall not have the right to take any judicial, legal or any other action against a guarantor in relation to the guarantee. The creditor notifies the guarantors in relation to the proof of debt and its acceptance of rejection by the official receiver or the liquidator.

Landlords do not have any bespoke rights or remedies in restructuring and insolvency proceedings.

See 4.4 Foreign Secured Creditors.

See 5.1 Differing Rights and Priorities.

See 4.2 Rights and Remedies and 5.1Differing Rights and Priorities.

See 2.1 Overview of Laws and Statutory Regimes and 3.2 Consensual Restructuring and Workout Processes.

The company during the Examinership period continues business as usual, under the restrictions and provisions contained in the law that will allow the examiner to assess and reorganise the financials of the company. During Examinership a moratorium is in place.

No proceedings for the winding-up of the company may be commenced, no receiver may be appointed, no attachment or execution may be put into force against the property of the company. Where any claim against the company is secured, no action may be taken to realise the security, except with the consent of the examiner. In addition, no steps may be taken to repossess goods in the company’s possession under any hire-purchase agreement.

Creditors are separated into different classes; secured and unsecured creditors.

The examiner may choose to appoint a committee of creditors to assist him or her in the performance of his or her functions. After the appointment of the committee, the examiner must meet the committee to transact such business as necessary. The committee cannot consist of more than five members, three of whom should be the largest unsecured creditors willing to serve.

Where a compromise or arrangement is proposed between a company and its creditors or any class of them, the court may order a meeting of the creditors or class of creditors to be summoned in such manner as the court directs.

If a majority in value of the creditors or class of creditors, as the case may be, present and voting either in person or by proxy at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the court, be binding on all the creditors or the class of creditors.

In the case of Examinership, 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 either in person or by proxy in favour of the resolution for the proposals.

During Examinership, proposals should not unfairly prejudice the interests of any party.

A member or creditor whose interests or claims will be impaired by the proposals may object to the confirmation by the court provided that the proposals were put forward for an improper purpose or the acceptance of them was obtained by improper means or where the proposals unfairly prejudiced the interests of the affected person.

See 6.2 Position of the Company.

Examinership may be utilised to reorganise a corporate group on a combined basis. Where the court appoints an examiner to a company it may appoint the examiner to be an examiner to a related company. In considering the extension of the protection (moratorium) afforded by Examinership to a related company, the court must have regard to whether the making of the order would be likely to facilitate the survival of either company, or of both, and the whole or any part of its undertaking as a going concern.

The examiner has the general right to handle and dispose of secured assets after applying to the court for such a permission.

Where, on a petition by the examiner the court is satisfied that the disposal with or without other assets of any property of the company which is subject to a security which, as created, was a floating charge or the exercise by the examiner of his or her powers in relation to that property would be likely to facilitate the survival of the whole or any part of the company as a going concern, the court may by order authorise the examiner to dispose the property or exercise his or her powers in relation to it, as the case may be, as if were not subject to the security.

Furthermore, any proposals for a compromise or a scheme should contain alternatives to the company in order to protect the business premises of the company.

See 6.7 Restrictions on a Company’s Use of or Sale of its Assets. Moreover, there are no specific provisions that restrict the use of ‘stalking horse’ bids as the sale process is at the discretion of the examiner. Credit bidding is permitted as no restrictions exist under the law; again this is at the examiner’s discretion.

Where any claim against the company is secured by mortgage, charge, lien or other encumbrance or pledge of, on or affecting the whole or any part of the property, no action may be taken to realise the whole or any part of that security except with the consent of the examiner. However, the examiner has the general right to handle and dispose of secured assets after he or she has obtained the relevant leave of the court.

See 3.3 New Money.

Distributions are made to creditors after the liquidator have processed all claims and have valued and sold, realised all assets of the company, including any possible set-offs and nettings that are applicable. Creditors will then receive compensation from the company, according to the priority of claims and according to the percentage that each creditor will receive given the capabilities of the company to make such payments.

The Companies Law contains adequate provisions that enable the court to make any order to amend or repudiate contracts in order to facilitate the process of reorganisation. The examiner has a wide range of power to amend existing contracts.

In deciding whether to confirm or refuse the proposals, the court may take into account whether the proposals are just and equitable, bearing always in mind that the company’s creditors should not find themselves in a more disadvantageous position by comparison to the position in which they would have been had the company gone into winding-up.

The liability of a guarantor is not released in Examinership, provided certain notification requirements as set out in the legislation are complied with.

Where the value of the property subject to security is equal to or exceeds the value of the debt due, the secured creditor may not take any measures against the guarantor in relation to the guarantee when the compromise comes into effect.

Moreover, a creditor cannot take any measures against a guarantor if that the guarantor is a natural person, the balance between the assets and liabilities of that guarantor, exempting his or her main residence, does not exceed the amount of EUR750.000 and the guarantee is for an amount of debt which is covered by a compromise that has come into effect, not exceeding EUR250.000 and for which the business premises of the company is subject to the security.

Creditors can exercise rights of set-off under certain provisions contained in Cap 113. Moreover, following the issuance of a winding-up order, the court may issue an order against any contributory to pay more money due from him or her to the company. It is also provided under Bankruptcy Law (which is applicable with respect to the liquidation of insolvent companies) that where mutual debts, mutual claims and mutual transactions exist between a creditor and the debtor, an account is taken of all the claims on either side and they are set off against each other and the difference is payable by the net debtor to the net creditor. The only exception is in the case of debts created by the debtor after the insolvency proceedings were initiated where the creditor was aware of the existence of those proceedings at the time of the creation of the debt.

Set-off or netting is further allowed on the basis of the Financial Collateral Law 43(I)/2004 (FCAL), which provides that on the occurrence of an enforcement event, the collateral taker shall be able to realise any financial collateral provided under and subject to the terms agreed in a security financial collateral arrangement. It further provides that if an enforcement event occurs while any obligation of the collateral-taker to transfer equivalent collateral under a title transfer financial collateral arrangement remains outstanding, the obligation may be the subject of a close-out netting provision and that a close-out netting provision can take effect in accordance with its terms, notwithstanding the commencement or continuation of winding-up proceedings or reorganisation measures in respect of the collateral provider or the collateral taker. Netting provisions are additionally protected under Directive 2001/24EC on the reorganisation and winding up of institutions and the respective national Business of Credit Institutions Laws and Co-operative Societies Law 22/1985.

Although the right of set-off is recognised and protected by both the BRRD and the Resolution Measures Law, an enforcement event within the meaning of the FCAL and Directive 2002/47/EC (which consequentially may trigger the exercise of set-off rights) may not be triggered solely on the basis of the implementation of a crisis-prevention measure or a crisis management measure provided that the substantive obligations under the contract, including payment and delivery obligations and the provision of collateral, continue to be performed. Nevertheless, provisions are included in both the BRRD and the Resolution Measures Law for the protection of set-off agreements, title transfer financial collateral arrangements, etc.

In addition, in a recent amendment to the FCA law, which was published on 20 October 2017, it has been specified that close-out netting provisions take effect in accordance with their terms irrespective of, inter alia, the provisions of part IVA of the Companies Law being the provisions that govern Examinership.

Where the court confirms proposals, those proposals shall be binding on all the creditors who are affected by them and shall also be binding on the company. The court may adopt any such orders for the implementation of its decision as it deems fit.

The shareholders of the company will only receive any surplus arising from liquidation provided that all creditors’ claims have been settled, unless there are outstanding loans provided to the company by the shareholder.

See 2.1 Overview of Laws and Statutory Regimes.

The liquidator has the power to sell the real and personal property and things in action of the company by public auction or private contract, with power to transfer the whole thereof to any person or company or to sell the same in parcels. A purchaser of assets from a liquidator will receive good title.

There are no specific provisions that restrict the use of ‘stalking horse’ bids as the sale process is at the discretion of the liquidator.

In contrast with Examinership (see 6.15 Failure to Observe the Terms of Agreements), under liquidation there is no rescue plan; instead, there is a sale of assets and a distribution.

See 3.3 New Money.

There are no specific provisions. Each company is considered a separate legal entity and, as such, each company is subject to separate procedures.

When a winding-up order is issued by the court, it is the duty of the creditors and contributories to establish a committee of inspection.

The powers of the committee are the following:

  • determination of the remuneration of the liquidator;
  • the approval for the continuation of the business of the company;
  • the approval of the filing of actions or defences;
  • the demand that the liquidator submit to the committee of inspection a report on the procedure of the liquidation and the accounts;
  • the demand that the accounts of the liquidator be examined by independent accountants.

In CVL, the creditors at the meeting may appoint a committee of inspection consisting of not more than five persons and, if such a committee is appointed, the company may, either at the meeting at which the resolution for voluntary winding-up is passed or at any time subsequently in a general meeting, appoint a  number of persons as they think fit to act as members of the committee, not exceeding five in number.

The liquidator, having assumed control of the company, is entitled to sell any of the company’s assets that are not subject to security in the way he or she considers most advantageous (ie, auction, private contract).

The Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on Insolvency Proceedings (recast) (Recast Regulation) is applicable in Cyprus and, as such, where the foreign proceedings are capable of recognition under the Recast Regulation, they will be recognised in Cyprus. As from 1 February 2018, the Archive of the Insolvency Service of Cyprus has joined the e-Justice of the European Committee facilitating the cross-border insolvency proceedings.

Cyprus has not entered into any cross-border insolvency protocols that enable the court to co-ordinate insolvency proceedings with other countries. The co-operation between courts across EU Member States is provided for under Articles 41 – 43 of the Recast Regulation (see 8.1 Recognition or Relief in Connection with Overseas Proceedings). Cyprus is not a member of the UNCITRAL Model Law on Cross-Border Insolvency.

The Recast Regulation sets out comprehensive rules as regards recognition of main insolvency proceedings within the EU (see 8.1 Recognition or Relief in Connection with Overseas Proceedings and 8.2 Co-ordination in Cross-border Cases).

Foreign creditors are entitled to claim in the same way as domestic creditors.

A licensed insolvency practitioner may be appointed as a liquidator, examiner or receiver.

Liquidator

  • appointed under MVL, CVL and under involuntary liquidation proceedings. See 2.1 Overview of Laws and Statutory Regimes;
  • role is to gather all assets of the company, realising that property and distributing the proceeds among creditors; 
  • duties are codified in Cap 113 and acts in the interests of all creditors;
  • accountable to the court.

Examiner

  • appointed under Examinership. See 2.1 Overview of Laws and Statutory Regimes.
  • role is to present is a rescue plan for the financial reorganisation of a viable company with liquidity problems, aiming to keep the business alive and repay creditors within the agreed timeframes;
  • duties are codified in Cap 113;
  • accountable to the court.

Receiver

  • appointed by a debenture-holder upon the crystallisation of the floating charge in accordance with the provisions of the floating charge;
  • a receiver may also be appointed by the court following a relevant application by the debenture-holder or other creditors;
  • role is to seize assets and then resign once these assets have been sold for the benefit of the debenture-holder;
  • following receivership, a company may continue its business operation.

See 2.1Overview of Laws and Statutory Regimes and 9.2 Statutory Roles, Rights and Responsibilities.

Typical advisers can be insolvency practitioners, accountants, lawyers, evaluators etc, depending on the issues that may arise during the liquidation procedure.

Any advisers/professionals employed by the liquidator to assist/facilitate the liquidation procedure are to be paid out of the assets of the company.

The appointed adviser/professional must be licensed under the relevant legislation.

Such duties and responsibilities arise both under the relevant legislation and under the agreement made with the liquidator.

An insolvency process is itself a public process that affects the rights of several third parties that have contractual relations with the company or individual. Therefore, these rights cannot be enforced through an arbitration process that requires consent and is usually private. In addition, the courts have jurisdiction over corporate and individual insolvencies, and only the courts may order liquidations. In the event of a shareholder dispute that leads to an application for liquidation before a court, it may be possible to resort to arbitration if all parties consent, prior to the court ordering the liquidation of the company. In these cases, shareholders’ disputes may be arbitrated but, failing this, a liquidation order will not be issued by the arbitration tribunal or body.

See 11.1 Utilisation of Mediation/Arbitration.

See 11.1Utilisation of Mediation/Arbitration.

The Arbitration Law (Cap 4) governs the law of arbitration in Cyprus. The International Arbitration in Commercial Matters Law (101/1987) applies exclusively to international commercial disputes.

There are no provisions in the domestic legislation limiting the parties' autonomy to select arbitrators.

In general, the duty of the directors is towards the company as a whole and not to the creditors thereof and the court will generally respect the business decisions of the directors if taken after due consideration and without self-interest but to the benefit of the company as a whole. If, however, the company is insolvent or nearly so, the directors are under an obligation not to act in any manner that can be classified either as fraudulent trading or as a fraud on the creditors and owe the creditors a special duty to be careful not to put the company further into debt by questionable business decisions, especially decisions in which the directors may have a personal interest or discriminate against certain creditors.

If the company is near insolvency and does not have assets to cover all creditors’ claims if it is wound up, then the directors should not proceed with any trading which might further deteriorate the financial situation of the company. Moreover, any transaction that the company enters into within six months before the commencement of its liquidation may be deemed a fraudulent preference against its creditors and be set aside. Any person who benefited from fraudulent preference is obliged to repay the benefit he or she obtained therefrom and the same is considered to be surety of the company for an amount equal to the value of such a benefit. 

If, during liquidation, a person is proved to be involved in fraudulent trading or some other offence (as those prescribed under Cap 113), he or she may be found personally liable.

Breach of the duty of acting in good faith in the best interests of the company (fiduciary duty) and of the duty of skill and care will render a director personally liable to the company in damages or injunctive relief. It should be noted that the liability is to the company not to individual shareholders. It is therefore for the company (or its liquidator) to take the necessary action.

Chief Restructuring Officers are generally uncommon in Cyprus.

Even though there are no specific provisions under Cyprus law, the shadow directorship as a concept is recognised. Where a person, although not being appointed as a director, is acting as such and with the consent of the company, such transactions bind the company and that person may be found liable under certain circumstances (eg, fraudulent trading, preferential payments). 

The liability of the shareholder is limited to the issued share capital. The shareholders have no obligation whatsoever to pay what the company has to pay unless there is unpaid share capital.

Any transaction (including any conveyance, mortgage, delivery of goods, payment, execution or other act relating to property made or done by or against a company) that the company enters into within six months before the commencement of its liquidation may be deemed a fraudulent preference against its creditors and be set aside.

A preference is considered to be fraudulent if it is intended to put a creditor in a better position in the event of liquidation of the company that he or she would have been without such action. Cap 113 creates an obligation for all and any creditors who benefited from fraudulent preference to repay any benefit they obtained therefrom and the same are considered to be sureties of the company for an amount equal to the value of that benefit.

See 13.1 Historical Transactions.

The liquidator or any creditor may promote an application to set aside or annul transactions (see 13.1 Historical Transactions).

Where on an application by the examiner it can be shown to the satisfaction of the court that any property of the company of any kind whatsoever was disposed of either by way of conveyance, transfer, mortgage, security, loan or in any way whatsoever, whether by act or omission direct or indirect and the effect of such disposal was to perpetrate a fraud on the company, its creditors or members, the court may order any person who appears to have the use, control or possession of such property or the proceeds of the sale or development thereof to deliver it or pay a sum in respect of it to the examiner on such terms or conditions as the court sees fit. For as long as the company is under the protection of the court, the six-month period shall be suspended and any unexpired period thereof shall commence again from the date on which the company concerned shall cease to be under the protection of the court.

Valuations are of fundamental importance in insolvency and Examinership proceedings. In an Examinership, the independent expert's report is a required document that must be submitted to the court prior to the appointment of an examiner to illustrate to the ourt that the company has a reasonable prospect of survival.

In a disposal of assets by a liquidator, valuations provide useful estimations regarding the value of the assets that are going to be disposed. Secured creditors obtain valuations in order to set the value of the asset that is subject to security. 

Valuations can be requested by the liquidator within the framework of the insolvency procedure. In addition, a secured creditor may also request a valuation in relation to the secured asset.

See 14.1 Role of Valuations. Moreover, an evaluator must be licensed and a registered member in the Register of members of the Cyprus Scientific and Technical Chamber according to the Cyprus Scientific and Technical Chamber Law.

Patrikios Pavlou & Associates LLC

Patrician Chambers
332 Agiou Andreou Str.
3035 Limassol
Cyprus

+357 25 871599

+357 25 344548

info@pavlaw.com www.pavlaw.com
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Patrikios Pavlou & Associates LLC is a leading law firm based in Cyprus with over 55 years of experience in the local and international legal market. The team specialises in cross-border restructurings and complex insolvencies, including planning, counselling and litigation as well as transactional matters. The lawyers provide comprehensive advice in financial transactions involving securities and corporate law, litigation, liquidations, insolvencies, M&As, reorganisations and restructurings in Cyprus and abroad. Clients include local and international corporations, credit-providers, investors, high net worth individuals, financial institutions, committees, trustees and many others, varying from SMEs to the largest multinationals. Amongst others, the firm is currently advising a major Russian financial institution on the recovery of over USD1.5 billion in assets through liquidation and other out-of-court enforcement measures, in order to ensure asset recoveries for debt repayment.

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