Insolvency 2020

Last Updated November 19, 2020

Cyprus

Law and Practice

Authors



Patrikios Pavlou & Associates LLC is a leading law firm based in Cyprus with over 57 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 firm's lawyers provide comprehensive advice in financial transactions involving securities and corporate law, litigation, liquidations, insolvencies, M&A, 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 recently advised 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.

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

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

  • The 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.
  • The Procedural Rules on the Insolvency of Natural Persons (PRPs) and DRO) of 2016.
  • The Insolvency Practitioners Law (L.64 (I)/2015).

In accordance with the records kept by the Department of Registrar of Companies and Official Receiver (ROC), there was an increase in voluntary liquidation (VL) proceedings from 1,144 in 2012 to 2,497 in 2017, followed by a decrease to 2,097 in 2019. Within the same period (2012–2019), involuntary liquidation (IL) proceedings were decreased from 133 to 67. 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).

COVID-19

As a result of COVID-19 the government of the Republic of Cyprus has implemented a number of restrictive measures, which have affected the normal operation of all public/governmental authorities, including the courts and the ROC.

As a corollary of this, some inevitable delays occurred in the commencement and completion of both IL and VL procedures (ie, publications in the Official Gazette, notification of certain documents to the ROC, convening of creditors’ meetings etc).

Because of the extraordinary situation caused by COVID-19, the financial position of many businesses has deteriorated while others have been led into insolvency.

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 is likely to 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 enters 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 has voting rights; and
  • a guarantor of the company.

Schemes of Arrangement (Scheme)

Moreover, Cap 113 provides the option of a scheme of arrangement 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 that floating charge. A receiver may also be appointed by the court following a relevant application by the debenture-holder or other creditors. His or her 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;
  • voluntary (members or creditors); or
  • under the supervision of the court.

Winding-up by 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;
  • a 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 be wound up; and
  • the Statute of the European Company (SE) fails to remedy the situation in accordance with Article 64 of 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;
  • if it is proven to the satisfaction of the court that the company is unable to pay its debts at the time these fall due (at the time they are payable) (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 it can be proven to the satisfaction of the court 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.

Voluntarily

A company may also be wound up voluntarily:

  • when the period, if any, for the duration of the company as stated by its articles of incorporation expires, or an event, if any, occurs, on the occurrences of which the articles provide that the company is to be dissolved, and the company has passed a resolution in a general meeting requiring the company to be wound up voluntarily;
  • if the company resolves by special resolution that the company be wound up voluntarily; or
  • 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 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.

Please see 2.1 Overview 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 creditors' voluntary liquidation (CVL).

Once a director has conducted the full due diligence on the company, that 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 12 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 establishing a framework for the recovery and resolution of credit institutions and investment firms (as amended) (Bank Recovery and Resolution Directive, 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 separate laws that are enacted for each such organisation. Normally, there are no provisions in these Laws 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 for borrowers with financial difficulties.

Recent amendments to Cap 113 introduced the examinership procedure (see 2.1 Overview 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 distressed companies is that of a scheme (see 2.1 Overview 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 relevant court, will bind all creditors and/or members whether they consented to the arrangement or not.

A scheme, or the appointment of an examiner by a company, can be considered as the typical procedures used for consensual restructuring. As already explained (see 2.1 Overview 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 that 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 the 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 that 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 2.1 Overview of Laws and Statutory Regimes and 3.1 Consensual and Other Out-of-Court Workouts and Restructurings.

The most common type of security that is taken on immoveable (real) estate is the mortgage. Mortgages allow the secured creditors to sell, to 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.

Real Estate

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.

Debentures

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

Secured Property

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.

Examinership

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.

Formalities

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 a change in its particulars.

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 is not, a secured creditor.

A secured creditor, within ten days from the date of publication of the appointment of the examiner in the Gazette, submits to that 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.

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 only 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, which 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.

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 and 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 that company if sanctioned by an extraordinary resolution and on the creditors if acceded to by three quarters 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 of 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.

Please see 4.2 Rights and Remedies and 5.1 Differing Rights and Priorities.

Please 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 and 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 that 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 an 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 their acceptance was obtained by improper means, or where the proposals unfairly prejudice the interests of the affected person.

Please 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 same to be the 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 (i) the disposal, with or without other assets, of any property of the company that is subject to a security that, as created, was a floating charge; or (ii) 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 authorise the examiner to dispose of the property or exercise his or her powers in relation to it, as the case may be, as if it were not subject to that 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.

Please see 6.7 Restrictions on a Company’s Use 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.

Please see 3.3 New Money.

Distributions are made to creditors after the liquidator has processed all claims and has 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, always bearing in mind that the company’s creditors should not find themselves in a more disadvantageous position in comparison to the position in which they would have been had the company been wound 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 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 that is covered by a compromise that has come into effect, not exceeding EUR250,000, and for which the business premises of the company are subject to the security.

Creditors can exercise rights of set-off under certain provisions contained in Cap 113. Under the Bankruptcy Law (which is applicable with respect to the liquidation of insolvent companies), where mutual debts, mutual claims and mutual transactions exist between a creditor and 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 may consequentially 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 FCAL, 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 Cap 113 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.

If the examiner is not able to enter into an agreement with the interested parties and any other persons concerned in the matter or formulate proposals for a compromise or scheme of arrangement in relation to the company concerned, he or she may apply to the court for a grant of directions in the matter and the court may, on such application, give such directions or make such order as it thinks fit including, if it considers it just and equitable to do so, an order for the winding-up of the company.

When a company receives government funds as a contribution towards partially covering its debts, and is late in making payment to any creditor for a period of three months, any protection given to it by its creditors according to the law shall be terminated and it shall be subject to enforcement measures by those creditors for the collection of its debts.

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.

Please 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.

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; and
  • the demand that the accounts of the liquidator be examined by independent accountants.

In a 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 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 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 (please 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 (please 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, an examiner, a receiver and an administrator.

Liquidators

The liquidator is appointed under an MVL, a CVL and under involuntary liquidation proceedings. Please see 2.1 Overview of Laws and Statutory Regimes.

His or her role is to gather all assets of the company, realising that property and distributing the proceeds among creditors. His or her duties are codified in Cap 113 and he or she must act in the interests of all creditors and be accountable to the court.

Examiners

The examiner is appointed under examinership. Please see 2.1 Overview of Laws and Statutory Regimes.

His or her role is to present 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. His or her duties are codified in Cap 113 and he or she must be accountable to the court.

Receivers

The receiver is appointed by a debenture-holder upon the crystallisation of the floating charge in accordance with the provisions of that floating charge. A receiver may also be appointed by the court following a relevant application by the debenture-holder or other creditors.

His or her role is to seize assets and then resign once those assets have been sold for the benefit of the debenture-holder. Following receivership, a company may continue its business operation.

Please see 2.1 Overview of Laws and Statutory Regimes and 9.2 Statutory Roles, Rights and Responsibilities of Officers.

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 these are taken after due consideration, without self-interest and 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 they 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.

Offences by Directors of Companies in Liquidation

Under Section 307 of Cap 113, if the company is near insolvency and does not have assets to cover all creditors’ claims, and if it is wound up, then the directors should not proceed with any trading which might further deteriorate the financial position of the company. Even though, under Section 307 of Cap 113, such a director might be held liable if he or she proceeded with a fraudulent transfer within twelve months prior to the commencement of the liquidation of the company, such limitation period (for a claim based on tort) can be extended up to six years prior to the commencement of the liquidation.

Section 307 of Cap 113 includes circumstances which constitute fraudulent trading or a fraud on the creditors, which are otherwise offences under the law. If a liquidator is appointed to a company following a successful winding-up petition and it appears that in the course of the winding-up of the company the directors carried on the company’s business with an intent to defraud its creditors or for any other fraudulent purpose, any creditor, or the liquidator, may apply to the court requesting that the directors of the company contribute personally into the company’s assets so as to enable the liquidator to make a distribution to creditors for their losses. The term "director" extends to de facto directors (ie, people who assumed the role of director without being appointed) and shadow directors.

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 a surety of the company for an amount equal to the value of such a benefit. 

Frauds by Directors of Companies That Have Gone into Liquidation

According to Section 309 of Cap 113, if any person, being at the time of the commission of the alleged offence an officer of a company that is subsequently ordered to be wound up by the court or subsequently passes a resolution for voluntary winding-up, (i) has by false pretences or by means of any other fraud induced any person to give credit to the company; (ii) with intent to defraud creditors of the company, has made or caused to be made any gift or transfer of or charge on, or has caused or connived at the levying of any execution against, the property of the company; (iii) with intent to defraud creditors of the company, has concealed or removed any part of the property of the company since, or within two months before, the date of any unsatisfied judgment or order for payment of money obtained against the company, he or she shall be guilty of an offence and shall be liable on conviction to imprisonment not exceeding two years.

Prosecution of Officers and Members of a Company

Under Section 313 of Cap 113, if it appears to the court in the course of a winding-up by, or subject to the supervision of, the court that any past or present officer, or any member of the company has been guilty of any offence in relation to the company for which he or she is criminally liable, the court may, either on the application of any person interested in the winding-up, or on its own motion, direct the liquidator to refer the matter to the Attorney-General. If, where any matter is reported or referred to the Attorney-General under this section, he or she considers that the case is one in which a prosecution ought to be instituted, he or she shall institute proceedings accordingly, and it shall be the duty of the liquidator, and of every officer and agent of the company past and present (other than the defendant in the proceedings), to give him or her all assistance in connection with the prosecution that they are reasonably able to give.

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.

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 than 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.

Furthermore, under Cap 113, certain transactions may be set aside when an insolvent party goes into liquidation. Principally these are:

  • where the transaction is a fraudulent preference;
  • where the transaction is a voidable floating charge;
  • in cases of disclaimer of onerous contracts; and
  • in cases of fraudulent transfer.

In each case a liquidator may apply to court to have the transaction set aside. If security were set aside under any of the heads referred to above, the creditor would prove their debt in the course of winding up as an unsecured creditor.

Please see 10.1 Duties of Directors and 11.1 Historical Transactions

The liquidator or any creditor may promote an application to set aside or annul transactions. Please see 10.1 Duties of Directors and 11.1 Historical Transactions.

Special reference should also be made to the Fraudulent Transfers Avoidance Law, Cap 62 (Cap 62), under which any judgment creditor may initiate proceedings against the company on the basis of an alleged fraudulent transfer.

Under Section 1 of Cap 62, “every gift, sale, pledge, mortgage or other transfer or disposal of any movable or immovable property made by any person with intent to hinder or delay his creditors or any of them in recovering from him, his or their debts shall be deemed to be fraudulent, and shall be invalid as against such creditor or creditors; and, notwithstanding any such gift, sale, pledge, mortgage or other transfer or disposal, the property purported to be transferred or otherwise dealt with may be seized and sold in satisfaction of any judgment debt due from the person making such gift, sale, pledge, mortgage or other transfer or disposal.”

Furthermore, Section 3 of Cap 62 provides that “no sale, mortgage, transfer or assignment made in exchange for money or other property of equivalent value shall be voidable under the provisions of this Law, unless the purchaser, mortgagee, transferee, or assignee shall be shown to have accepted it with knowledge that such sale, mortgage, transfer, or assignment, was made by the vendor, mortgagor, transferor, or assignor with intent to delay or defraud his creditors.”

Section 4 of Cap 62 sets out the procedure that must be followed in order to set aside such a transaction. Where any gift, sale, pledge, mortgage or other transfer or disposal of any movable or immovable property is deemed to be fraudulent under the provisions of Section 3 above, “whether made before or after the commencement of an action or other proceeding wherein the right to recover the debt has been established may be set aside by an order of the Court, to be obtained on the application of any judgment creditor made in such action or other proceeding, and to the Court before which such action or other proceeding has been heard or is pending”.

It should be noted here that the above wording is broad enough, and has been interpreted by case law to be broad enough, to cover any transaction/disposal of asset that takes place at a time that the company/debtor could predict that a claim/action could be promoted against it. Therefore, the time that has elapsed before the judgment was issued in favour of the creditor, or the petition for winding-up was filed, is of no importance per se. What is important is the time that the debt became due/payable and/or the time at which the debtor defaulted in paying the debt. After such default takes place it can be said that the debtor can predict/expect steps to be taken against it or even before actual default, if the debt is due and the debtor is in no position, or has no intention, to fulfil its contractual obligations.

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.

Patrikios Pavlou & Associates LLC

Patrician Chambers
332 Agiou Andreou St
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 57 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 firm's lawyers provide comprehensive advice in financial transactions involving securities and corporate law, litigation, liquidations, insolvencies, M&A, 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 recently advised 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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