Insolvency procedures are governed by the Cypriot Companies Law Act, Cap 113. Section 203 of the Law provides two methods of liquidation, namely:
• An involuntary liquidation by the court; and
• A voluntary liquidation, either by the company itself or by its creditors.
Insolvency is the procedure whereby a legal entity which has incurred debts and is unable to pay them is wound up, and the liquidator makes use of its assets in an effort to indemnify the creditors of the entity.
Involuntary/Compulsory Liquidation by the Court
A petition so as to demand the winding up of a legal entity may be filed by the company itself, by any contributor(s), by the Official Receiver or by any creditor(s).
According to section 211 of the Companies Law, Cap 113, a company may be compulsorily wounded up by the Court in any of the following circumstances:
1. the company has resolved by means of a special resolution that it should be wound up by the Court;
2. default is made in delivering the statutory report to the Registrar of Companies or in holding the statutory meeting;
3. the company does not commence its business within a year from its incorporation or suspends its business for a whole year;
4. the number of members is reduced below 1 (in the case of a private company) or in the case of any other Company, below 7;
5. the company is unable to pay its debts;
6. the Court is of the opinion that it is just & equitable that the company should be wound up.
For these purposes, a company is considered to be ‘unable to pay its debts’ when the company is indebted with a sum total exceeding €5.000, the concerned creditor has served the company (at its registered office) with a written notice demanding payment of the incurred debt due and the company failed to pay the sum due within three (3) weeks from the date the notice was served; when a judgment was executed against the company’s property but the execution failed to settle the debt; or, when the Court is satisfied that the company is unable to pay its debts when they become payable (section 212, Cap 113).
If a winding up order is made, a liquidator will be appointed by the Court to whom the administration and control of the company as well as its property will pass. The liquidator, subject to the powers granted to him by virtue of section 233, Cap 113, will have to secure that the assets of the company are distributed to all its creditors and to ensure that any remaining surplus is distributed to any person entitled to it.
When the above is effected, a petition for the final winding up of the company is filed by the liquidator to the Court which, at its absolute discretion, will issue an order for its final dissolution (section 260, Cap 113).
According to the Law, a company may be wound up voluntarily (a) when the period fixed for its duration by the Articles expires; (b) if the company so resolves by special resolution; or if the company resolves by an extraordinary resolution because it cannot, by reason of its liabilities, continue its business.
Upon concluding and mutually agreeing that it would be in their best interests to cease the existence of the company, its directors convene a General Meeting with the purpose of passing a resolution so as to place the company into voluntary liquidation.
The company may vote for liquidation by an ordinary resolution. Alternatively, a special or an extraordinary resolution is required for the Company’s voluntary liquidation, clarifying that it is impossible to continue conducting its business due to its liabilities or debts (section 261, Cap 113).
The insolvency procedure begins on the day the resolution is approved (section 263, Cap 113). In relation to the appointment of the liquidator, voluntary liquidation is sub-categorized as follows:
Members Voluntary Liquidation: The members of the company appoint the liquidator and the creditors have no say in this appointment. Such voluntary liquidation initiates if the company is able to settle all its incurred debts within a year and provided that the directors covenant by way of declaration to that effect before the passing of the resolution (section 266, Cap 113).
Creditors Voluntary Liquidation: The appointment of a liquidator lies with the discretion of the creditors who hold a meeting on the same day, or on the next, as the meeting at which the resolution to liquidate was passed. The creditors may accept the liquidator appointed by the members or appoint a different person (section 277, Cap 113).
By virtue of Section 286(1)(a), the liquidator has equal powers as those given to a liquidator in a compulsory insolvency defined herein above.
Upon liquidation, the assets of the company will be distributed in the following manner:
i. The overall costs of liquidation;
ii. The preferential debts;
iii. The secured creditors;
iv. The unsecured ordinary creditors; and
v. The deferred debts.
Any surplus will be distributed among the members according to their rights (section 300, Cap 113).
Our firm is frequently called upon for consultation, legal advice and representation in complex liquidation proceedings and has the expertise at handling the challenges facing companies and their key constituents in distressed financial situations. Our team is able to combine all the elements involved in complex restructurings, both contentious and non-contentious.