Cyprus: Cyprus Chapter Of Getting The Deal Through - Restructuring And Insolvency

1 What legislation is applicable to insolvencies and reorganisations? What criteria are applied in your country to determine if a debtor is insolvent?

Personal insolvency is governed by the Bankruptcy Law and the Bankruptcy Rules. Corporate insolvencies and reorganisations are governed by the Companies Law. Section 203 of the Companies Law provides two methods of winding up:

  • compulsory winding up, or winding up by the court; and
  • voluntary winding up, which may be either a members' winding up or a creditors' winding up.

Sections 198 to 201 of the Companies Law set out procedures for compromises with members and creditors, either within or outside formal insolvency proceedings, and for mergers and divisions of public companies.

Courts

2 What courts are involved in the insolvency process? Are there restrictions on the matters that the courts may deal with?

Personal insolvency proceedings are dealt with by the district court of the district in which the debtor's home or place of business is located. A petition to wind up a company must be presented to the district court in whose area the company's registered office is situated. The procedure commences with the filing of the bankruptcy petition (in the case of an individual) or petition for winding up (in the case of a company) in the appropriate court.

Excluded entities and excluded assets

3 What entities are excluded from customary insolvency proceedings and what legislation applies to them? What assets are excluded from insolvency proceedings or are exempt from claims of creditors?

There are no excluded entities, either in personal or corporate insolvency. The definition of 'debtor' given in section 3(2) of the Bankruptcy Law gives jurisdiction to the courts to adjudicate bankrupt Cypriots and foreign nationals residing in Cyprus. Bankruptcy proceedings can only commence if the debtor has committed one of the acts set out in section 3(1) of the Bankruptcy Law.

A company may be wound up following a court order in the following circumstances:

  • the company has by special resolution resolved that it is to be wound up by the court;
  • default is made in delivering the statutory report to the registrar 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 private company, to below two, or in the case of any other company, to below seven (subject to Law 2(I) of 2000, which provides that a company can be formed with only one shareholder);
  • the company is unable to pay its debts;
  • the court is of the opinion that it is just and equitable that the company should be wound up; or
  • the company is a Societas Europaea (SE) that no longer complies with article 7 of Council Regulation (EC) 2157/2001, which requires the registered office and head office of an SE to be in the same member state.

Special arrangements apply to insolvent banks and insurance companies.

Protection for large financial institutions

4 Has your country enacted legislation to deal with the financial difficulties of institutions that are considered 'too big to fail'?

The Resolution of Credit and Other Institutions Law of 2013 (Resolution Law) empowers the Central Bank of Cyprus, as Resolution Authority, together with the Minister of Finance and the Capital Markets Commission jointly to take the measures they consider necessary to achieve the following objectives:

  • ensuring continuity in the provision of critical banking or financial services;
  • preventing the creation or propagation of risks that could have possible adverse effects on the stability of the financial system in Cyprus or elsewhere;
  • safeguarding public confidence in the stability and smooth operations of the financial system;
  • protecting public funds by discouraging institutions from depending on public support;
  • protecting depositors covered by the Deposit Protection Fund;
  • minimising the costs of resolution for the taxpayer; and
  • safeguarding the public benefit and serving the public interest. The Resolution Law sets out the general principles that are to apply in the context of the adoption and implementation of resolution measures, as follows:
  • the shareholders of an institution under resolution will be the first to bear any losses resulting from the implementation of resolution measures;
  • the losses will then be borne by the creditors, in accordance with the order of priority of claims provided for in the Resolution Law, which follows the order applying to liquidations under the Companies Law;
  • except as otherwise provided in the Resolution Law, or if there are compelling reasons in the public interest, there is to be no discrimination between creditors of the same class;
  • the creditors of an institution under resolution may not be placed in a worse financial position as a result of the implementation of the resolution measures than they would had the institution concerned been put into liquidation instead;
  • the senior management of an institution under resolution may be replaced;
  • the senior managers of an institution under resolution are to bear losses commensurate, under civil or criminal law, with their individual responsibility for the failure of the institution;
  • any interference with property rights must comply with the provisions of the Constitution and the European Convention on Human Rights; and
  • any measures taken must be compatible with the EU legal framework regarding state aid and EU competition rules.

Secured lending and credit (immoveables)

5 What principal types of security are taken on immoveable (real) property?

The type of security most commonly granted over immoveable property is the legal mortgage. A mortgage does not constitute an estate in land but only a contractual right for the benefit of the mortgagee and a charge on the immoveable property. Mortgages or other charges over immoveable property must be registered with the Department of Lands and Surveys and, if given by a company, with the Registrar of Companies.

Secured lending and credit (moveables)

6 What principal types of security are taken on moveable (personal) property?

The security devices for moveables are the lien, the pledge and the floating charge.

A lien may be legal under common law or equitable. A common law lien is the right to retain possession of certain property belonging to another person until complete payment of a debt. This type of lien merely provides a possession right to the holder of the property until payment, not a right to sell or otherwise deal with the property and it is extinguished if the creditor gives possession to the debtor or any agent of the debtor.

An equitable lien does not require continued possession of the property and is superficially similar to a mortgage, the difference being that a mortgage is a right founded on contract, whereas an equitable lien arises from general principles of equity, which do not permit a person who has acquired property under a contract to keep it without payment.

A pledge is the bailment of moveables (typically goods or shares) as security for payment of a debt or performance of a promise, usually in the context of a loan of money in return for the delivery of possession to the lender. The lender has the power to sell but the general ownership of the goods remains with the borrower. The pledge must be in writing, made in the presence of two competent independent witnesses and signed by the pawnor.

A floating charge is a security interest over the assets of a company that 'floats' until an event of default is triggered or until the company goes into insolvent liquidation, at which time the floating charge crystallises and attaches to all of the company's assets. It gives the secured creditor two important remedies in the event of default. First, the creditor may crystallise the charge and then realise any assets subject to the charge as if it were a fixed charge. Alternatively, if the floating charge substantially encompasses all of the assets and undertaking of the company, the creditor may appoint a receiver to take control of the business with a view to discharging the debt out of income or selling off the entire business as a going concern. Mortgages over Cyprus ships must be supported by a deed of covenants entered into by the parties and must be registered with the Registrar of Cyprus ships or at a Cyprus consulate overseas.

Any charge, pledge or marine mortgage given by a company must be registered with the Registrar of Companies.

Sums due to a person, such as a legacy under a will, money to be received from the sale of property, an interest in trust funds and similar choses in action, may be assigned to a lender as security for an advance.

Other arrangements such as hire purchase and leasing are also common.

Retention of title or 'Romalpa' (after the English case of Aluminium Industrie Vaassen BV v Romalpa Aluminium Limited) clauses are frequently encountered, providing 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. In the event of the purchaser's insolvency the buyer may be able to recover possession of goods that have not been paid for. In Cyprus law, English law precedents after 1960 are highly persuasive and although retention of title clauses have not been tested in the Cyprus courts, it is likely that the courts would follow the English precedents, of which there are many.

Unsecured credit

7 What remedies are available to unsecured creditors? Are the processes difficult or time-consuming? Are pre-judgment attachments available? Do any special procedures apply to foreign creditors?

A creditor may bring an action for recovery of the debt in the district court where the debtor lives or has his or her principal place of business. Such actions can be protracted if the debtor files a defence. If the debtor owns certain assets and there is a risk that the debtor will dispose of them, the creditor can obtain an injunction to freeze them.

If the creditor has obtained a judgment against the debtor it can be enforced in various ways, namely by a writ of moveables, garnishee proceedings, registration of a charging order over the immoveable property of the judgment debtor or over chattels (eg, shares), a writ of delivery of the goods ordered to be delivered to the judgment creditor, a writ of possession of the land ordered to be delivered to the judgment creditor, a writ of sequestration and bankruptcy proceedings against the judgment debtor. Pre-judgment attachments are not available, and no special procedures apply to foreign creditors.

Generally as a last resort, the creditor may present a petition for bankruptcy or winding up.

Voluntary liquidations

8 What are the requirements for a debtor commencing a voluntary liquidation case and what are the effects?

A corporate debtor may enter into members' or creditors' voluntary liquidation. The directors decide that the company has no future and agree that it would be best to terminate its existence. Voluntary liquidations start with a resolution of the company. If the articles of association of the company provide for a fixed period for the duration of the company or specify that a certain event should occur for the winding up, only an ordinary resolution in a general meeting is needed. Otherwise, a special or an extraordinary resolution is necessary, resolving that the company should be voluntarily wound up.

A voluntary winding up is deemed to begin on the passing of the resolution. After the commencement of the winding up, the company may not carry on any business except that required for its winding up. Any transfer of shares, unless done with the approval of the liquidator, is void as it is an alteration in the status of the members.

In order to enter into a members' voluntary winding up the company must be able to pay all its debts, with interest, within a year and a majority of the directors are required to swear a statutory declaration to that effect prior to the passing of the resolution to wind up and deliver it to the Registrar of Companies. The liquidator is appointed by the members and, unless the company subsequently proves to be insolvent (in which case the liquidation is converted to a creditors' voluntary winding up), the creditors have no say in his or her appointment.

If the company is insolvent, the members' appointment of a liquidator is considered by a meeting of creditors held on the same or the following day. The creditors may accept the liquidator appointed by the members or appoint someone else, either to act in place of the liquidator appointed by the members or to act jointly with him or her.

Involuntary liquidations

9 What are the requirements for creditors placing a debtor into involuntary liquidation and what are the effects?

A petition for the winding up of a company may be presented by any creditor, including a contingent or prospective creditor. On hearing the petition, the court may dismiss it, adjourn it, or make any order that it deems fit. If a winding-up order is made, the liquidation will be deemed to have commenced at the time of presentation of the petition, unless a resolution has been previously passed for a voluntary winding up, in which case liquidation will be deemed to have begun with the passing of the resolution.

Any disposition of the company's property that takes place after the commencement of winding up and any transfer of shares or alteration in the status of the members of the company after the commencement of winding up will be void unless the court otherwise orders.

Voluntary reorganisations

10 What are the requirements for a debtor commencing a formal financial reorganisation and what are the effects?

Reorganisations may be formal or informal. Most reorganisations are informal, so there is no set procedure to be followed. Even in formal reorganisations the company will usually have agreed the arrangement in principle with its creditors before entering into the formal process.

Under section 198 of the Companies Law, where a compromise or arrangement is proposed between a company and its creditors or between the company and its members or any class of them, the court may, on application by the company or any creditor or member or, in the case of a company being wound up, by the liquidator, order a meeting of the creditors or of the members of the company to be summoned in such a way as the court directs. At this meeting, any compromise or arrangement passed by a majority in number representing three-quarters in value of the creditors or members present and voting will be binding on all the creditors or members and also on the company. In the case of a company being wound up, the compromise will also be binding on the liquidator and contributories of the company.

To have binding force such an order must be delivered to the Registrar of Companies for registration and a copy of every order must be annexed to every copy of the memorandum of the company issued after the order has been made. If no memorandum exists, then a copy of every order must be attached to every copy of the instrument comprising or defining the constitution of the company.

Involuntary reorganisations

11 What are the requirements for creditors commencing an involuntary reorganisation and what are the effects?

Although section 198 of the Companies Law allows for the possibility of a creditor initiating a reorganisation, reorganisations initiated by creditors are not typical. The procedure to be followed is as described in question 10.

Mandatory commencement of insolvency proceedings

12 Are companies required to commence insolvency proceedings in particular circumstances? If proceedings are not commenced, what liabilities can result? What are the consequences if a company carries on business while insolvent?

Any director of a company making a declaration of solvency for the purposes of a members' voluntary liquidation without having reasonable grounds for the opinion that the company will be able to pay its debts in full within the specified period will be liable to up to two years' imprisonment or a fine of up to €2,560. If the liquidator, once appointed, forms the opinion that the company will not be able to meet its obligations and pay all its debts within the specified period, he or she must call a meeting of creditors and supply them with full information regarding the company's financial position and affairs. From the date of that meeting, the winding up is converted from a members' voluntary winding up to a creditors' voluntary winding up.

Personal liability may only be imposed on directors in the event of fraudulent trading (ie, carrying on business with intent to defraud creditors). Because of the high standard of proof required, successful claims for fraudulent trading are extremely rare.

Cyprus law does not contain any wrongful trading provisions requiring directors to commence insolvency proceedings as soon as they know or ought to know that their company will be unable to pay its debts.

Doing business in reorganisations

13 Under what conditions can the debtor carry on business during a reorganisation? What conditions apply to the use or sale of the assets of the business? Is any special treatment given to creditors who supply goods or services after the filing? What are the roles of the creditors and the court in supervising the debtor's business activities? What powers can directors and officers exercise after insolvency proceedings are commenced by, or against, their corporation?

Any business carried on by a company during a reorganisation occurs outside any formal insolvency and the law offers no automatic protection in these circumstances. Any arrangements would be the subject of specific agreement between the company and the creditor or supplier in question. The effect of any form of liquidation is to vest the assets of the company in the liquidator. The directors' powers to deal with the assets cease. Similarly, the appointment of a receiver over an asset places the asset in the hands of the receiver, and the directors are no longer empowered to deal with it.

Stays of proceedings and moratoria

14 What prohibitions against the continuation of legal proceedings or the enforcement of claims by creditors apply in liquidations and reorganisations? In what circumstances may creditors obtain relief from such prohibitions?

In reorganisations there is no automatic stay of proceedings. In compulsory liquidations, under section 215 of the Companies Law, at any time after the presentation of a winding-up petition and before a winding-up order has been issued, the company or any creditor or contributory may, where any action or proceeding against the company is pending in any district court or the Supreme Court, apply to the court in which the action or proceeding is pending for a stay of proceedings. Where any other action or proceeding is pending against the company, the company or any creditor or contributory may apply to the court having jurisdiction to wind up the company to restrain further proceedings in the action or proceeding. The court in which such an action is brought may restrain the proceedings accordingly on any terms it thinks fit. Once a winding-up order has been made and a company is being wound up by the court, any attachment, sequestration, distress or execution put in force against the estate or effects of the company after the commencement of the winding up (which dates back to the presentation of the winding-up petition) is void (Companies Law, section 217) and no action or proceeding may be proceeded with or commenced against the company except by leave of the court and subject to such terms as the court may impose (Companies Law, section 220).

In voluntary liquidations creditors, even if they have obtained judgment, cannot enforce it against the company (Companies Law, sections 305 and 306).

Post-filing credit

15 May a debtor in a liquidation or reorganisation obtain secured or unsecured loans or credit? What priority is given to such loans or credit?

Under section 117 of the Bankruptcy Law, a bankrupt individual may not obtain any loan or credit of more than €17 without disclosing that he or she is an undischarged bankrupt. Such debts rank after all others and have no priority over the existing debts on the day of the receiving order.

An insolvent company may not enter into any further transactions after a winding-up order unless it exits from liquidation (for example, by successfully completing an arrangement with its creditors). However, the liquidator may raise money on the security of the assets of the company (Companies Law, section 233).

As noted earlier, the Cyprus reorganisation procedure is extremely flexible and further credit can be taken on whatever terms can be agreed.

Set-off and netting

16 To what extent are creditors able to exercise rights of setoff or netting in a liquidation or in a reorganisation? Can creditors be deprived of the right of set-off either temporarily or permanently?

Set-off is generally available to creditors, subject to the following restrictions.

Under section 204(g) of the Companies Law, a sum due to any member of a company in his or her capacity as a member by way of dividends, profits or otherwise is not deemed to be a debt of the company, but it may be taken into account for the purpose of the final adjustment of the rights of the contributories among themselves.

Under section 246 of the Companies Law the court may, at any time after making a winding-up order, make an order against any contributory for the time being on the list of contributories to pay any money due from him to the company. In making such an order the court may make, to any director or manager whose liability is unlimited, an allowance by way of set off of any monies due from the company on any independent dealing or contract with the company, but not any money due to him or her as a member of the company in respect of any dividend or profit.

Sale of assets

17 In reorganisations and liquidations, what provisions apply to the sale of specific assets out of the ordinary course of business and to the sale of the entire business of the debtor? Does the purchaser acquire the assets 'free and clear' of claims or do some liabilities pass with the assets? In practice, does your system allow for 'stalking horse' bids in sale procedures and does your system permit credit bidding in sales?

Under section 200 of the Companies Law the assets may be transferred on such terms as the court determines, including the release of charges on assets (section 200(2)). This gives great flexibility. Some potential or contingent liabilities will nevertheless pass with the assets, for example under the Transfer of Undertakings Law, in connection with the sale of the business and under environmental, tax or other public laws in the case of specific assets. Industry-specific restrictions may exist in certain regulated industries such as banking, insurance, transport and media.

Intellectual property assets in insolvencies

18 May an IP licensor or owner terminate the debtor's right to use it when an insolvency case is opened? To what extent may an insolvency administrator continue to use IP rights granted under an agreement with the debtor? May an insolvency representative terminate a debtor's agreement with a licensor or owner and continue to use the IP for the benefit of the estate?

There is no provision in the Bankruptcy Law or the Intellectual Property Rights Law of 1976, as amended, that enables the licensor or the owner of the IP to terminate the debtor's right to use it when an insolvency case is opened. Also, no provision is made in any law as to the right of an insolvency administrator to continue to use IP rights that are granted under an agreement with the debtor or in regard to the insolvency representative's right to terminate a debtor's agreement with an IP licensor to continue to use the IP for the benefit of the estate. Cyprus law is silent on the particular issues and the general approach taken is that the terms incorporated in the agreement entered into by the parties apply. The general principles of contract law apply and IP rights may be sold or transferred like other assets of the estate.

Rejection and disclaimer of contracts in reorganisations

19 Can a debtor undergoing a reorganisation reject or disclaim an unfavourable contract? Are there contracts that may not be rejected? What procedure is followed to reject a contract and what is the effect of rejection on the other party? What happens if a debtor breaches the contract after the insolvency case is opened?

Section 200 of the Companies Law gives the court comprehensive powers to make any appropriate order to facilitate a reconstruction, including the power to make provision for any persons dissenting from the arrangement. In practice, the preferred option would be to terminate the onerous contract by negotiation but if no agreement can be reached the company could apply to the court for an order setting out the terms for cessation. Industry-specific restrictions may exist in certain regulated industries such as banking, insurance, transport and media. The consequences of a debtor breaching a contract after the insolvency case is opened depend on the terms of the contract. Any claim would generally rank as unsecured.

Arbitration processes in insolvency cases

20 How frequently is arbitration used in insolvency proceedings? Are there certain types of insolvency disputes that may not be arbitrated? Will the court allow arbitration proceedings to continue after an insolvency case is opened? Can disputes that arise in an insolvency case after the case is opened be arbitrated with the consent of the parties? Can the court direct the parties to such disputes to submit them to arbitration?

Arbitration is rarely, if indeed ever, encountered in insolvency proceedings. According to section 5(1) of the Arbitration Law:

Where it is provided by a term in a contract to which a bankrupt is a party that any dispute arising out of this contract or in connection therewith shall be referred to arbitration, the said term shall, if the trustee in bankruptcy adopts the contract, be enforceable by or against him so far as it relates to any such dispute.

Section 5(2) provides that if the trustee in bankruptcy does not adopt the contract, the trustee or any other party to the agreement may apply to the court for an order directing that the matter in question be referred to arbitration in accordance with the agreement. There are no decided cases in which the court has allowed arbitration proceedings to continue after the commencement of insolvency proceedings.

As far as the limitations on the availability of arbitration procedures in insolvency cases are concerned, section 24 of the Arbitration Law provides for the time limit for commencing arbitration proceedings. Specifically, section 24(1) provides that the laws on limitation of actions apply to arbitrations as they apply to proceedings in the court. Section 24(7) provides that the laws on limitation of actions include any law or public instrument limiting the time within which any particular proceeding may be commenced.

Successful reorganisations

21 What features are mandatory in a reorganisation plan? How are creditors classified for purposes of a plan and how is the plan approved? Can a reorganisation plan release non-debtor parties from liability, and, if so, in what circumstances?

Notices of meetings to consider proposed arrangements under section 198 of the Companies Law must be accompanied by a statement explaining the effect of the compromise or arrangement, and in particular stating any material interests of the directors of the company – whether as directors, members or creditors of the company or otherwise – and the effect on these of the compromise or arrangement, insofar as it is different from the effect on the like interests of other persons.

Section 201C of the Companies Law sets out the details to be provided in the case of a reorganisation of a public company under section 201A. In general, full financial information must be provided on the proposed reorganisation, accompanied by reports from the company's advisers and an independent expert.

As noted in question 19, the court has wide powers to make any order facilitating the reconstruction, including the power to create releases in favour of third parties.

Expedited reorganisations

22 Do procedures exist for expedited reorganisations?

Section 200 of the Companies Law provides a mechanism for expedited or prepackaged reconstructions.

Unsuccessful reorganisations

23 How is a proposed reorganisation defeated and what is the effect of a reorganisation plan not being approved? What if the debtor fails to perform a plan?

If a proposed arrangement does not secure the requisite majorities, creditors are not bound and any creditor may petition for the winding up of the company. Creditors may also petition for winding up in the event that the debtor fails to carry out its obligations under the arrangement.

Insolvency processes

24 During an insolvency case, what notices are given to creditors? What meetings are held? How are meetings called? What information regarding the administration of the estate, its assets and the claims against it is available to creditors or creditors' committees? What are insolvency administrators' reporting obligations? May creditors pursue the estate's remedies against third parties?

Individual insolvency

In an individual bankruptcy, a general meeting of the debtor's creditors will be convened within 14 days of the receiving order being made. The purpose of the meeting is to allow the creditors to consider any proposal for a composition or scheme of arrangement that the debtor may make or to resolve to make the debtor bankrupt.

If the debtor proposes an arrangement with his or her creditors, a written proposal must be submitted to the official receiver, setting out the terms of the proposed arrangement, together with details of any proposed guarantors or any security offered.

On receipt of the proposal, the official receiver circulates it to creditors, together with his or her comments on the proposal and notice of the meeting to consider the proposal. The debtor must be present at this meeting and provide all requested information essential for the purposes of convening the meeting (Bankruptcy Law, section 23).

If the debtor's proposal is approved by a majority in number representing 75 per cent in value of the creditors who have proved their debts, it is deemed to have been accepted by the creditors and, subject to the court's approval, is binding on all creditors. If no arrangement is proposed by the debtor, or if the requisite majorities are not achieved, the court will adjudge the debtor bankrupt and his or her property will become available for distribution among the creditors (Bankruptcy Law, section 19). At the meeting, the creditors may appoint an appropriate person (who may or may not be a creditor) to act as trustee in bankruptcy. The creditors may also elect a committee of inspection of between three and five persons to assist and supervise the trustee in bankruptcy. Generally, creditors' rights are assigned to the trustee in bankruptcy and they may not take separate actions.

In the event of bankruptcy the debtor may be required to undergo a public examination, designed to elicit information on the debtor's assets and liabilities, and the events leading up to bankruptcy. The debtor is examined under oath and the court, official receiver and creditors may ask questions. The examination is concluded when the court is satisfied that the debtor has made full disclosure of his or her assets and of the circumstances of the bankruptcy. The official receiver may apply to the court to dispense with a public examination.

Corporate insolvency

Notices of the first meeting of creditors should be posted to the creditors not less than seven days before the date of the meeting and the meeting must be advertised once in the official gazette and once in two daily newspapers circulating in the district where the registered office of the company or its principal place of business is situated. As described in question 8, the meeting may accept or change the liquidator appointed by the members. The creditors may also establish a committee of inspection.

Enforcement of estate's rights

25 If the insolvency administrator has no assets to pursue a claim, may the creditors pursue the estate's remedies? If so, to whom do the fruits of the remedies belong?

Cyprus courts do not permit contingent fee arrangements and we are not aware of any cases in the past in which the remedies of an insolvent estate have been assigned to one or more creditors, though there would be no prohibition on this. Alternatively, it would always be open to creditors to provide the liquidator or trustee with a fighting fund to pursue a claim and this happens in some cases.

Creditor representation

26 What committees can be formed (or representative counsel appointed) and what powers or responsibilities do they have? How are they selected and appointed? May they retain advisers and how are their expenses funded?

In a bankruptcy or a liquidation a committee of inspection may be formed. The principal function of a committee of inspection is to act as a representative of the creditors (or, more rarely, the members) and give the trustee in bankruptcy or liquidator a means of consulting them. In addition, the committee generally fixes the trustee's or liquidator's remuneration.

The trustee in bankruptcy or the liquidator in a winding up by the court requires the approval of the committee of inspection to exercise certain of his or her powers, including:

  • bringing or defending any action or other legal proceeding in the name and on behalf of the debtor or company;
  • carrying on the business of the debtor or company;
  • appointing an advocate;
  • paying any classes of creditors in full;
  • making any compromise or arrangement with creditors or persons claiming to be creditors; and
  • compromising calls and liabilities to calls.

If there is no committee, the trustee or liquidator must obtain the sanction of the court. In a voluntary liquidation, the approval of the committee is required only for the last three of these powers.

The court has the power to decide on the composition of the committee in case of disagreement, and may make any order it considers appropriate regarding how it is to function.

Insolvency of corporate groups

27 In insolvency proceedings involving a corporate group, are the proceedings by the parent and its subsidiaries combined for administrative purposes? May the assets and liabilities of the companies be pooled for distribution purposes? May assets be transferred from an administration in your country to an administration in another country?

There is no provision in Cyprus law that provides for the combination of proceedings by the parent company and its subsidiaries for administrative purposes, nor for the aggregation of assets and liabilities. Each company is a separate legal entity and is subject to separate procedures.

Claims and appeals

28 How is a creditor's claim submitted and what are the time limits? How are claims disallowed and how does a creditor appeal? Are there provisions on the transfer of claims? Must transfers be disclosed and are there any restrictions on transferred claims? Can claims for contingent or unliquidated amounts be recognised? How are the amounts of such claims determined?

Proof of debt must be delivered to the official receiver, the trustee in bankruptcy of an individual or the liquidator of a company. The proof should be verified by affidavit and accompanied by a detailed statement of account and vouchers to substantiate it. All proofs are open to inspection by any creditor who has submitted a proof. Secured creditors are obliged to realise, value or surrender their security. The trustee or liquidator has the right to redeem the security at the creditor's valuation or may apply to the court for an order for realisation of the property comprised in the security. On receiving a proof, the trustee or liquidator must admit or reject it wholly or partially, or request further supporting evidence. The creditor must be notified in writing of the decision and any grounds for rejection of the proof. A creditor dissatisfied with the trustee's or liquidator's decision may apply to the court for a determination.

Interest ceases to accrue on the commencement of insolvency. Any default interest included in a claim is limited by the Liberalisation of Interest and Related Issues Law as amended.

When paying interim dividends, the trustee or liquidator must reserve funds to allow for likely debts that have not yet been proved and must notify all creditors, whether they have proved their debt or not, of his or her intention to pay a dividend.

Before paying a final dividend, the trustee or liquidator must notify all creditors of his or her intention and give them a final time limit (determined on a case-by-case basis by the court) to submit and prove their claim. There are no provisions dealing with the purchase, sale or transfer of claims. A claim acquired from a third party at a discount will rank at its full face value for dividend.

Modifying creditors' rights

29 May the court change the rank of a creditor's claim? If so, what are the grounds for doing so and how frequently does this occur?

There are a number of provisions in the Companies Law that may invalidate a charge granted by a company and remove the creditor's secured status. These are explained in question 36 .

Priority claims

30 Apart from employee-related claims, what are the major privileged and priority claims in liquidations and reorganisations? Which have priority over secured creditors?

The order for distribution of the assets in a winding up is as follows:

  • the costs of the winding up;
  • preferential debts;
  • any amount secured by a floating charge;
  • the unsecured ordinary creditors; and
  • any deferred debts, such as sums due to members in respect of dividends declared but not paid.

Claims of each succeeding class rank equally among themselves and abate in equal proportions if the assets are insufficient to meet them.

Preferential claims comprise:

  • all government and local taxes and duties due at the date of liquidation, having become due and payable within 12 months before that date and, in the case of assessed taxes, not exceeding in the whole one year's assessment; and
  • all sums due to employees including wages, accrued holiday pay, deductions from wages and compensation for injury.

In personal insolvency up to four months' rent is also preferential.

Employment-related liabilities in restructurings

31 What employee claims arise where employees are terminated during a restructuring or liquidation? What are the procedures for termination?

Contracts, including contracts of employment, are terminated by winding up. Employees will have claims according to their contracts and statute law, including claims for pay in lieu of notice and redundancy. Some elements are preferential (see question 30). Certain employee claims are safeguarded in reorganisations or business transfers (see question 34).

Pension claims

32 What remedies exist for pension-related claims against employers in insolvency proceedings and what priorities attach to such claims?

Retirement provision in Cyprus is generally made through an individual or collective 'provident fund', which is akin to a defined contribution arrangement. The question of actuarial deficiencies in pension funds does not therefore arise. Unpaid contributions to provident funds rank as preferential claims under section 300(1) of the Companies Law.

Environmental problems and liabilities

33 In insolvency proceedings where there are environmental problems, who is responsible for controlling the environmental problem and for remediating the damage caused? Are any of these liabilities imposed on the insolvency administrator, secured or unsecured creditors, the debtor's officers and directors, or on third parties?

The insolvency administrator (the liquidator or receiver as the case may be) will be responsible for dealing with environmental obligations as they arise. Section 304 of the Companies Law allows a liquidator to disclaim onerous property with the approval of the court. Similarly, a secured creditor may release any charge on onerous property. As yet there are no reported instances of these provisions being used to avoid environmental liabilities, such as a liability to clean up a contaminated site.

Liabilities that survive insolvency proceedings

34 Do any liabilities of a debtor survive an insolvency or a reorganisation?

In company arrangements, under section 200(1) of the Companies Law the court has a wide discretion to direct that where an application is made under section 198 for the sanctioning of a compromise or arrangement involving the transfer of the whole or any part of the undertaking or the property of any company concerned in the scheme to another company, the court may, either by the order sanctioning the compromise or arrangement or by any subsequent order, make provision for all or any of the following matters:

  • transfer to the transferee company of the whole or any part of the undertaking, and of the property or liabilities of any transferor company;
  • continuation by or against the transferee company of any legal proceedings pending by or against any transferor company; and
  • dissolution, without winding up, of any transferor company.

According to section 200(4) of the Companies Law, the expression 'property' includes property, rights and powers of every description, and the expression 'liabilities' includes duties.

Section 6 of the Law on the Safeguarding and Protection of Employees Rights in the Event of the Transfer of Undertakings, Businesses or Parts Thereof, of 2000 (the Transfer of Undertakings Law) provides that liabilities as regards employees remain with the insolvent transferor in the event of bankruptcy, liquidation or similar proceedings and are not transferred to a purchaser of the business or assets. Furthermore, any reorganisation must respect the rights of the employees of all the companies that participate in the reorganisation in accordance with the Transfer of Undertakings Law (section 201H of the Companies Law).

Distributions

35 How and when are distributions made to creditors in liquidations and reorganisations?

Distributions to the creditors should be made as soon as there are adequate funds in hand. The procedures are described in question 28.

Transactions that may be annulled

36 What transactions can be annulled or set aside in liquidations and reorganisations and what are the grounds? What is the result of a transaction being annulled?

There are various provisions in the Companies Law which may invalidate a charge granted by a company or any other disposition it has made or any debt incurred. These are as follows:

  • a charge that has not been properly registered is void against the liquidator and any creditor of the company (Companies Law, section 90(1)); and
  • any conveyance, mortgage, delivery of goods, payment, execution or other act relating to property made or done by or against a company within six months before the commencement of its winding up is considered to be a fraudulent preference against its creditors and invalid under section 301 of the Companies Law.

On the question of fraudulent preference, the court looks at the dominant or real intention and not at the result. The onus is on those who claim to avoid the transaction to establish what the debtor really intended and that the real intention was to prefer. The onus is only discharged when the court, after reviewing all the circumstances, is satisfied that the dominant intention to prefer was present.

A floating charge on the undertaking or property of the company created within 12 months of the commencement of winding up is valid only to the extent of any cash paid to the company at the time of or subsequent to the creation of and in consideration of the charge, unless it is proved that immediately after the creation of the charge the company was solvent (Companies Law, section 303). The onus of proving the company's solvency is on the holder of the floating charge. Solvency requires not only an excess of assets over liabilities, but also the ability to pay debts as they become due.

Proceedings to annul transactions

37 Does your country use the concept of a 'suspect period' in determining whether to annul a transaction by an insolvent debtor? May voidable transactions be attacked by creditors or only by a liquidator or trustee? May they be attacked in a reorganisation or a suspension of payments or only in a liquidation?

See question 36. Voidable transactions can be attacked by any creditor or the liquidator or trustee, but only in winding-up proceedings. In personal bankruptcy the Bankruptcy Law and the Fraudulent Transfers Avoidance Law contain provisions for the avoidance of certain settlements in which the suspect period may be up to 10 years depending on whether at the time of the transaction the debtor was able to pay his debts.

Directors and officers

38 Are corporate officers and directors liable for their corporation's obligations? Are they liable for pre-bankruptcy actions by their companies? Can they be subject to sanctions for other reasons?

Cyprus law does not contain any wrongful trading provisions requiring directors to commence insolvency proceedings as soon as they knew or ought to have known that the company would be unable to pay its debts. The principal way in which directors and officers may be made liable for the company's debts is under a claim for fraudulent trading as set out in section 311 of the Companies Law. Because of the high standard of proof required, successful claims for fraudulent trading are extremely rare.

Groups of companies

39 In which circumstances can a parent or affiliated corporation be responsible for the liabilities of subsidiaries or affiliates?

Each company is a separate legal entity and parent companies or associated companies are not liable for the debts of other group companies unless they have executed a guarantee or given security for their liabilities. If a person is proved to be involved in fraudulent trading under section 311 of the Companies Law, the court may make an order for him or her to be personally liable for the company's debts or to pay compensation. In the absence of severe misconduct such as this, however, there are no provisions for lifting the corporate veil.

Insider claims

40 Are there any restrictions on claims by insiders or non-arm's length creditors against their corporations in insolvency proceedings taken by those corporations?

Employees' claims for arrears of pay or holiday pay would normally rank as preferential under section 300(1) of the Companies Law. However, if the employee is a director (other than in a representative capacity) or shareholder the preferential status is lost.

Creditors' enforcement

41 Are there processes by which some or all of the assets of a business may be seized outside of court proceedings? How are these processes carried out?

As described in question 7, Cyprus law provides many of the 'self-help' remedies to creditors available under English law, including liens and seizure of assets to secure judgment debts. A creditor secured by a charge may appoint a receiver (or a receiver and manager if the charge is a floating charge) to take possession of the assets subject to the charge and realise them for the benefit of the appointor.

Corporate procedures

42 Are there corporate procedures for the liquidation or dissolution of a corporation? How do such processes contrast with bankruptcy proceedings?

A company may be struck off the Register under section 327 of the Companies Law. If it is dormant with no assets and liabilities, no formal liquidation procedure need be followed. The company may be restored to the register on application by an interested party up to 20 years after the date of dissolution.

Conclusion of case

43 How are liquidation and reorganisation cases formally concluded?

In a compulsory winding up, once the liquidator has distributed the funds in his or her hands and summoned a final meeting of the company's creditors, he or she may vacate office and obtain his or her release. Under section 260 of the Companies Law the company is dissolved from the date of the issue of the court order for its dissolution. The liquidator is required to forward a copy of the order to the Registrar of Companies within 14 days of its being made. On receipt of the notice, the Registrar records the dissolution of the company in his or her books.

In a voluntary winding up, the liquidator will call final meetings of the company's creditors for approval of his or her accounts. Within a week the liquidator will file his or her accounts and a return of the meetings with the Registrar of Companies. The company is deemed dissolved three months after the registration of the return.

After either type of liquidation, the court can restore the company to the register within two years if, for example, further assets are discovered that should be distributed to creditors.

International cases

44 What recognition or relief is available concerning an insolvency proceeding in another country? How are foreign creditors dealt with in liquidations and reorganisations?

Are foreign judgments or orders recognised and in what circumstances? Is your country a signatory to a treaty on international insolvency or on the recognition of foreign judgments? Has the UNCITRAL Model Law on Cross-Border Insolvency been adopted or is it under consideration in your country?

Foreign insolvency proceedings are recognised by Cyprus courts when those proceedings are taken in accordance with the law of the country of the company and there is no domestic law that prevents recognition. The appointment of a foreign liquidator will also be recognised and there is no need for the liquidator to apply for formal recognition. If there are simultaneous proceedings in Cyprus and abroad, the Cyprus courts will consider the local proceedings as subsidiary to the foreign proceedings. Foreign creditors can prove their claims in a liquidation in Cyprus under the normal procedure. In the event of concurrent liquidation of the same company in the foreign jurisdiction, a creditor who proved his claim in Cyprus will only receive a share in any distribution after any amount received in the foreign proceedings has been taken into account.

Generally, Cyprus courts will recognise judgments and orders made by courts in other jurisdictions where the Cyprus court considers that such judgments or orders have been properly made under the foreign law and that the foreign courts had the necessary jurisdiction. Cyprus is a contracting state to the European Convention on the Recognition of Certain Aspects of Bankruptcy (Law 36(III) of 1993). Contracting states to the convention are the members of the Council of Europe and, until now, no rules have been passed to govern its procedural enforcement.

COMI

45 What test is used in your jurisdiction to determine the COMI (centre of main interests) of a debtor company or group of companies? Is there a test for, or any experience with, determining the COMI of a corporate group of companies in your jurisdiction?

No reported case has yet been brought before the Cyprus courts to interpret COMI, so it cannot be said with any certainty how the Insolvency Regulation would be interpreted. It is expected, however, that the court would recognise the importance of creditors being clear about where they can pursue assets, and of the jurisdiction concerned having a reliable legal infrastructure.

Cross-border cooperation

46 Does your country's system provide for recognition of foreign insolvency proceedings and for cooperation between domestic and foreign courts and domestic and foreign insolvency administrators in cross-border insolvencies and restructurings? Have courts in your country refused to recognise foreign proceedings or to cooperate with foreign courts and, if so, on what grounds?

In principle, the court system allows cooperation between domestic and foreign courts and domestic and foreign insolvency administrators in cross-border insolvencies and restructurings, but there have as yet been no practical cases to test the efficacy of the procedures in practice.

Cross-border insolvency protocols and joint court hearings

47 In cross-border cases, have the courts in your country entered into cross-border insolvency protocols or other arrangements to coordinate proceedings with courts in other countries? Have courts in your country communicated or held joint hearings with courts in other countries in cross-border cases? If so, with which other countries?

No. Unlike most Commonwealth countries, Cyprus is not a party to the mutual assistance arrangements set out in section 426(4) and (5) of the UK Insolvency Act 1986.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Elias Neocleous
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.