Cyprus: Insolvency Q&A

Legislation

1. What legislation is applicable to bankruptcies and liquidations?

Personal bankruptcy is governed by the Bankruptcy Law, Cap 5 and the Bankruptcy Rules, Cap 6. Corporate insolvencies and reorganisations are governed by the Companies Law, Cap 113. Section 203 of the Companies Law provides two methods of winding up, namely:

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

Excluded entities

2. Are any entities are excluded from bankruptcy proceedings? If so, what legislation applies to them?

The definition of a debtor given in section 3(2) of the Bankruptcy Law gives jurisdiction to the courts to adjudicate bankrupt all persons residing in Cyprus, whether Cypriot or not, provided they have committed one of the acts of bankruptcy set out in section 3(1) of the Bankruptcy Law.

The winding-up procedures set out in the Companies Law apply to all Cyprus-registered companies apart from banks and insurance companies, which are subject to special procedures under the relevant legislation. A company incorporated outside Cyprus which is carrying on business in Cyprus or which having carried on business in Cyprus ceases to do so may be wound up by the Court, notwithstanding that it has been dissolved or otherwise ceased to exist as a company by virtue of the laws of the country in which it was incorporated (section 362, Companies Law).

Courts

3. What courts are involved in the insolvency process? Are there restrictions on the matters that the court can deal with?

Bankruptcy proceedings are dealt with by the district court of the district in which the debtor's home or business premises are located. The procedure begins with the filing of the bankruptcy petition in the appropriate court. A petition to wind up a company must be presented to the district court in whose area the company’s registered office is situated.

Voluntary liquidation

4. What are the requirements for a company to commence a voluntary liquidation? What are the effects of liquidation?

The directors resolve that the company has no future and agree that it would be best to terminate its existence and convene a general meeting for the purpose of passing a resolution to place the company into voluntary liquidation. An ordinary resolution is sufficient if the company's articles of association provide for a fixed period for the duration of the company or specify that it may be wound up in a certain event. Otherwise a special or an extraordinary resolution is necessary.

The voluntary winding up begins on the passing of the members’ resolution. Thereafter, the company may not carry on any business except for the purposes of a beneficial winding up. No execution may be levied against the company’s property except with the consent of the court. Any transfer of shares or other alteration in the status of the members is void unless done with the approval of the liquidator.

There are two types of voluntary winding up, namely members' and creditors'.

  • In order to commence 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. 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 appointment.
  • If the company is insolvent the members' appointment of a liquidator is considered by a meeting of creditors held on the same day as the meeting at which the resolution to wind up was passed, or the next day. The creditors may accept the liquidator appointed by the members, or appoint someone else, either to act in his place or to act jointly with him.

Compulsory liquidation

5. What are the requirements for creditors to successfully place a company in compulsory liquidation? What are the effects?

A company may be compulsorily wound up by the court if:

  • it has resolved by special resolution to be wound up by the court;
  • default is made in delivering the statutory report to the Registrar of Companies 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 below one in the case of a private company or below seven in the case of any other company;
  • 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.

A petition for the winding up of a company may be presented by the company itself, by any creditor (including a contingent or prospective creditor), or by a member or contributory. The Official Receiver may present a petition against a company that is being wound up voluntarily.

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 been passed for a voluntary winding up, in which case liquidation will be deemed to have begun with the passing of the resolution. No action may be taken or continued against the company, or any execution levied, except with the consent of the liquidator or the court. 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.

Mandatory commencement of insolvency proceedings

6. Are companies required to commence insolvency proceedings in particular circumstances (to avoid personal liability to directors and officers or otherwise)? In what circumstances must companies do so? If proceedings are not commenced, what liabilities can result?

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 for up to 2 years' imprisonment or a fine of up to CY£ 1,500. If the professional liquidator is of the opinion that the company will not be able to meet its obligations and pay all its debts within the specified period, he must call a meeting of the company's creditors and supply them with full information. From the date of that meeting the winding up is converted from a members’ voluntary liquidation to a creditors’ voluntary liquidation.

Personal liability may only be imposed on directors in the event of fraudulent trading, namely 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 knew or ought to have known that the company would be unable to pay its debts.

Set-off and netting

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

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

Under section 204 (g) of the Companies Law a sum due to any member of a company, in his character of a member, by way of dividends, profits or otherwise shall not be deemed to be a debt of the company, but any such sum may be taken into account for the purpose of the final adjustment of the rights of the contributories among themselves. According to 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 money due to him from the company on any independent dealing or contract with the company but not any money due to him as a member of the company in respect of any dividend or profit.

8. Do any liabilities of a debtor survive insolvency so that they are enforceable against a purchaser of the debtor’s assets?

No. Section 6 of the Law regarding 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") specifically 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.

Bankruptcy processes

9. During a bankruptcy case, what notices are given to creditors? What meetings are held? What committees are or can be formed? What powers or responsibilities do these committees have? Can creditors initiate proceedings to pursue 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. 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 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 of any security offered.

On receipt of the proposal, the official receiver circulates it to creditors, together with his comments on the proposal and notice of the meeting to consider the proposal. The debtor must be present at this meeting and must provide all the 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% by 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. However, before the court will make an order approving the arrangement the debtor’s public examination must have been concluded. The public examination is designed to elicit information on the debtor’s assets and liabilities and on the events leading up to bankruptcy. The debtor is examined on oath and the court, the official receiver and the creditors may question the debtor. The examination is concluded only when the court is satisfied that the debtor has made full disclosure of his assets and of the circumstances of his bankruptcy.

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 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.

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 8 above, the meeting may accept or change the liquidator appointed by the members. The creditors may also establish a committee of inspection

Role of the committee

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. 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 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 of inspection is required only for the last 3 of these powers.

In addition, the committee generally fixes the trustee's or liquidator's remuneration.

Insolvency of corporate groups

10. In insolvency proceedings involving a corporate group, are the proceedings in respect of the parent and its subsidiaries combined for administrative convenience? May the assets and liabilities of the companies be combined into one pool for distribution purposes?

There is no provision in Cyprus law which 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 dealt with separately.

Modifying creditors’ rights

11. May the court change the priority of a creditor’s claim? If so, on what grounds? How commonly does this occur?

According to section 90(1) of the Companies Law, "every charge created after the fixed date by a company registered in the Republic of Cyprus and being a charge to which this section applies shall, so far as any security on the company’s property or undertaking is conferred thereby, be void against the liquidator and any creditor of the company, unless the prescribed particulars of the charge together with the instrument, if any, duly stamped by which the charge is created or evidenced, are delivered to or received by the Registrar of Companies for registration in manner required by this Law within twenty-one days after the date of its creation, but without prejudice to any contract or obligation for repayment of the money thereby secured, and when a charge becomes void under this section the money secured thereby shall immediately become payable".

Claims and appeals

12. How are creditors’ claims submitted and what are the applicable time limits? How are claims disallowed and how does a creditor appeal a disallowance? Are there any provisions that deal with the purchase, sale or transfer of claims against the debtor?

Proofs of debt must be delivered to the Official Receiver or the trustee in the case of bankruptcy or to the liquidator of a company. The proof of debt should be verified by affidavit and accompanied by a detailed statement of account and vouchers to substantiate the debt. All creditors' 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 he may apply to the court for an order for realization of the property comprised in the security.

On receiving a proof, the trustee or liquidator must admit it or reject it, whether wholly or partially, or require further supporting evidence. He must notify the creditor in writing of his decision, and of the grounds for any rejection of a proof.

A creditor who is dissatisfied with the trustee's or liquidator's decision may apply to the court for a determination.

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 intention to pay a dividend.

Before paying a final dividend the trustee or liquidator must notify all creditors of his 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 in the laws dealing with the purchase, sale or transfer of claims.

Priority claims

13. What are the major priority claims in liquidations? Which claims have priority over secured creditors?

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

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

Preferential claims comprise:

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

In bankruptcy, up to four months' rent also ranks as preferential.

Distributions

14. How and when are distributions made to creditors?

Distributions to the creditors should be made as soon as there are adequate funds in hand. The procedures are described in 12 above.

Voidable transactions

15. What transactions can be annulled or set aside in bankruptcies and liquidations? What are the grounds and what are the consequences 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 which it has incurred. These are as follows.

According to Section 301, 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 shall, in the event of the company being wound up, be deemed a fraudulent preference against its creditors and be invalid accordingly.

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.

According to section 303, where a company is being wound up, a floating charge on the undertaking or property of the company created within 12 months of the commencement of the winding up is invalid, unless the charge holder can prove that the company was solvent immediately after the creation of the charge the company was solvent, except to the extent of any cash paid to the company at the time of or subsequently to the creation of and in consideration of the charge.

In the case of personal bankruptcy certain antecedent transactions may be set aside at the trustee’s instance if they are to the detriment of the general body of creditors. A transfer of property from an insolvent debtor to a creditor, with a view to giving that creditor preferential treatment, made within three months prior to presentation of a bankruptcy petition against the debtor, is deemed fraudulent and void as against the trustee, who may recover the property for the benefit of creditors. The rights of a bona fide person who acquires title for value from the bankrupt or from a creditor of the bankrupt are not affected.

Voluntary settlements and transfers of property by the debtor in the two years leading up to bankruptcy may also be set aside at the instance of the trustee in bankruptcy. Voluntary settlements made by the bankrupt up to ten years prior to bankruptcy may also be voidable unless the beneficiaries can show that the bankrupt was able to pay his debts at the time the settlement was made, without the aid of the property transferred.

Directors and officers

16. Are corporate officers and directors liable for or can they be made to pay obligations owed by their companies such as amounts owed to government bodies?

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 and 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.

17. Do corporate directors and officers have any liability for pre-bankruptcy actions by their companies? Can they be made subject to sanctions or penalties for other reasons?

Sections 307 to 310 inclusive of the Companies Law describe a range of bankruptcy offences, including failure to cooperate with the liquidator, concealment of the company's assets and falsification of accounts, which result in criminal liability punishable by imprisonment for up to two years.

Furthermore, if in the course of winding up a company it appears that any person who has taken part in the formation or promotion of the company, or any past or present director, manager or liquidator, or any officer of the company, has misapplied or retained any money or property of the company or been guilty of any misfeasance or breach of trust in relation to the company, the court may compel him to repay or restore the money or property or any part thereof respectively with interest at such rate as the court thinks just, or to contribute such sum to the assets of the company by way of compensation.

Creditors’ enforcement

18. Are there processes by which some or all of the assets of a business can be seized outside court proceedings?

Cyprus law provides many of the "self-help" remedies to creditors available under English law, including liens and seizure of assets to secure judgement debts. In addition a secured creditor may appoint a receiver and manager to take possession of the assets subject to the charge and realise them for the benefit of the appointor.

Administrative procedures

19. Are there administrative procedures for the liquidation or dissolution of a corporation? How do they contrast with liquidation proceedings?

A company may be dissolved under section 327 of the Companies Law if it is dormant and has no assets and liabilities. No formal liquidation procedure need be followed. The company can be restored upon the application of an interested party for up to 20 years from the date of dissolution.

Conclusion of case

20. How are liquidations formally concluded?

In a compulsory winding up, once the liquidator has paid off the creditors, distributed the surplus (if any) and summoned a final meeting of the company’s creditors, he may vacate office and obtain his 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 must forward a copy of the order to the Registrar of Companies within 14 days of it being made.

In a voluntary winding up, the liquidator will call final meetings of the company’s creditors for approval of his accounts. Within a week he will file his accounts and a return of the meetings with the Registrar of Companies. Three months after the registration of the return, the company is deemed to be dissolved.

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

International cases

21. What recognition 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?

Foreign insolvency proceedings are recognised by courts in Cyprus when those proceedings are taken in accordance with the law of the country of in which the company is incorporated and there is no domestic law which prevents recognition. The appointment of a foreign liquidator will also be recognised and there will be no need for the liquidator to apply for formal recognition. If there are simultaneous proceedings both in Cyprus and abroad, the local courts will consider the domestic proceedings as subsidiary to the foreign proceedings. Foreign creditors can prove their claim 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, courts in Cyprus will recognise judgments and orders made by courts in other jurisdictions where they consider 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 this Convention are the members of the Council of Europe and, until now, no rules have been passed to govern its procedural enforcement.

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.

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