Economies globally are passing through severe turbulence. As if the adverse effects of the pandemic were not enough, the recent crisis in Ukraine and its financial consequences are causing increasing macro and microeconomic adversities. Cyprus is no exception to this situation, and it is expected that these circumstances will induce an increase in the cases of corporate failure. Cyprus's insolvency framework is relatively versatile in accommodating various corporate restructuring and insolvency forms. One of the mechanisms available is Receivership, on which the Supreme Court of Cyprus has quite recently issued a decision increasing the clarity in its application and, thus, its efficiency.
Receivership at a glance
A creditor holding a charge over assets can appoint a Receiver to realize the assets subject to the charge and discharge the debt out of the proceeds. If the charge is a floating charge covering all the company's assets substantially, the creditor can appoint a Receiver. In particular, debenture holders or other creditors of a company can apply to the court to order a Receiver to be appointed (section 336 of the Companies Law, Cap. 113). Alternatively, a secured creditor may appoint a Receiver under a specific power contained in the charge. Within seven days of appointing a Receiver, the appointer must notify the Registrar of Companies (section 97, Cap. 113) of the appointment. No voting thresholds apply, and no approvals are required.
The Court appoints a Receiver if it considers that the interests of the creditor(s) concerned require protection by the appointment of a Receiver, depending on the circumstances of the case (for example, whether the assets are in jeopardy). A Receiver appointment under a charge must be in compliance with the provisions of the charge.
The procedure applies to all Cyprus-registered companies apart from banks and insurance companies, which are subject to special procedures. The receivership's purpose is to recover the secured creditor's debt, and the secured creditor's recovery prospects are entirely determined by the value of the security in relation to the debt.
Receivership does not bring the existence of the corporate debtor to an end and therefore, it offers the best chance of the debtor continuing as a going concern. Once the Receiver has repaid the sum due to the appointer (or has concluded that it is uneconomic to continue the receivership), he/she will account to the appointer and the company and notify the Registrar of Companies under section 97, Cap. 113 that he/she has ceased to act.
The length of the receivership depends on the realization prospects of the company's property and assets. It also depends on any challenges to the appointment and acts of the Receiver that may be made by the company directors or other creditors, which may serve to delay the receivership process. A receivership can take months or years to conclude. It must also be noted that the appointment of a Receiver does not give any protection against recovery actions by creditors.
The extent of the Receiver's powers and the degree of supervision over him are set out in the document appointing him, which may be a court order or a charge. The Receiver can apply to the Court for directions in relation to any matter concerning the exercise of his/her powers (section 337, Cap. 113). This has been a point that has caused some contention; to what extent does receivership end the directors' powers of management over the assets encompassed by the court order or charge and place them in the hands of the Receiver?
Towards greater clarity; Aqua Sol Hotels Public Company Ltd V. Τράπεζας Πειραιώς (Κύπρου) Λτδ
Receiver vs. Board powers
The Supreme Court of Cyprus (the "Court") has recently issued a decision providing much-needed clarity on two matters concerning also the above question, in out-of-court receiverships. The question at first instance concerned whether the board of directors (the "Board") had the authority to register an application for setting aside a court decision issued in absentia. The first instance court answered in the affirmative, i.e., there was a remnant of power in the Board to do this.
In light of the general theoretical and case law deliberations, the question the Court was called to provide insight into was, who had the authority to defend court cases on behalf of the company; in particular, who could file a request for withdrawal of an in absentia decision, the Receiver or the Board of the appellant company?
As per the view of the Court and, according to the prevailing case law, with his appointment, the Receiver and Administrator receives the company assets, while the powers of the company and its directors to act concerning these assets diminish. If the charge, under which the appointment of the Receiver has been made, covers the entire property of the company, as in the case at hand, its directors essentially do not control its commercial activity (see Chatzirousou under his capacity as Receiver of the company Y. Liasides Developers Ltd (2011) 1 AAD 1703).
However, case law also accepts that the Board retains a balance of power, which was recognized in the case of Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd and Others  2 NSWR 782. This balance includes the authority to raise lawsuits against the bondholders who appointed the Receiver and Administrator.
In Newhart Developments Ltd v Co-op Commercial Bank Ltd  2 ALL ER 896, a controversial judgment, the power of a Receiver under a bond/charge to sue in the name of the company "does not divest the directors of the company of their power, as the governing body of the company, of instituting proceedings in a situation where so doing does not in any way impinge prejudicially upon the position of the debenture holders by threatening or imperiling the assets which are subject to the charge." At the same time, the Board continues to be in charge of duties imposed by law, such as preparing annual reports.
Finally, in Tudor Grange Holdings Ltd v Citibank NA  Ch 53, a distinction was made in relation to the (otherwise binding) Newhart case; in that particular case (Tudor), in contrast to Newhart, the subject of the litigation the directors decided to raise, could directly affect the property that was subject to the powers of the Receiver and the Administrator. The notion of this helpful distinction was further explained in Independent Pension Trustee Ltd v LAW Construction Co Ltd, 1997 S.L.T.1105 (1996): "It may be that in some circumstances, such as where there is a conflict of interest, a Receiver may in practical terms be disabled from exercising a right or power of the company. In such circumstances, the Board may be entitled to exercise that right or power. It may be that the decision in Newhart can be justified on that basis[...]".
In light of the above argument, the Court deemed that the representation of a company by the Receiver and its Administrator is exclusive, within limits set by the relevant charge, and agreed that the court of first instance was incorrect to conclude that there was a remnant power in the Board concerning the authority to file an application for setting aside an in absentia decision. Such authority was solely vested with the Receiver.
Thus, in this case, it was ruled that the Receiver has the power to take any action in the name of the appellant company and in arrangements or compromises that he considers to be in the latter's interest, including the filing of legal proceedings and litigation. The Court also included in the relevant set of arguments Article 340 Cap. 113, which imposes an obligation on a Receiver or Administrator appointed under a floating charge on the whole or substantially all of the company's assets to immediately notify the company about his appointment.
Serving the court application
On the issue of litigation procedure and the service of the court application, the Court was called to rule on whether the documents initiating a court case against the company must be served on the Receiver or any member of the Board. The Court recognized that this service is inextricably linked to the right of each party to be informed of the procedure. As indicated in jurisprudence, "the sole purpose of service is to notify the other party, to be informed and able to oppose what is sought against her "(Francescu v Grigoriou (2000) 1 AAD 1765).
The real and adequate notification of the defendant about the legal action against him is usually substantiated by the finding that he became aware according to the provided procedural ways (see XXX Hosan n. C & X FLASH RECYCLING LTD et al., Pol. Eph. E134 / 2014, date 21.4.2021). In this case, it has not been documented that the Receiver became aware; particularly when taking into consideration that the parties agree that the claim was not served on the Receiver nor the registered office of the appellant and that the Receiver was informed of the in absentia decision, a few days after its issuance, by one of the lawyers handling the claim for the defendants.
According to the Court, what matters here is that, while the appellant company at the material time was under management/administration, the action was not served on its agent, the Receiver, or its registered office, with consequent lack of knowledge of the procedure by the Receiver, who was the only person having locus standi to represent the company in the lawsuit.
Recent case law confirms that judicial acts suffering from a fundamental defect, such as in the present case, i.e. failure to deliver the action to the recipient or registered office of the appellant, are rendered defective and must be set aside (see also Manoli v Hellenic Bank (Financing) Ltd, PE 423/11, date 3.2.2017).
In both matters, the Court based its argument about the foundations of the above mentioned authority on whether the cases at hand a) fall in the scope of the receivership and b) whether they may be affected by the outcome of the court case. This is quite a solid background to capitalize on the wealth of relevant case law. It is undoubtedly quite efficient from a theoretical and also practical point of view to connect the question with the one of the scope of the bond/charge as per which the Receiver is appointed, as this is the ultimate legalizing factor and the basis on which the Receiver can deploy his operational "arsenal." A restrained approach could jeopardize the integrity of the receivership and put the interests of the creditors at risk. In relation to the service of the court application, given that, as explained above, the Receiver has the sole right to defend cases, any other option than him/her taking notice of the relevant documents should be rejected. Of course, even though the wide powers of receivers are confirmed, Board authority is not terminated, but this must be confined to the actions challenging the powers of the receiver.
These clarifications are expected to provide much needed certainty in this field and reduce frictions that cause delays in the relevant proceedings at a time when the importance of the latter becomes more significant day by day. In any case, parties should always seek specialized legal advice.
Originally published by International Financial Law Review.
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.