During these difficult times, both SMEs and mutli-national businesses face financial struggles including cash flow shortages and decreased revenue.
No one can underestimate the influence that such a crisis may have on the corporate world and economic stability of a country. And because no one is assured of how long the Covid-19 pandemic will threaten the world society, businesses kneel and easily declare liquidation. It is therefore increasingly important to inform entrepreneurs of the outcomes of declaring liquidation and more specifically which are the advantages and disadvantages of liquidation in Cyprus.
Why does a corporation declare liquidation?
To begin with, it is important to summarise the reasons a company will usually go into liquidation in Cyprus by giving some examples.
- Company A is a solvent organisation that wishes to declare liquidation in order to achieve the termination of a business in a harmonious manner. Members' voluntary liquidation will be the appropriate liquidation process to follow;
- Company B is an insolvent organisation and its directors will have no other choice but to declare liquidation. Creditor's voluntary liquidation will be the appropriate liquidation process to follow where the entity is unable to service its debt and payoff its creditors, implying that the rescue of the corporation is unachievable;
- Creditor X or Company C itself filed a petition of compulsory liquidation for Company C, because of the company's inability to pay its debts or the company's failure to continue its operations as normal. In such a circumstance the court will order compulsory liquidation.
The regulatory authority for such procedures in Cyprus is the Registrar of Companies and the insolvency procedures are governed by sections 261-274 of Chapter 113 of the Cyprus Companies Law.
What are the pros of going into liquidation for a limited company in Cyprus?
- There is no doubt that the liquidation procedure provided by the law is a useful cost-effective tool to close down a legal entity which is no longer able to continue trading. An insolvent company will usually close down without any complex issues and in an organised way. An entrepreneur, who after going through liquidation of his company, returns to financial stability and feels able to operate his own company again, will face no barrier when it comes to establishing a new company and continuing trade as normal;
- Although there is no independent statute on the matter of liquidation in Cyprus, the legal provisions on liquidation procedures are flexible, explicit and straightforward;
- Any creditor disputes with the company will come to an end given that when the company declares insolvent the liquidator (an insolvency licenced practitioner in Cyprus) undertakes the management of the company and any such disputes will be managed by the insolvency practitioner. Consequently, directors' responsibilities to deal with creditors are detached from the point of insolvency and onwards;
- At this stage, directors must be careful not to assume that every responsibility is removed from them. Once the company goes into liquidation, directors will carry the responsibility to cooperate with the liquidator and deliver the financial books or provide any other information they reasonably have for the purpose of assisting the practitioner's investigation and safeguarding the company's assets in the best interests of its creditors;
- When the company goes into liquidation, unpaid workers are able to claim their salary, leave pay and other rights from the cash flows received from the company's liquidated assets, but only after preferential debts and government taxes and duties are paid off. The high seniority of employee salaries, compared to ordinary creditors and shareholders, makes it more likely that employees do in fact get paid what there are owed.
What are the cons of going into liquidation for a limited company in Cyprus?
- The company will no longer be given the right to trade or use the same trading name for a different company that may be set up in the future;
- Consequently, the company's reputation will be significantly devalued, valuable assets will be used to settle the company's debts and any licences obtained will be useless in the future. Additionally, it is highly likely that during liquidation, the assets of the company, when sold, will fetch an amount much less than the actual market value of these assets. Therefore, any potential remaining value that could remain for the shareholders, after all other parties are paid, will either be significantly reduced or completely annihilated;
- The company's shareholders, directors and employees will be released without further rights against the company;
- The winding-up process can take from three to twelve months depending on the complexity of the case and the size of the company. Workers will be unable to claim redundancy before the procedure is finished;
- Given the different intricacies of the majority of liquidation cases, especially in the current market conditions and after the Covid-19 global crisis, the law is in need of change in Cyprus. A new insolvency regime needs to be introduced to serve the need of easily and swiftly resolving insolvency matters in future.
Our advice to current and prospective clients of A.G. Paphitis & Co. LLC, whether shareholders, directors or employees of companies which may or have already gone into liquidation is to always seek professional advice. Directors of such companies should always explore the possibility of reducing their personal liability with regards to the company's debts and liabilities as well as what their rights and responsibilities are after the company goes into liquidation. There are numerous questions to be raised by directors when their company goes into liquidation regarding how they should deal with a specific complex situation or which information they are obliged to provide to the insolvency practitioner upon request. Employees may seek independent legal advice on their pay claims and where they stand in relation to the unpaid salary, leave, notice or redundancy claims. A.G. Paphitis & Co. LLC is licensed to offer liquidation services but also to appoint liquidator as the firm's managing partner, Mr Angelos Paphitis, is a licensed insolvency practitioner since 2015.
Our team at A.G. Paphitis & Co. LLC is also able to assist in the formation of a new company and help clients, who have already gone through a liquidation process, on rebuilding their new company's reputation by administrating the company's legal matters.
The information provided by A.G. Paphitis & Co. LLC is for general informational purposes only and should not be construed as professional or formal legal advice. You should not act or refrain from acting based on any information provided above without obtaining legal or other professional advice.
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.