Introduction

With extensive experience in representing clients in insolvency disputes exceeding the value of €2.5 billion, Economou & Co LLC is deeply familiar with the intricacies of Cyprus’ liquidation and insolvency laws.

Liquidation and insolvency are critical aspects of corporate law, particularly in Cyprus, where the legal framework is designed to address the complexities of winding up a company’s affairs. The Cyprus Companies Law, Cap. 113 (hereinafter referred to as “Cap.113”), governs the processes of liquidation and insolvency in Cyprus, providing a structured approach to dealing with insolvent companies or those that have decided to cease operations. This guide offers an overview of the types of liquidation available in Cyprus, the legal procedures involved, and the potential risks faced by directors during the liquidation process.

Types of Liquidation and Insolvency Procedures in Cyprus

In Cyprus, the liquidation of a company can occur through one of the following methods:

1. Winding Up by the Court
2. Voluntary Winding Up
3. Winding Up under the Supervision of the Court

Each method involves specific procedures and legal implications, depending on whether the company is solvent or insolvent, and whether the initiation of liquidation is voluntary or court-ordered.

Winding Up by the Court in Cyprus

Winding up by the Court is a process initiated when certain statutory grounds exist that justify the closure of the company. Section 211 of Cap.113 outlines the conditions under which the Cyprus courts may order the winding-up of a company, particularly in cases of insolvency. These grounds include:

1. the company has by special resolution resolved that the company be wound up by the court;
2. default is made in delivering the statutory report to the registrar or in holding the statutory meeting;
3. the company does not commence its business within a year from its incorporation or suspends its business for a whole year
4. the number of members is reduced, in the case of a public company, below seven. The Court shall grant to the company a sufficient in its judgment timeframe for the removal of the reason for winding-up, and shall proceed with the winding-up, only if the company either from the beginning declares inability to increase its number of members, or cannot increase it within the given timeframe;
5. the company is unable to pay its debts;
6. the Court is of opinion that it is just and equitable that the company should be wound up;
7. the SE fails to remedy the situation according to article 64 of Council Regulation (EC) No. 2157/2001 of 8 October 2001 concerning the Statute for a European Company.

In Cyprus, creditors frequently initiate winding up by the court as a means to recover debts from insolvent companies. The court’s involvement ensures that the liquidation process is conducted fairly, especially when the company is no longer able to meet its financial obligations.

Role of the Liquidator

Once a winding-up order is issued by the Cyprus courts, the liquidator takes charge of the company’s assets and liabilities. Section 231 of Cap.113 empowers the liquidator to assume custody of all property and things in action to which the company is entitled. This includes assets in Cyprus and abroad, as well as any shares held by the company in subsidiaries.

The liquidator’s actions are subject to the court’s oversight. Section 234(5) of Cap.113 allows any creditor or contributory to apply to the court if they are aggrieved by any act or decision of the liquidator. The court possesses broad powers to confirm, reverse, or modify the liquidator’s decisions, ensuring that the winding-up process is conducted fairly and transparently.

Voluntary Liquidation in Cyprus

Voluntary liquidation in Cyprus is a process initiated by the company itself, rather than by the court. Section 261 of Cap.113 specifies the circumstances under which a company may be wound up voluntarily. These include:

• Special Resolution: The company resolves by special resolution that it should be wound up voluntarily.
• Extraordinary Resolution: The company resolves by extraordinary resolution that it cannot continue its business due to its liabilities, and that it is advisable to wind up.

Voluntary liquidation can be further categorized into two types: members’ voluntary liquidation and creditors' voluntary liquidation. Both types of voluntary liquidation in Cyprus are governed by the provisions of Cap.113.

Members’ Voluntary Liquidation in Cyprus

A members’ voluntary liquidation occurs when a company is solvent and can pay its debts in full within a specified timeframe. Section 266(4) of Cap.113 outlines the requirement for a declaration of solvency, which must be made by the directors within five weeks before the resolution for winding up is passed. This declaration is a statutory requirement that confirms the company’s ability to meet its financial obligations.

If the liquidator, at any point during the winding-up process, believes that the company will not be able to pay its debts in full within 12 months, they are obligated to convene a meeting of the creditors. At this meeting, the liquidator must present a statement of the company’s assets and liabilities. Failure to comply with this requirement may result in personal liability for the liquidator and potential fines under Cyprus law.

Creditors' Voluntary Liquidation in Cyprus

Creditors' voluntary liquidation occurs when a company is insolvent and cannot pay its debts in full. Unlike members’ voluntary liquidation, this process does not require a declaration of solvency. Instead, the creditors play a more active role in the liquidation process, as they are directly affected by the company’s insolvency.

During a creditors' voluntary liquidation, the creditors have the right to appoint a liquidator and form a committee of inspection to oversee the liquidator’s actions. This ensures that the liquidation process is conducted in the best interests of the creditors.

Liquidation under the Supervision of the Court

Liquidation under the supervision of the Court in Cyprus is a hybrid process that combines elements of both voluntary liquidation and court-ordered liquidation. Section 293 of Cap.113 provides that when a company has passed a resolution for voluntary winding up, the court may order that the liquidation continue under its supervision.

This process allows the court to impose conditions and grant liberty to creditors, contributories, or other interested parties to apply to the court as needed. The court’s involvement ensures that the liquidation is conducted fairly and that the interests of all parties are protected.

Furthermore, according to s.295, a petition for the continuance of a voluntary winding up subject to the supervision of the Court shall, for the purpose of giving jurisdiction to the Court over actions, be deemed to be a petition for winding up by the Court.

Risks for Directors During the Liquidation Process

Directors of companies undergoing liquidation or insolvency in Cyprus face significant risks, especially if they have engaged in wrongful conduct or failed to fulfill their legal obligations. Key risks include:

1. Fraudulent or Wrongful Trading

Sections 307 and 309 of Cap.113 address the issue of fraudulent and wrongful trading. If it is found that the directors continued trading and incurring debts when they knew or should have known that the company had no reasonable prospect of avoiding liquidation, they may be held personally liable for the debts incurred during that period.

Directors found guilty of these offences can face severe consequences, including personal liability for the company’s debts and potential imprisonment. Section 307 of Cap.113 also provides that it shall be a defence if the accused provides that he/she had no intent to defraud and/or conceal the state of affairs of the company or defeat any of the provisions of the law.

2. Tax Challenges

During liquidation, tax authorities in Cyprus may closely scrutinize the company’s financial records to ensure that all tax liabilities are addressed. This may include verifying the accuracy and completeness of tax returns, ensuring that outstanding taxes are paid, and investigating potential tax avoidance or evasion. Directors must ensure that the company’s tax affairs are in order to avoid legal challenges and penalties.

3. Regulatory Compliance

Throughout the liquidation process, directors and shareholders must adhere to various legal and regulatory requirements. This includes fulfilling reporting obligations, maintaining proper accounting records, and complying with applicable laws. Failure to meet these obligations can result in fines and other legal consequences.

4. Creditor Challenges

Creditors may challenge the liquidation process if they believe their interests are not being adequately protected. They may object to the valuation of assets, the distribution of funds, or other aspects of the liquidation. Directors must work closely with the liquidator and creditors to ensure that the process is transparent and that all stakeholders’ interests are considered.

Conclusion

Understanding liquidation and insolvency in Cyprus requires a thorough understanding of the legal framework and the potential risks involved. Whether a company is undergoing a voluntary liquidation or facing a court-ordered winding up, the role of the liquidator and the potential oversight of the court are crucial in ensuring a fair and orderly process. Directors, in particular, must be aware of their responsibilities and the potential liabilities they may face during liquidation.

At Economou & Co LLC, we offer comprehensive legal services to guide you through the liquidation process, ensuring compliance with all legal requirements and protecting your interests at every stage. Our experienced team is equipped to handle complex liquidation cases, providing expert advice and representation tailored to your specific needs.