Insolvency: Liquidation of a Cyprus Company
The legislation and procedure relating to winding up of legal entities is set out in the Companies Law, Cap.113 (the “Law”).
Under section 203 of the Law the two main types of winding up procedure are voluntary liquidation and liquidation by the court.
A. Voluntary Liquidation
A Cyprus company may enter into a members’ or creditors’ voluntary liquidation. In order to enter into a members’ (shareholders) voluntary liquidation, the company must be able to pay all its debts, with interest, within a year.
a) Procedure for voluntary liquidation
The liquidation procedure begins with the passing of a resolution of the company. If the articles of association provide for a fixed period for the duration of the company or specify that a certain event should occur for the liquidation, only an ordinary resolution in a general meeting is needed. If not, a special or an extraordinary resolution is required, resolving that the company should be voluntarily wound up.
The directors, or a majority of them, are required to swear a statutory declaration to the effect that they have made a full inquiry into the company’s affairs and that having done so, they have formed the opinion that the company will be able to pay its debts in full, together with interest at the official rate, within such period not exceeding 12 months from the commencement of the winding up, as may be specified in the declaration. The declaration must contain a statement of the company’s assets and liabilities as at the date before the making of the declaration.
In order for the declaration to have effect, it must be made within 5 weeks immediately preceding the date of the passing of the resolution for winding up and must be delivered, within 14 days, to the Registrar of Companies for registration.
Additionally the company must, within 14 days of the passing of the resolution, give notice of the resolution by advertisement in the Official Gazette. Failure to adhere to comply with this requirement renders the company and every officer of it who is in default liable to a fine.
It should also be noted that before company passes a resolution for a voluntary liquidation it must give written notice of the resolution to the holder of any qualifying floating charge.
b) The liquidator
The company in a general meeting must appoint a liquidator for the purpose of winding up the company’s affairs and distributing assets. The creditors have no say in this appointment.
On the appointment of a liquidator all the powers of the directors cease, except so far as the company in general meeting or the liquidator sanctions their continuance.
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 liquidation.
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.
c) Liquidation procedure
The liquidation procedure is deemed to have begun on the passing of the resolution. After the commencement of the liquidation, the company may not carry on any business except that required for its winding up.
The company shall, from the commencement of the winding up, cease to carry on its business, except so far as may be required for its beneficial winding up. However, the corporate state and the corporate powers of the company continue until the company is dissolved.
Any transfer of shares, not being a transfer made to or with the sanction of the liquidator and any alteration in the status of the company’s members, made after the commencement of the voluntary winding up, will be void.
By definition, creditors in a members’ voluntary liquidation must be paid in full within a year from the commencement of the liquidation. However, in certain case, realisation and distribution of residual assets to members and formal conclusion of the winding up may take longer. If the liquidation continues for more than one year the liquidator must convene annual meetings of members and present accounts before them. No consents and approvals are required.
As soon as the company’s affairs are fully wound up, the liquidator is required to make up an account of the winding up, showing how it has been conducted and how the company’s property has been disposed of.
The liquidator is required to call final meetings 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.
Within one week after the meeting, the liquidator must send to the Registrar of Companies a copy of the account.
The company is deemed to be dissolved three months after the registration of the return.
In the case where a company has been dissolved, with members voluntary liquidation, the Court may at any time within two years of the date of dissolution on an application being made for the purpose by the liquidator of the company or by any other person who appears to the Court to be interested, make an order, upon such terms as the Court thinks fit, declaring the dissolution to have been void.
d) Voluntary Liquidation under the supervision of the Court
When a resolution has been passed by the Company to wind up voluntarily, the court may make an order directing that the voluntary winding up shall continue, but subject to the supervision of the Court, and on such terms as the court thinks just.
B. Liquidation by the Court
A court petition requesting the winding up of a Company may be filed by the Company itself, by any shareholder, by the Official Receiver or by any creditor.
As set out by s.211 of the Law, a Company may be compulsorily wounded up by the Court in any of the following situations:
(a) the Company has resolved by means of a special resolution that it should be wound up by the Court;
(b) default is made in delivering the statutory report to the Registrar of Companies or in holding the statutory meeting;
(c) the company does not commence its business within a year from its incorporation or suspends its business for a whole year;
(d) the number of members, in the case of a private Company, is reduced below one, or, in the case of any other Company, below seven;
(e) the Company is unable to pay its debts;
A Company is considered as unable to pay its debts when
(i) the Company is indebted with a sum total exceeding €854, the concerned creditor has served the Company with a written notice demanding payment of the incurred debt due and the Company failed to pay the sum due within three (3) weeks from the date the written notice was served;
(ii) when a judgment was executed against the Company’s property but the execution failed to settle the debt; or
(iii) when the Court is satisfied that the Company is unable to pay its debts.
(f) the Court is of the opinion that it is just and equitable that the Company should be wound up.
If a winding up order is made, a liquidator will be appointed by the Court to whom the administration and control of the Company as well as its property will pass. In turn, the liquidator, subject to the powers granted to him by virtue of s.233 of the Law, will have to secure that the assets of the Company are distributed to all its creditors and to ensure that any remaining surplus is distributed to any person entitled to it. When the liquidation of the Company’s assets is fulfilled and every matter is settled, a petition for the final wind up of the Company is filed by the liquidator to the Court which, at its absolute discretion, will issue an order for its final dissolution.
a) Procedure for liquidation by the court
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.
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.
b) The liquidator
At the first meeting the creditors may accept or change the liquidator appointed by the members. The creditors may also establish a committee of inspection.
c) Liquidation procedure
Once the liquidation order is made, no action or proceedings can proceed with or commence against the company except by leave of the court and subject to such terms as the court may impose.
The general rule is that secured creditors may enforce their security. The extent to which secured creditors can enforce their security is dependent upon the value of their security. If the value of the security covers the debt which is owed to the creditor they will be fully satisfied and any remaining balance will be credited to the assets of the company and will be used by the liquidator to satisfy other liabilities of the company. If however the security does not cover the full amount of the debt then they will join the ranks of the unsecured creditors.
Once the liquidator has distributed the funds in his 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 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.
C. Ranking of Creditors’ claims
The claims of the creditors are satisfied in accordance with a priority ranking determined by the Law. The order of distribution of assets in a winding-up, whether through a court judgment or voluntarily is as follows:
1. The costs of the winding-up.
2. Preferential debts. Preferential debts, ranking equally, comprise of:
- all government and local taxes and duties due at the date of liquidation and having become due and payable within 12 months before that date and, in the case of assessed taxes, not exceeding one year’s assessment;
- all sums due to employees including wages, up to one year’s accrued holiday pay, deductions from wages (such as provident fund contributions) and compensation for injury;
- claims of employees who are shareholders or directors may not rank as preferential depending on the nature of the shareholding or directorship
3. Secured creditors.
4. Unsecured creditors.
5. Sums due to members in respect of dividends declared but not paid.
6. Any share capital of the company.
All claims in a particular ranking must be satisfied in full before payments can be made to creditors of a lower priority ranking. If the company’s assets are insufficient to satisfy all creditors of ranking, payments to such creditors shall be made on a pro-rata basis.
D. Personal Liability
Personal liability may only be imposed on directors in the event of fraudulent trading, namely carrying on business with intent to defraud creditors. However due to the high standard of proof required, successful claims for fraudulent trading are extremely rare. However, directors involved with a company that could potentially be unable to pay its debts should abstain from engaging in any transactions that could be considered having any element of an intention to defraud creditors.
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.
However, 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.
The Law describes a range of offences by officers of companies in the course of winding up including failure to cooperate with the liquidator, concealment of the company’s assets and falsification of accounts. Furthermore, if in the course of winding up 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 being 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.
E. Other information
Following either type of liquidation, the court can restore a Company to the register within two years if, for example, further assets are discovered which should be distributed to creditors.
It should also be noted that a Cyprus company may apply to the Registrar to be struck off the register if the company is not trading, has no assets or liabilities and no creditors (or the creditors have been notified and do not object to the strike-off), and an affidavit to this effect is sworn before the Cyprus courts by the directors. However, any shareholder, creditor or liquidator can apply to restore the company to the register for up to 20 years after its date of strike-off.
The time frame for the liquidation process depends on a variety of factors including how well organised and up to date the records of the individual Company are, the existence of creditors or litigation procedures etc.
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Theodorou Law Firm is a Cyprus law firm with Cyprus lawyers and other legal experts on legal matters involving Cyprus law, EU law and international law. The above should be used as a source of general information only. It is not intended to give a definitive statement of the law.