In Cypriot Law, insolvency insinuates the procedure whereby a legal entity or a Company which has incurred debts and is unable to pay them is wound up, and the liquidator makes use of its assets in an attempt to indemnify the creditors.
Insolvency procedures are governed by the Cypriot Companies Law Act, Cap 113. Section 203 of the Act provides two methods of liquidation, namely:
- a compulsory liquidation by the court; and
- a voluntary liquidation, either by the company itself or by its creditors.
Compulsory Liquidation by the Court
A petition so as to demand the winding up of the Company may be filed by the company itself, by any contributor(s), by the Official Receiver or by any creditor(s).
As set out by s.211 Companies Law, Cap 113, a Company may be compulsorily wounded up by the Court in any of the following situations:
- the Company has resolved by means of a special resolution that it should 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, in the case of a private Company, is reduced below one, or, in the case of any other Company, below seven;
- 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.
For these purposes, a Company is considered unable to pay its debts when the Company is indebted with a sum total exceeding €854 (£500), 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; when a judgment was executed against the Company’s property but the execution failed to settle the debt; or, when the Court is satisfied that the Company is unable to pay its debts. (s.212 Companies Law, Cap 113)
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 Companies Law, Cap 113, 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. (s.260 Companies Law, Cap 113)
Voluntary winding up is initiated provided the members pass on a resolution.
Inasmuch, upon concluding and mutually agreeing that it would be in their best interests to cease the existence of the Company, its directors convene a General Meeting with the purpose of passing a resolution so as to place the Company into voluntary liquidation. The Company may vote for liquidation by an ordinary resolution provided its Articles of Association encompass a fixed period as regards the Company’s lifetime or specify that it may be wound up in a certain event. Alternatively, a special or an extraordinary resolution is required for the Company’s voluntary liquidation, clarifying that it is impossible to continue conducting its business due to its liabilities or debts. (s.261 Companies Law, Cap 113)
The insolvency procedure begins on the day the resolution is approved. (s.263 Companies Law, Cap 113) In relation to the appointment of the liquidator, voluntary liquidation is subcategorized as follows:
- Members Voluntary Liquidation: The members of the Company appoint the liquidator and the creditors have no say in his appointment. Such voluntary liquidation commences if the Company is able to settle all its incurred debts within a year and provided that the directors covenant by way of declaration to that effect before the passing of the resolution. (s.266 Companies Law, Cap 113)
- Creditors Voluntary Liquidation: The appointment of a liquidator lies with the discretion of the creditors who hold a meeting on the same day, or on the next, as the meeting at which the resolution to liquidate was passed. Inasmuch, the creditors may accept the liquidator appointed by the members or appoint someone else. (s.277 Companies Law, Cap 113)
The appointed liquidator by virtue of Section 286(1)(a) has inasmuch the same powers as those given to a liquidator in a compulsory insolvency defined herein above.
The direct consequence of a voluntary liquidation is that, thereafter, the Company may not conduct any business except for the purposes of a beneficial liquidation. (s.264 Companies Law, Cap 113)
Upon liquidation, the assets of the Company will be distributed in the following order:
- The overall costs of liquidation;
- The Preferential debts (every local and government tax due, any unpaid wages and social security contributions due);
- The secured creditors;
- The unsecured ordinary creditors; and
- The deferred debts.
Any surplus will be distributed among the members according to their rights. (s.300 Companies Law, Cap 113)