The Cyprus Companies Law recognizes three formal procedures for companies in financial difficulties:
A company in financial difficulties may decide to take a re-organizational plan which will/may involve the merger of two companies or it may involve the incorporation of a new company. This action may be taken in order to advance the chance of the company resolving its financial difficulties. Once the directors have approved the restructuring measures and they decide that the option of re-organization is indeed appropriate under the company’s circumstances, a petition to the court will be made for the approval of the plan and typically an order will be issued to that effect. This method of restructuring a company is not always suitable and will depend upon the severity of the financial difficulties the company is facing.
Winding up by the court:
The court may issue a liquidation order for the company and this will result from the presentation of a petition by either a creditor, the company itself, the Official Receiver or the Attorney General. The court will issue an order to wind up a company in the following situations:
a) A special resolution is made resolving that the company be wound up by the court.
b) The company is unable to pay its debts (Section 212, Cap. 113).
c) The court believes that it is just and equitable to wind up the company (Section 211).
d) The company does not commence business within 1 year of its incorporation or suspends its business for a year without giving notice of this intention or submitting a plan for the business to be restored.
Voluntarily winding up:
The directors take a decision that the company should be wound up and therefore proceed to terminate the company's existence. For this to happen, a special or an extraordinary resolution should be passed by the company in a general meeting, unless the articles of association of the company provide otherwise, stating that the company is unable to continue its business due to its liabilities (Section 261, Cap 113).
In the case of a company under reorganization, the creditors will claim their debts in the way that is prescribed in the reorganization agreement/order. There is no way to state definitively how this will occur, as each case will be different.
In a case whereby a liquidator is appointed, the creditors will send the company a formal claim in order to prove their debts. The creditors must send the liquidator proof of their claims. The liquidator is obliged to send forms of proof to every known creditor and the creditors must submit them back to him with all their proofs for any kind of claim they have, present or future. It is then the job of the liquidator to consider each of these and decide if he accepts, rejects or requires more information and details about certain claims. If a claim is rejected, the liquidator must give in writing the reasons to the creditor as to why he has rejected the claim. Only proved claims may be paid by the liquidator. An unsatisfied creditor may apply to the court if the liquidator did not accept the proof of his debt.
There is a hierarchy of priorities in the distribution and satisfaction of the creditors when a company enters into a voluntary arrangement or a re-organization plan. The creditors are paid according to the terms and conditions they have agreed and approved. It should be noted that the rights of the secured and preferential creditors remain intact. According to the Law, the ranking of claims in a company under an administration or liquidation are the following:
1) Costs of the winding up (this covers the costs of getting in the assets, the petition and the making of the statements of affairs as well as the liquidators remuneration and the expenses of the Committee of Inspection).
2) Any preferential debts (every local and government tax due, any unpaid wages and social security contributions due).
3) Secured creditors by a floating charge.
4) Unsecured creditors.
5) Any deferred debts such as sums due to members in respect of dividends declared but not paid.
6) Lastly, any remaining surplus will be distributed among the members in proportions based on their rights under the articles.
According to Section 220, Cap. 113, when a winding-up order has been made or a provisional liquidator has been appointed, no action or proceeding shall be proceeded with or commenced against the company except by leave of the court and subject to such terms as the court may impose.
According to Section 233, Cap. 113, the liquidator in a winding up by the court shall have the power to, amongst others, bring or defend any action or other legal proceeding in the name and on behalf of the company; to carry on the business of the company so far as may be necessary for the beneficial winding up thereof; to pay any classes of creditors in full; to make any compromise or arrangement with creditors or persons claiming to be creditors etc.
Dissolution of company
When the affairs of a company have been completely wound up, the court, if the liquidator makes an application in that behalf, shall make an order that the company be dissolved from the date of the order, and the company shall be dissolved accordingly.
Where a company has been dissolved with voluntary liquidation, the court may at any time within 2 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.
With regards to the strike off of the company, if a company or any of its members or creditors of that company suffers by the company having been struck off the register, the court, on an application made before the expiration of 20 years from the publication of the relevant notice for the strike-off in the Official Gazette of the Republic of Cyprus, if satisfied that the company was at the time of the striking off carrying on business, or was in operation, may order that the company is restored to the Register and the company shall be deemed to have continued its existence as if its name had not been struck off.
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