In brief: liquidation and reorganisation processes in Cyprus

Types of liquidation and reorganisation processes

What are the requirements for a debtor commencing a voluntary liquidation case and what are the effects?

The shareholders of a company express their wish to liquidate the company by written instructions to the board of directors. The directors proceed to pass a resolution to discontinue the company’s activities, to close its bank accounts and to instruct the auditors to prepare financial statements. The auditors perform their audit and provide the board with an up-to-date balance sheet. The final tax return of the company is then submitted to the tax authorities. The next step is for the board to make a full enquiry into the affairs of the company with a view to forming the opinion that the company will be able to pay its debts in full, within a period not exceeding 12 months from the commencement of the winding up, and prepare a declaration of solvency. An extraordinary general meeting is convened and held where the shareholders appoint a liquidator to act for the purposes of the winding up. The appointed liquidator must be licensed as an insolvency practitioner and must meet the criteria set out in the Insolvency Practitioners Law 64(I) of 2015 (specifically section 14) and the Insolvency Practitioners Regulations of 2015.

The company must be able to meet its debts to enter into a voluntary liquidation. In the absence of a declaration of solvency, the company must proceed with a creditors’ voluntary liquidation.

What are the requirements for a debtor commencing a voluntary reorganisation and what are the effects?

The Companies Law provides two types of mechanisms for voluntary re-organisations by a debtor. One can be effected through the provisions of section 198 of the Companies Law and the other on the basis of Part IVA of the same.

Section 198 of the Companies Law provides the legal basis for a scheme of arrangement between a company and its creditors or members. A compromise or arrangement may be proposed by the company, any creditor or member, or (if the company is in liquidation) by the liquidator. If a majority in value of creditors (or class of creditors) or a majority in number of members (or class of members) present and voting (in person or by proxy) approve the scheme and the court sanctions the scheme, the arrangement becomes binding on all creditors and members of that class as well as on the company (and the liquidator, if applicable).

Although the creditors can convene a meeting, the approval of the board of directors of the company is also necessary, thereby, in effect, requiring the cooperation of the company itself to be able to be initiated.

Following approval of the compromise or arrangement, an application must be made to the court requesting the sanctioning of the proposed compromise or arrangement. Thereafter, the order is filed with the Registrar of Companies. The court may, either by the order sanctioning the compromise or arrangement or by any subsequent order, make provision for all or any of the following matters:

• the transfer to the transferee company of the whole or any part of the undertaking and of the property or liabilities of any transferor company;
• the allotment or appropriation by the transferee company of any shares, debentures, policies or other interests in that company that, under the compromise or arrangement, are to be allotted or appropriated by that company to or for any person;
• the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company;
• the dissolution, without winding up, of any transferor company;
• the provision to be made for any persons who, within the time and in the manner the court directs, dissent from the compromise or arrangement; and
• incidental, consequential and supplemental matters as are necessary to ensure that the reconstruction or amalgamation shall be fully and effectively carried out.

A compromise or arrangement under the provisions of section 198, unlike examinership, does not offer a mandatory protection period within which any other actions from the creditors or the members and the company itself are precluded; instead, a standstill agreement can be entered into, provided that the creditors are willing to enter into such an agreement.

Examinership, introduced in 2015 under the Companies Law, is the process that allows a financially distressed but potentially viable company that aims to keep the business alive and pay creditors over time to restructure under court protection. It also seeks to provide relief from actions of creditors of the company so that the company has time to reorganise its financial affairs.

The court will only issue an order for examinership if the company is found to be a ‘going concern’ and has a reasonable prospect of survival. This is determined by a report that is prepared by an independent adviser (who is either the auditor of the company or a person who has the qualifications to act as an auditor), which is attached to the application for examinership and must show to the court that there are reasonable prospects of survival. Applications for examinership may be made by the following interested parties:

• the company itself;
• any creditor or future creditor, including a company employee;
• members of the company who, at the time of the application, hold no less than 10 per cent of the paid capital of the company that has voting rights attached to it;
• a guarantor of the company;
• any entity as listed above, jointly or severally.

In considering an application, the court may take into account factors such as the company’s inability to pay debts, its asset-to-liability position or requests for extensions from creditors. Credit institutions and insurance companies are excluded from examinership, as they fall under specialised regulatory regimes.

With the submission of an application for the appointment of an examiner, the company is under court protection for four months. During this period, a receiver cannot be appointed, and the company cannot be placed under liquidation. In addition, no actions can be made against assets of the company without the consent of the examiner (including mortgages, confiscations and lease agreements). An examiner, when appointed, must propose a plan to the court and has wide powers to manage the company’s affairs, including varying or amending contracts, negotiating with creditors and proposing a restructuring plan – all aimed at preserving the business and maximising value for stakeholders.

How are creditors classified for purposes of a reorganisation plan and how is the plan approved? Can a reorganisation plan release non-debtor parties from liability and, if so, in what circumstances?

The court must approve the financial reorganisation plan and decide whether it will approve the proposals for a debt repayment plan. The court must take into account whether the proposals are just and equitable (under principles of equity) under the following principles set out in the law:

• the resumption of normal business activities;
• avoidance of employee redundancies; and
• safeguarding of creditors so that they are not in a worse position than they would be if the company were to commence liquidation proceedings.

Creditors are classed as secured and unsecured creditors under the plan prepared by the examiner. Officers of the company cannot be released from their liability against the company from liability for fraudulent conduct or fraudulent trading. Outside those exceptions, any broader releases would be subject to Court scrutiny and creditor approval.

What are the requirements for creditors placing a debtor into involuntary liquidation and what are the effects? Once the proceeding is opened, are there material differences to proceedings opened voluntarily?

Under the Companies Law, a creditor may apply to the district court in the district where the debtor company is located, seeking the winding up (liquidation) of the company by the court.

A compulsory liquidation (also known as winding up by the court) may be initiated by way of petition, filed, among others, by a creditor of the company. One of the statutory grounds for such an application, under section 211(f) of the Companies Law, is that the company is unable to pay its debts.

To proceed, the applicant must establish a prima facie case for the liquidation and may also be required by the court to provide security for the costs of the proceedings, as the court deems appropriate.

A company is presumed to be unable to pay its debts if:

• a creditor to whom the company owes more than €5,000 has served a written demand (commonly known as a ‘statutory demand’) requiring payment, and the company fails to pay the debt within 21 days of receipt; or

• it is otherwise proven to the satisfaction of the court that the company’s liabilities exceed its assets, taking into account contingent and prospective liabilities.

Once an application for the winding-up of a company is filed, any disposition of the company’s assets (including any rights in title, transfer of shares and change in the status of the members of the company) shall be void, as well as any third-party seizure, lien, attachment or execution commenced against the property of the company.

What are the requirements for creditors commencing an involuntary reorganisation and what are the effects? Once the proceeding is opened, are there any material differences to proceedings opened voluntarily?

The examinership scheme allows for the procedure to be commenced by either the company or members of the company (voluntary) or by creditors or guarantors (involuntary) or by a mixture of all the above-mentioned interested parties. The process remains the same in all eventualities and therefore there are no alternate effects other than those described above.

Apart from financial reorganisations, a creditor of the company may initiate the procedure for the reorganisation of a company by making an application in a summary way requesting a meeting of the creditors. If the court orders the convening of the meeting and if a majority in numbers representing three-quarters in value of the creditors agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the court, be binding on all the creditors or the class of creditors, or on the members or class of members, as the case may be, and also on the company or, in the case of a company in the course of being wound up, on the liquidator and contributories of the company. The compromise or arrangement includes merger, division, partial division, transfer of assets, exchange of shares and transfer of registered office.

Do procedures exist for expedited reorganisations (eg, ‘prepackaged’ reorganisations)?

Cyprus does not have formal, statutory procedures specifically dedicated to expedited or prepackaged reorganisations similar to those found in other jurisdictions. However, the process under examinership is relatively brief. Further, certain restructuring mechanisms under the Companies Law, such as the transfer or sale of business assets or property during voluntary liquidation processes, may offer some flexibility for quicker transactions.

When a company is voluntarily liquidated, its liquidator may, with the approval of a special resolution of the company, transfer or sell all or part of the company’s business or assets to another company. While this is not an explicit prepackaged reorganisation procedure, it can facilitate more streamlined asset transfers within restructuring contexts.

Legislative developments and case law should be monitored, as Cyprus continues to align its insolvency framework with evolving EU directives, which may introduce more formal mechanisms for expedited reorganisations.

How is a proposed reorganisation defeated and what is the effect of a reorganisation plan not being approved? What if the debtor fails to perform a plan?

In the context of examinership, a court-supervised rescue procedure, the company must satisfy specific eligibility requirements. The examiner must submit a rescue plan for approval within the statutory time frame granted by the court, known as the period of protection or stay of proceedings. Failure to do so will result in the early termination of the examinership process, and the company will lose its legal shield from creditor actions. If the plan is submitted but not approved by the requisite majorities of creditors or the court, the examinership will conclude without effect, leaving the company exposed to insolvency proceedings such as liquidation.

Separately, under section 198 of the Companies Law, a reorganisation plan must be approved by a majority representing three-quarters in value of the creditors or class of creditors present and voting at a court-sanctioned meeting. If the required majority is not achieved, the arrangement fails. Even where creditor approval is obtained, court ratification is necessary to ensure that all statutory and procedural safeguards have been met. The court does not typically engage with the commercial merits of the plan but ensures procedural fairness and that creditor interests have been properly addressed.

If a reorganisation plan is approved but the debtor fails to perform its obligations under the plan, this may trigger default provisions within the plan itself or lead creditors to take enforcement action, including potentially initiating winding-up proceedings or seeking the appointment of a receiver or liquidator.

Are there corporate procedures for the dissolution of a corporation? How do such processes contrast with bankruptcy proceedings?

Cypriot law provides for corporate dissolution procedures under the Companies Law. One method is through administrative strike-off, initiated by the Registrar of Companies when it appears that a company is no longer carrying on business or has failed to comply with certain statutory obligations (eg, filing annual returns or financial statements). In those cases, the Registrar may send a notice, and, if the company fails to respond or take action, the Registrar may proceed to strike the company off the register.

This process is non-judicial in nature and does not involve creditors, nor does it constitute a formal insolvency procedure. A company that is struck off is considered dissolved, although it may be restored to the Register upon application by an interested party to the court within 20 years of the publication of the strike-off in the Official Gazette.

In contrast, bankruptcy proceedings (in the case of natural persons) or winding-up proceedings (in the case of companies) are formal procedures that may involve the court, creditors and the appointment of a liquidator or receiver. These proceedings are designed to address the debtor’s liabilities and to liquidate assets and distribute them to creditors in accordance with the legal priorities set out in the relevant legislation.

How are liquidation and reorganisation cases formally concluded?

Liquidation cases are concluded by court application of the liquidator as soon as the affairs of the company have been fully wound up (compulsory liquidations) and the submission of the relevant Court order to the Registrar of Companies.

In the case of a members’ voluntary liquidation, as soon as the affairs of the company are fully wound up, the liquidator will draw up an account of the winding up, showing how it has been conducted and the manner in which the property of the company has been disposed of, and will call a general meeting of the company to explain this. This meeting is called through an advertisement in the Official Gazette, published at least one month before the meeting. Within one week of the meeting, the liquidator sends the Registrar of Companies a copy of the account and shall make a return of the meeting and its date. The Registrar of Companies on receiving the account and the return, will proceed with registering the same. The company shall be deemed dissolved after three months have passed after the registration of the return.

in the case of dissolution by the court, when the affairs of a company have been completely wound up, the court, if the liquidator applies, shall make an order that the company be dissolved. A copy of the order is filed at the Registrar of Companies, which records the dissolution.

In the case of a reorganisation within the meaning of section 198 of the Companies Law, an official copy of the order granted by the court must be delivered to the Registrar of Companies; otherwise, it shall have no effect. A copy of every such order is annexed to every copy of the memorandum of the company issued after the order has been made. Furthermore, the provisions set out in the arrangement agreed between the companies in question must be performed.