Chapter 113(III) of the Companies Law is the main legal framework which regulates the voluntary liquidation procedure in Cyprus. There are two ways in which voluntary liquidation can be triggered: by members or creditors.
Voluntary liquidation by members is the procedure pursuant to which members of a solvent company wish to bring the same to a formal end by distributing the underlined assets at a surplus to its members. By the passing of a special resolution and following the relevant procedure, the company will be deemed dissolved and will end its activities.
Sections 261 to 274 of Chapter 113 of the Companies Law stipulate the applicable procedure which must be followed for voluntary liquidation of a solvent company by its members.
Prior to a general meeting, the directors must prepare several documents which need to be presented at the meeting. These include:
- audited financial statements which are relevant to the liquidation date;
- a solvency statement confirming that the company can pay all its debts; and
- a written resolution approving the solvency statement.
Following a five-week period, members must convene a meeting in which they will have to pass a special resolution for voluntary winding up the company and approve the appointment of a liquidator.
Members must complete the relevant liquidation forms and procure delivery of the declaration of solvency and resolution to the registrar.
Once the process regarding the forms and the special resolution is completed, the company must advertise the passing of such resolution in the Official Gazette within 14 days.
One month prior to the company's final meeting, the company's members must send a notification to the registrar and publish the details of such meeting in the Official Gazette.
Following publication, the members will convene the company's final meeting.
One week later, the members must send a copy of the return of the final meeting and the liquidator's statement to the registrar.
Three months following the date on which the last documents have been submitted, the registrar will issue a relevant certificate and the company will then be deemed dissolved.
The liquidation procedure initiated by members takes approximately one year to be completed. Where it takes longer, the liquidator must convene annual meetings of the members and report any accounts of its acts and dealings to them.
A creditors' voluntary liquidation process is initiated by creditors and occurs only where the company cannot pay its debts. It aims to distribute the insolvent company's assets among creditors resulting in the company's permanent dissolution.
The relevant procedure is underlined in Sections 275 to 283 of Chapter 113 of the Companies Law.
Prior to the creditors' meeting, the company directors must:
- provide a statement of their position on the company's affairs and a list of the creditors and an estimate amount of their claims; and
- send a notification simultaneously to both creditors and shareholders. Such a notice of the meeting must also be published in the Official Gazette and at least two local newspapers.
Further to this, the company will convene a creditors' meeting in which the company's winding will be proposed. Once approval from the creditors is obtained and a special resolution is passed, the company will be placed into liquidation.
At the creditors' meeting, the creditors and directors will need to agree the appointment of a liquidator. In case of disagreement, the person who was chosen by the creditors will be appointed. On the approval of the creditors and if it is deemed appropriate, they may opt to appoint an inspection committee. The inspection committee may consist of up to five persons and in such a case, the company can to also appoint up to five persons to be part of such committee.
Following the liquidator's appointment, a notice must be published in the Official Gazette and the registrar must also be notified of the subsequent appointment.
Once the liquidator has settled all matters, they must call for a general company and a creditors' meeting.
One week after the meeting has been convened, the liquidator must send a copy of the account to the registrar and make a return of the meetings and their dates.
In return, the registrar will register all meetings and accounts provided accordingly as per above.
As a last step and three months following the registration of the meetings, the registrar will issue a certificate and the company will be deemed dissolved.
The process may take several years to be completed due to the difficulty to realise assets and complete various investigations. If the liquidation procedure takes longer than one year, again, the liquidator must convene separate meetings of creditors and members on an annual basis and must lay before the meetings accounts for the liquidation procedure and provide adequate explanations thereof.
Members' voluntary liquidation
A members' voluntary liquidation may be initiated for various business or commercial reasons which are solely member focused, including:
- for reorganisation and reconstructing purposes;
- for liability purposes;
- for tax purposes;
- to engage in different conduct of business; and
- to return capital to shareholders.
In general, triggering liquidation proceedings constitutes an efficient and preferable mechanism for the distribution of assets. Maintaining capital in a company which might no longer be needed to sustain or operate can be sufficient reason to return capital or assets to shareholders.
Creditors' voluntary liquidation
A creditors' voluntary liquidation may be appropriate where:
- the company is insolvent and thus cannot pay off existing debts;
- the company cannot be rescued to continue operating, leaving the creditors' voluntary liquidation as a last resort; and
- creditors wish to distribute efficiently available assets and recover assets and agreements of claims by the appointment of a liquidator.
In both cases, liquidators are granted extensive powers to complete the process of a company's liquidation. Namely, these include, among others, powers in relation to:
- entering or concluding agreements and payments to creditors;
- reaching a viable consensus on debts and claims;
- calling for meetings of creditors and members, respectively;
- the settlement of legal claims;
- the repayment of existing debts; and
- taking any necessary actions for the purposes of voluntary liquidation.
As is obvious from the above, both proceedings are distinctly different and triggered for different reasons.
Despite the differences, the two liquidation procedures have a common objective (ie, the ultimate dissolution of a company). Both procedures are expected to be settled in an efficient manner by a liquidator, hence, the liquidator is given a wide discretion to settle claims and realise assets.
Inevitably, global insolvencies are forecast to increase significantly in 2021 as the pandemic leads economies into recession.