The near collapse of the Cypriot economy resulted in new legislation that introduced amendments to companies law (Chapter 113). The amendments introduced the examinership procedure, which is essentially a rescue process. This process is designed to save potentially viable companies by facilitating their survival in a manner that is not unfair on the parties involved, including the creditors as a whole. Concurrently, it attempts to avoid receivership and winding-up where possible, which work more in favour of secured creditors. In short, the procedure purports to strike a balance among creditors based on the idea that the fate of a company and those parties that depend on it (including employees) should not rest solely in the hands of secured creditors, to the disadvantage of those that are less protected. However, the examinership procedure is not designed to save or help shareholders whose investment has been unsuccessful.
The amendments give a company facing insolvency a period of protection from its creditors to facilitate its survival as a going concern. They provide for a statutory period in which some form of compromise with creditors can be reached. The company is placed under the court's protection for a limited period while its affairs are assessed by the examiner, during which the examiner ascertains whether the company is capable of being rescued. If a rescue is possible, the examiner must present a rescue plan.
The company is placed under the court's protection for an initial period of four calendar months from the date that a petition is presented. The protection period ends if the petition is withdrawn or dismissed. If protection is granted, the examiner is required to put together proposals for a scheme of arrangement. The examiner may apply for a further 60 days to finish the report. Therefore, the maximum protection period is six calendar months. After the presentation of the report, the court may extend the protection period further in order to make a decision (ie, whether to approve a scheme of arrangement).
The court petition may be presented by:
- the company;
- a creditor or contingent or prospective creditor (including an employee);
- a member or members of the company (holding at least 10% in paid-up voting share capital); or
- a guarantor under a guarantee made pursuant to Cypriot contracts legislation (Chapter 149).
The petitioner has a duty to exercise utmost good faith in the preparation and presentation of the petition.
There are a number of preconditions for an examiner to be appointed:
- The company must be unable to pay its debts or be likely to be unable to do so. This precondition is met if:
- the company is unable to pay its debts as they fall due;
- the value of the company's assets is less than its actual, contingent and prospective liabilities;
- a creditor has made a demand in writing that a sum exceeding €5,000 be paid and the company has neglected to pay the sum or satisfy the creditor; or
- a judgment or court order has been made in favour of a creditor and has remained unsatisfied in whole or in part.
- No resolution must have been passed and published in the Official Gazette for the voluntary winding-up of the company.
- No order must have been made for the winding-up of the company by the court.
- No receiver must have been appointed to the company for more than 30 days.
Obtaining significant extensions on the payment of debts will imply that the first precondition has been met. The examiner (as in the case of a receiver and liquidator) must be an individual qualified as an insolvency practitioner.
The court has the power to appoint an examiner where there is a reasonable prospect of survival for the company and the whole or any part of the company's undertakings as a going concern.
A proposal to sell off the company's business and assets does not meet the above test, as there is no prospect of survival of the whole or part of the company's undertakings as a going concern – the whole or part of the company's undertakings must remain with the company.
The power of the court to appoint an examiner may be exercised once the former is satisfied that there are reasonable prospects of survival. This power is discretionary; thus, the petitioner is not entitled to have an examiner appointed. As a part of this discretion, the court may also consider whether one or more creditors will be prejudiced as a result of an examiner being appointed. The interests of the employees may also be relevant to the court's decision. In making its decision, the court will consider the effects of the alternatives to an examinership and a winding-up. The independent expert is required to express an opinion as to whether saving the whole or any part of the undertaking will be more advantageous to the members and the creditors as a whole than the alternative of winding-up.
The court will not consider having a receiver appointed instead of the two aforementioned alternatives. This is because the prime responsibility of a receiver is to protect the interests of the secured creditors and to realise the charged assets for their benefit. An examiner's role is wider and takes broader considerations into account, such as the interests of employees, who are less protected as contingent or future creditors.
The examiner may resign or be removed by the court and the court may fill the examiner's vacancy.
The petition must be accompanied by an independent expert's report. This expert may be the auditor of the company or an insolvency practitioner. The expert also has a duty of utmost good faith in the preparation of the report.
The main purpose of the report is to inform the court of whether the company has a viable future and, if so, of the necessary steps (including possible arrangements) required to achieve this. The expert is expected to express opinions and give recommendations on a number of matters, including the statutory matters listed in the amendments.
Any opinions expressed should be based on evidence. Optimistic but unjustified or unsupported projections for success do not amount to demonstration of an identifiable possibility of survival. The company's auditor should generally be in the best position to prepare the report.
The report influences but does not bind the court. Its level of influence depends on the degree and extent to which the expert supports his or her opinions with objective reasoning or justification and appraisal of the material factors relied upon for reaching his or her conclusions.
The court may also appoint an examiner to any subsidiary, holding or associated company of the company named in the petition. This complements the protection afforded to the company named in the petition, as it prevents attack against any related company. The court must be satisfied separately that there are reasonable prospects of survival for the related company. Apart from the first precondition for the examiner's appointment, it seems that the others need to be satisfied concerning related companies.
An examiner appointed for at least two related companies will have the same powers in relation to each, but must exercise them separately for each company unless the court orders otherwise. The examiner may not formulate proposals which would impair the interests of creditors of the original company in a manner which favours the interests of the creditors or members of a related company. If an examiner is appointed to a company and at least one related company, then:
- separate proposals for schemes of arrangement are required for each company in the group under examination;
- each set of proposals for each company is interdependent – that is, the ultimate approval of each proposal is conditional on the approval of all other proposals; and
- each creditor must be furnished with copies of all proposals in respect of the companies in the examinership, but votes only on the proposals that relate to the company or companies which are in debt or liable to it.
Unless a treaty is in place between Cyprus and another country, a non-EU member or a Commonwealth member, statutory protection is unlikely to extend to assets or subsidiaries situated in that country or state. If such a related company is not a Cypriot company and has no assets in Cyprus, then there is no connection to Cyprus.
During the protection period, the creditors may not pursue the remedies which they have normally pursued against the debtor. No petition to wind up the company can be brought. If there is an outstanding winding-up petition when the petition is presented to appoint an examiner, both petitions should be heard together; if the court decides not to appoint an examiner, it may issue a winding-up order. The court will not appoint a receiver once a petition to appoint an examiner has been presented. If a receiver has been appointed for 30 days or less, the court may direct the receiver to cease to act or to act only in relation to particular assets. Further, no action can be taken to realise any security or enforcement be made in relation to company assets without the examiner's consent.
Similarly, proceedings may not be initiated against any guarantor (or other third party) to pay company debt during the protection period. Although it seems that, in general, the creditor could serve a demand on the guarantor to pay pursuant to the guarantee, the guarantee cannot be enforced during the protection period. If the guarantor pays up pursuant to the guarantee, the guarantor ceases to be a contingent creditor and becomes an actual creditor.
Creditors with retention of title rights over property (usually stock in trade) in the company's possession are prohibited from recovering their goods without the consent of the examiner.
No legal proceedings can be brought on grounds of oppression under Chapter 113 and any other proceedings in relation to the company cannot be commenced without leave of the court. The company cannot pay any of its pre-emption debts during the examinership process, unless this is recommended in the independent expert's report or the court approves such a payment on the application of the examiner, creditor or member. The court must be satisfied that failure to make the payment will reduce considerably the prospects of the survival of the company or the whole or any part of its undertaking as a going concern. Pre-petition liabilities may be paid to employees (eg, their salaries in arrears) or to essential suppliers, such as electricity, water and telephone.
Once appointed, the examiner is vested with the rights and powers of the company's auditor, which enables the examiner to formulate proposals for saving the company.
The court may give the examiner additional powers, including any or all of the directors' powers (eg, management and borrowing) and/or the liquidator's powers. Unless vested with the powers of directors, the examiner is not an agent of the company. The examiner will nevertheless be personally liable for any contract entered into by him or her in the name of the company or as an examiner in the performance of his or her functions. He or she is entitled to an indemnity from the company's assets. The examiner – as in the case of any company officer – may be sued for breach of duty.
The examiner's primary duty is to the court and to comply with the statutory obligation to examine the company and, if appropriate, to formulate and present proposals for a scheme of arrangement. The examiner may have to balance a range of interests imposed by the amendments or required by the court. However, the examiner may apply to the court to determine any question that arises in the course of his or her office or in the exercise of any powers afforded to him or her. This right gives adequate protection to the examiner, as it is hardly possible (if at all) to hold him or her liable for implementing the directions of the court.
Certain liabilities incurred by the company during the examinership may be certified as "expenses properly incurred" by the examiner and as such enjoy preferential status once the examiner's remuneration, costs and expenses are approved by the court. Simply put, post-petition liabilities may be paid in preference to certain creditors. Nevertheless, such expenses and costs are subject to the discretion of the court.
In certifying post-petition liabilities, the examiner should exercise care and professional expertise. If the directors continue to manage the company during examinership and propose to incur liabilities, the examiner should require that the directors submit their proposals and justify themselves to the examiner's satisfaction that such liabilities will contribute to the company's survival during the protection period. The court will potentially approve liabilities certified by the examiner, such as:
- employee salaries or wages;
- the supply of raw materials; and
- the payment of utilities (eg, telephone, water or electricity bills).
These liabilities may be contested at a costs hearing and therefore the examiner should certify them in writing, referring to the relevant statutory conditions of the amendments.
The examiner may apply to the court for permission to dispose of charged property or any other security such as the retention of title over goods where this would facilitate the survival of the company. The holder of the security must be given notice of the application. If a receiver has been appointed by the holder of a floating charge before the appointment of the examiner, the floating charge will de-crystallise upon the examiner's appointment.
Where such charged property is disposed of, a charge holder's priority is preserved. This is achieved by making any disposal of secured property conditional upon the net proceeds from the disposal being applied towards discharging the creditors secured by the property so disposed.
The examiner has the power to take any steps to halt, prevent or rectify the effects of any actual or proposed act, omission, course of conduct, decision or contract taken by or on behalf of the company or any person in relation to the income, assets or liabilities of the company which were created before the appointment of the examiner, if the examiner is of the opinion that any of these is likely to be detrimental to the company or any interested party. However, the examiner cannot repudiate a contract entered into by the company before the appointment of the examiner, except in relation to contractual terms that could prohibit the company from borrowing or obtaining credit or creating security over company assets (a negative pledge). The dissatisfied creditor may apply to the court as an interested party to consider whether the examiner's proposed action to override the contract or term was necessary under the circumstances. The company may also repudiate contracts with the approval of the court for the purpose of formulating proposals for a scheme of arrangement.
The examiner must formulate proposals for a compromise or a scheme of arrangement as soon as practicable after appointment and report to the court within 60 days or such longer period as the court may allow.
The examiner is unrestricted in formulating a suitable scheme of arrangement. Company officers have a duty to provide reasonable assistance to the examiner in the performance of his or her functions.
If at any stage in the course of the examinership it becomes apparent to the examiner that it is not possible to rescue the company, he or she should immediately bring this to the attention of the court. Failure to do so may have a negative impact on the examiner when applying to have his or her remuneration, costs and expenses approved by the court.
The examiner may convene meetings of members and creditors and may appoint a committee of creditors. The purpose of these meetings is to approve, reject or modify the examiner's proposals. The proposals presented at the meetings must specify the class of members and creditors and indicate those classes whose interests will be impaired.
Members will generally be divided in accordance with the class of shares that they hold (eg, ordinary shares and preference shares). Creditors will generally be divided into preferential, secured and unsecured creditors and then further divided (depending on the circumstances) into other categories, such as contingent creditors.
The principles applicable for distinguishing classes may give rise to litigation. It is submitted that the court may potentially adopt either of the following principles in the context of examinership:
- The classes must be constituted in a manner to avoid confrontation and injustice, and so that individuals can be classed together only where their rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest.
- The inclusion of certain creditors or shareholders in a class must have resulted in others in that class suffering actual rather than potential prejudice before the constitution of the classes will be set aside.
The individual position of the creditors and members within their relevant classes must also be considered. A particular creditor or member may object on the ground that the scheme affecting the creditor's or member's designated class would unfairly prejudice the objector's interests. If the objection is sustained, the court will not approve the scheme. While the objector's class in general may receive fair and equitable treatment, the objector's particular circumstances may render that treatment unacceptably harsh.
The responsibility for designating and constituting classes lies in the first instance with the examiner.
With regard to creditors, the examiner's proposals are deemed to be accepted if a majority – in both number and value – of the claims or creditors represented at the meeting vote in favour of the proposals. If the proposals are rejected, the court will order the winding-up of the company. However, with regard to members, their lack of acceptance of the proposals will not determine whether the proposals will be approved by the court.
A creditor cannot enforce a guarantee or indemnity unless it serves a notice on the guarantor offering to transfer voting rights at the creditors' meeting on the examiner's proposals to the guarantor. The notice must be given within 48 hours of the creditor receiving notice of the meeting. The guarantor may vote on the proposals according to his or her own interests.
If the creditor fails to serve this notice, it may not enforce the guarantor's obligation through legal proceedings or otherwise in the event that the examinership is successful and the scheme is approved by the court.
The content of the examiner's report is statutory. The proposals for a scheme of arrangement to be approved by the court should be appended to the report, which should also include an account of the examinership costs to date in order to provide a full picture of the company's position post-examinership. The examiner should include in the report facts which support or justify the opinions expressed. The court will give additional weight to any appraisal of facts or factors relied on or reasons for the opinions expressed and recommendations made.
The court's confirmation of the proposals binds the various parties affected by them. Where the proposals cannot be adopted by the affected parties or where the proposed scheme is rejected by the court, the court will order that the company be wound up.
The amendments give some hope to businesses in financial difficulty in the volatile Cypriot economy. However, it is not an escape route by which companies can evade their creditors or liabilities. The amendments attempt to give relief to promising yet financially troubled businesses for a certain period. This provides an otherwise unavailable chance to redirect the fate of the company, make a new start and ultimately prevent its failure and the associated effects on the wider economy. It is a tool to mitigate the local impact of the financial crisis. However, it is yet to be seen whether this tool will prove successful and boost the economy.
For further information on this topic please contact Demetris Loizides at Harneys Aristodemou Loizides Yiolitis LLC by telephone (+357 25 820020) or email (email@example.com). The Harneys website can be accessed at www.harneys.com.
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