the conduct of the liquidation and the liq- uidator’s receipts and payments account. Once the liquidation is complete the liquida- tor convenes final meetings of members and creditors to receive his accounts. Following submission of the reports of the final meet- ings to the registrar of companies, the compa- ny is dissolved and removed from the register.
Compulsory liquidation Compulsory liquidation is the nuclear option for creditors. The company immediately ceases to trade, the assets are realised and distributed, and the company’s existence comes to an end. While the threat of compulsory liquidation may be used as a debt collection tool, if a company actually goes into compulsory liquidation, recovery prospects are slim. Compulsory liquidation also involves investi- gation into the conduct of persons involved in the company to ascertain the reasons for its demise and their part in it. The procedure begins with an application
(petition) to the court, which may be present- ed by the company, any creditor (including a contingent or prospective creditor), a mem- ber or a contributory. On hearing the petition, the court may
dismiss it, adjourn it, or make any order that it deems fit. If a winding up order is made, the liquidation will be deemed to have com- menced at the time of presentation of the petition unless a resolution has previously been passed for a voluntary winding up, in which case liquidation will be deemed to have begun with the passing of the resolu- tion.
There are a number of grounds on which
the court will make a winding up order, but overwhelmingly the most common is the company’s inability to pay its debts. On the making of a winding up order, the company may no-longer trade, except with the approval of the court (or the committee of creditors, if there is one) for the beneficial realisation of assets. No action may be pro- ceeded with, or commenced against, the company except by leave of the court and subject to such terms as the court may impose. Any disposition of the company’s property that takes place after the commence- ment of winding up (which may be some time before the winding up order) and any transfer of shares or alteration in the status of the members of the company after the com- mencement of winding up will be void unless the court orders otherwise.
022
All the company’s assets vest in the official
receiver, a government official, who is respon- sible for realising them and distributing the proceeds among the creditors. The directors are required to provide the official receiver with a statement of affairs detailing all the company’s assets and liabilities, including prospective and contingent assets and liabili- ties. The official receiver may apply to the court for another person to conduct the liq- uidation under his direction and will convene meetings of creditors and contributories to ascertain their wishes on this. The official receiver or the liquidator appointed to act in his place will realise the assets, determine the amount of individual claims and distribute any funds in accordance with the statutory priorities set out earlier. Liquidators in compulsory liquidations
have extensive powers to investigate the con- duct of persons involved with the company, including the power to apply to the court for the public examination of any officer of the company or anyone involved in its promo- tion. The court may order the arrest of any person it considers liable to abscond and the seizure of any relevant records. No legal action or proceeding can be con-
tinued or commenced against a company in respect of which a winding up order has been made, or a provisional liquidator has been appointed, except with the leave of the court and subject to such terms as the court may impose. As in a voluntary liquidation, a cred- itor who has issued execution against a com- pany’s property or has attached any debt due to the company after commencement of the winding up cannot retain the benefit of the execution or attachment against the liquida- tor in the winding up. Compulsory liquidation is the most for-
mal insolvency process and proceedings gen- erally take several years to complete. Once the assets have been realised and the funds have been distributed, the liquidator may apply to the court for the dissolution of the company. The company is dissolved with effect from the date of the order.
An old-fashioned but effective regime Given that the Companies Law was introduced more than 60 years ago, Cyprus’s corporate insol- vency regime looks rather old-fashioned. It is cred- itor-friendly rather than debtor-friendly and, par- ticularly since the current recession began, ques- tions have arisen as to whether it does enough to
promote an enterprise culture. Critics of the law argue that the opportunity should have been taken during prosperous times to put in place a regime that rescues troubled businesses rather than termi- nates them. However, this is a simplistic argument,
which overlooks the fact that most of the companies on Cyprus’s register are not oper- ating companies, but holding and finance companies. Companies that operate locally and that might benefit from a more rescue- oriented regime represent a small minority. Indeed, it can be argued that the regime,
far from being a disadvantage, positively ben- efits Cyprus as an international business cen- tre. Investors are comfortable with the assur- ance that operating in an environment with clear, simple and well-tested rules gives them. Courts in Cyprus follow English precedent where no local precedent exists and there is a wealth of such precedent. Investors and lenders can therefore predict the outcome of various scenarios with confidence. Some people have gone further, and said
that Cyprus could provide an attractive envi- ronment for main insolvency proceedings in the context of the European Insolvency Regulation. Arrangements and compromises under the Companies Law are a very fast, simple and low cost means of restructuring. Furthermore, the absence of a statutory obli- gation for management to file for bankruptcy such as exists in Germany facilitates the res- cue and restructuring of businesses. The main objective of the French insolvency code is to maintain a going concern and preserve employment, and creditors have little say in the restructuring process. Despite this objec- tive, insolvency proceedings in France are generally regarded as costly and time con- suming, and most result in the liquidation of the insolvent company. As was demonstrated in the Daisytek case, where a choice of juris- diction is available, international practition- ers prefer the UK. Cyprus offers the same flexibility as the UK, with lower costs. While Cyprus’s insolvency regime may
look old-fashioned, it actually provides a reli- able and predictable legal framework, togeth- er with and a fast and effective means of restructuring.
IFLR|RESTRUCTURING & INSOLVENCY
www.iflr.com
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