The new Insolvency Statutory Framework
Reform of the insolvency statutory framework was one of the terms of the Memorandum of Understanding between the government of Cyprus, the International Monetary Fund (IMF), the European Central Bank (ECB) and the European Commission (EC) program, as agreed in 2013 during the banking crisis.
The reform was achieved by passing new legislation and amending existing legislation. Specifically the Parliament passed both entirely new statutes and amendment of the Companies Law, Capital 113 and the Bankruptcy Law, Capital 5.
The main purpose of the new and amending Laws is to resolve the issues arising out of the growing number of non – performing debts. This is expected to be achieved by the modernization of the processes of compulsory liquidation and the insolvency of natural people. What is more, the examinership process is introduced and the Insolvency Consultant is institutionalized so that the rights and property of the insolvent people (legal and natural) are safeguarded against the rights of the creditors.
What follows is a brief analysis of the new and amending laws which will be referred to collectively as “the new Insolvency Laws”.
The Office of the Insolvency Consultant
The institutionalization of the Office of the Insolvency Consultant is to ensure the efficient application of the new Insolvency Laws.
A crucial amendment to the Companies Law provides that only licensed Insolvency Consultants are authorized to act on behalf of either legal or physical persons as liquidators, receivers or examiners.
There are criteria in the Law for becoming an Insolvency Consultant and the profession is regulated by the Insolvency Consultants Law (Law no 64(I)/2015). In the event of non-compliance with the Law, the licensed Insolvent Consultant may be charged with disciplinary penalties.
Liquidation of a company is regulated by the Company Law, Cap.113 and it can be either compulsory or voluntary. A compulsory liquidation is performed by a Court Order whilst a voluntary liquidation is performed by the company’s members or creditors.
Following a Court order, a company can be liquidated when the value of its assets is lower than the amount of its liabilities taking also into account the company’s contingent and future liabilities.
The Law amending the Company Law provides for the appointment of a liquidator either by a Court Order or by a General meeting convened by the company’s creditors and contributories. By the issuance of a liquidation order, the Official Receiver acts as the liquidator otherwise the liquidator is to be a Licensed Insolvency Consultant.
A general meeting between the company and its creditors is convened once the liquidator has prepared the liquidation proposals. Decisions are taken up by a simple majority of either the value of creditors or member voting.
The liquidator can, following a Court Order, manage any secured assets if this is considered as the most favorable liquidation policy. In this way, the liquidator can repay the unsecured creditors by taking advantage of the difference between the secured amount of money and the market value of the secured asset that may accrue.
In case the liquidated assets cannot cover the liquidation expenditure, the liquidator can petition the court for an early liquidation so as to prevent delays.
The institutionalization of examinership came along with the new Insolvency Laws. The process of examinership, a mechanism for restructuring corporate debt, aims at reviving the business activity in order to ensure economic growth and employment.
An examiner can only be appointed where the company is unable to repay its debts; there is no liquidation order whilst there is a reasonable prospect of survival.
Those who can file a petition to the court for the appointment of an examiner are: the company itself, any creditor, any shareholders who possess at least 10% of the capital value of the company and any guarantor.
By appointing an examiner, the company comes under the protection of the Court for a period of four months. The Court has the ultimate discretion to extend further the four-month period. During that period:
– The company is not to go into liquidation;
– A Receiver is not to be appointed;
– Secured assets are not to be disposed of;
– Creditors are not to petition against guarantors;
– Lawsuits are not to be initiated against the company.
The examiner is to examine the financial statements of the company and set out proposals of compromise or settlement in order to protect the business. These proposals must be submitted to the court for approval. In case of approval, the proposals are confirmation. As soon as the compromise/settlement comes into force, both the court protection and the Office of the examiner come to an end.
In addition, if the examiner ensures new credit as capital, these creditors rank first in priority in case the company goes eventually into liquidation.
Assessment of the new Insolvency Framework
The main purposes of the new Insolvency Laws can be summarized as preventing delays in debt repayments and reviving the business activity.
Importantly, the new Insolvency Laws provide for the establishment of business responsibility. It is indicative that the Official Receiver and/or the liquidator has the power to petition the Court for scrutinizing any person who has been involved in the affairs of the company including its members, former examiners or contributories. In this way, the new Insolvency Framework aims at founding a reliable business culture, which potentially could attract and revive business activity.
The most important contribution to the revival of business activity is undoubtedly the process of examinership. The institutionalization of this office together with the requirements of obtaining the relevant work experience and expertise in consultancy to hold Office constitutes a major chance of survival for companies that are close to liquidation.
It is questionable, however, whether the new package of insolvency laws speeds up significantly the liquidation process. On the one hand, the simple rather than the previously ¾ majority voting requirement facilitates an agreement on the liquidation policy. Moreover, the power of the liquidator to petition the court for an early liquidation can potentially speed up the liquidation process. However, in all circumstances, litigation is time consuming whilst it doesn’t guarantee the resolution of non-performing debt.
Under these circumstances, one could argue that the Official Receiver/liquidator should enjoy some discretion so as to prevent such delays.
Our firm has extensive experience with Liquidations of Legal Entities and Nicolas Mouktaroudes has been accredited as an Insolvency Consultant by the Cyprus Bar Association
For further information, please contact our firm at [email protected]