There are three formal procedures for companies in financial difficulties and these are as follows:
• A reorganization plan of the company and/or a settlement between the company and its creditors may be effected following the approval of the court;
• There are two methods of winding up a company a) through compulsory winding up (order given by the Cyprus courts) and b) through voluntary winding up, which can be instigated either by the members or the creditors of the company.
A company in financial difficulties may decide to take a re-organizational plan which will/may involve the merger of two companies or it may involve the incorporation of a new company. Once the directors have decided that the option of re-organization is suitable under the company’s circumstances, a petition to the court shall be made for the approval of the plan and typically a court order will be issued to that effect.
Winding up by the court:
The court may issue a liquidation order for the company and this will result from the presentation of a petition by either a creditor, the company itself, the Official Receiver or the Attorney General. The court will issue an order to wind up a company in the following circumstances:
a) A special resolution is made resolving that the company be wound up by the court.
b) The court believes that it is just and equitable to wind up the company (Section 211).
c) The company is unable to pay its debts (Section 212, Cap. 113).
d) The company does not commence business within one year of its incorporation or suspends its business for a year without giving notice of this intention or submitting a plan for the business to be restored.
Voluntarily winding up:
The directors take a decision that the company should be wound up. A special or an extraordinary resolution should be passed by the company in a general meeting, unless the company’s articles of association otherwise provide, stating that the company is unable to continue its business due to its liabilities.
Where a liquidator is appointed, the creditors will send the company a formal claim in order to prove their debts. It is then the job of the liquidator to consider each of these and decide if he accepts, rejects or whether he requires more information and details about the claims. If a claim is rejected, the liquidator must give in writing the reasons to the creditor as to why he has rejected the claim. Only proved claims may be paid by the liquidator. An unsatisfied creditor may apply to the court if the liquidator did not accept the proof of his debt.
There is a hierarchy of priorities in the distribution and satisfaction of the creditors when a company enters into a voluntary arrangement or a re-organization plan. According to the Law, the ranking of claims in a company are as follows:
1) Costs of the winding up (this covers the costs of getting in the assets, the petition and the making of the statements of affairs as well as the liquidators remuneration and the expenses of the Committee of Inspection).
2) Any preferential debts (every local and government tax due, any unpaid wages and social security contributions due).
3) Secured creditors by a floating charge.
4) Unsecured creditors.
5) Any deferred debts such as sums due to members in respect of dividends declared but not paid.
6) Lastly, any remaining surplus will be distributed among the members in proportions based on their rights under the articles.
The liquidator in a winding up by the court shall have the power to, amongst others, bring or defend any action or other legal proceeding in the name and on behalf of the company; to carry on the business of the company so far as may be necessary for the beneficial winding up thereof; to pay any classes of creditors in full; to make any compromise or arrangement with creditors or persons claiming to be creditors etc.
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