Cyprus Continued

The banking sector crisis in Cyprus, the effects of which we witnessed in the spring of 2013, reverberated among European entrepreneurs. To this day, it still spends the sleep of those who, two years ago, were surprised by a regulation introduced overnight imposing a one-off tax on bank deposits, resulting in the de facto blocking of funds held in accounts.

Although this had no effect on the other benefits of doing business on the island, Cyprus was given the patch of the ‘night thief’ and thus became famous for devising ever more unpleasant surprises for its citizens as well as foreign investors.

The continuation of the recovery programme, which has been implemented since 2013 and is based on monetary easing and economic restructuring in Cyprus, includes the unification and reform of the existing bankruptcy law in Cyprus and its alignment with European standards. Amendments to the Cypriot company law, introduced in late 2014, significantly simplified, modernised and streamlined the procedures related to court-initiated compulsory liquidation of companies. The update has, most notably, displaced the provisions of the now obsolete Companies Law, based on English law from 1948.

It is therefore a great opportunity to put the new provisions into practice. Cyprus has, as usual, decided to approach the matter in a rather comprehensive manner.

Referring to the events of 2013, one can easily come to the conclusion that the contents of bank accounts not infrequently represent only a small percentage of a company’s total assets. After all, a company’s assets do not only consist of cash accumulated in its bank accounts, but in most cases include much higher-value non-monetary assets such as real estate, securities, trademarks or, forming part of the company, machinery and other types of movable property used in the course of business.

Therefore, the focus this time is on the companies themselves, together with their financial backing, and those companies for which the Registrar has reasonable grounds to suspect that they do not carry out the business activities described in their articles of association and have no other activity (Article 327 (1) of the Cyprus Companies Law). The basis for such a judgement will be, in the first instance, the recorded absence of financial statements of the company’s activities for a long period of time and the absence of regularly filed tax returns as required under Cypriot accounting rules. This may be the case, in particular, with holding companies whose purpose presupposes the absence of any day-to-day strictly business activity.

Therefore, entrepreneurs doing business in Cyprus who are deficient in their accounting records must be on their guard!

However, are they aware of the looming threat of liquidation? By the end of September 2015, 253,441 entities had been registered in the Cyprus company register. Comparing this to the number of companies on the aforementioned blacklist, which reaches 10,000, it is questionable whether all of these companies were even notified of the proceedings against them and, if so, whether the notification was effective?

In theory, entrepreneurs should be aware of this state of affairs. This is because all the above actions are carried out on the basis and within the limits of the applicable law in Cyprus. According to the Companies Law, entities deemed by the Registrar of Companies to be defunct companies should first be summoned to answer, within one month, whether the company is conducting or intends to conduct day-to-day business and whether it considers itself to be active. The summons shall be addressed to the company twice at an interval of 14 days. If the company does not respond within one month of the date of service of the second summons, the registry shall notify the entry of the company’s details in the official gazette (Gazette), with the proviso that, in the absence of evidence to the contrary, the company shall be dissolved and struck off the register after three months from the date of entry.

However, the deletion of a company from the register does not imply the formal liquidation of its assets. Indeed, with companies without assets, the liquidation procedure consists of a decision to remove the company’s name from the register. However, what if the company happens to hold assets of significant value? Then the court, as the liquidation will be compulsory, may take appropriate action to end its legal existence and order the compulsory liquidation of its assets. Each time, however, despite the formal deletion of the company from the register, the liability of the members of the management board for the company’s obligations does not cease. In this respect, the company is treated as if it had not been subjected to the liquidation procedure.

In the process of liquidation of a dysfunctional company, the post-liquidation assets remaining after the satisfaction of liabilities and payment of all existing debts are not placed at the disposal of its shareholders, as they, in the absence of interest in the company’s affairs, are deemed to be undisclosed. Such assets go into a state of so-called bona vacantia, i.e., according to Anglo-Saxon law, they are given the status of nobody’s assets. In practice, the possession and management of such property is vested in the state authority.

Of course, this state of affairs is not irreversible and the entrepreneur may at any stage seek to recover the lost assets. However, in the event of its final seizure, this already requires a more sophisticated evidentiary step and, above all, an invitation to the participation of the Cypriot governmental authority in the form of the Treasury’s General Asset Manager.

So there can only be one conclusion: it is better to take an interest in the fate of your company earlier, before it is swallowed up by the Cypriot recovery programme.

Author: Natalia Wytrykowska