Cyprus: Restructuring & Insolvency Comparative Guide

1 Legal framework

1.1 What domestic legislation governs restructuring and insolvency matters in your jurisdiction?

Corporate insolvency and restructuring are governed by:

• the Companies Law (Cap 113); and
• the Companies (Winding up) Rules 1933–2013.

1.2 What international / cross-border instruments relating to restructuring and insolvency have effect in your jurisdiction?

The EU Recast Regulation 2015/848 on Insolvency Proceedings and EU Directive 2019/1023 on Preventive Restructuring Frameworks have effect in Cyprus.

1.3 Do any special regimes apply in specific sectors?

Specific regimes apply to banks, insurance companies and alternative investment funds. The main respective related legislation is set out below:

• the Business of Credit Institutions Law (66(I)/1997, as amended);
• the Resolutions of Credit Institutions and Investment Firms Laws 2016 to 2/2021;
• the Law which Provides for Alternative Investment Funds and Other Related matters (124(1)/2018, as amended); and
• the Law on Insurance and Reinsurance Business and Related Issues (38(I)2016, as amended).

1.4 Is the restructuring and insolvency regime in your jurisdiction perceived to be more creditor friendly or debtor friendly?

The insolvency regime in Cyprus has traditionally been a creditor-friendly regime. One noteworthy example of this is the fact that a floating charge holder can appoint a receiver manager of its choice on a debtor, with minimal notice, provided that certain conditions set out within the floating charge are met.

However, in May 2015, elements of debtor-friendly legislation were introduced to the Cyprus insolvency framework, including:

• personal repayment plans and debt relief orders;
• amendments to the bankruptcy process; and
• the adoption of the examinership regime, originally an Irish insolvency tool – albeit that thus far this has been unsuccessful in Cyprus. Despite several applications having been made for the appointment of an examiner to the Cyprus courts since its introduction (other than the appointment of an interim examiner, which was subsequently dismissed), this mechanism has failed to bring about the desired results of rescuing companies as a going concern and preventing job losses.

1.5 How well established is the legal regime and infrastructure relevant to restructuring and insolvency in your jurisdiction (e.g. extent of recent legislative changes, availability of specialist judges / courts / advisers)?

The legal regime in relation to insolvency is well established: the Companies Law – which governs corporate insolvency – was introduced in 1951. This was a near mirror image of the English Companies Act 1948 (which at the time regulated liquidations and receiverships only). The regime in relation to restructuring through an insolvency tool is less established, as examinership was only introduced in Cyprus in 2015 and to date there have been no successful examinership appointments in Cyprus.

The insolvency profession was recognised in Cyprus with the introduction of the Insolvency Practitioners Law of 2015. Prior to that, any person could be appointed as a liquidator, trustee in bankruptcy or receiver manager, provided that they had not been adjudged bankrupt.

There are currently no specialist insolvency/commercial courts in Cyprus. With regard to corporate insolvency cases, these are heard by the district court where the company has its registered office (for at least six months before filing of the petition).

2 Security

2.1 What principal forms of security interest are taken over assets in your jurisdiction?

• Mortgage: This is a charge over immovable property which grants the mortgagee legal interest in the mortgaged property until full repayment of a loan or performance of obligations.
• Fixed charge: This is granted over specific assets and although these assets remain in the possession of the chargor, it gives the chargee a contractual right of control over any dealings or disposals of the tangible property by the chargor.
• Pledge over securities: This is a type of fixed charge under which the lender has the right to sell the securities (eg, shares in a company) in the event of default by the borrower, but until default, the general ownership of the securities remains with the pledgor.
• Debenture – floating charge: This is secured over all or any assets of a company, which may change from time to time, giving the chargor the right to deal with the assets in the ordinary course of business. A floating charge 'floats' over all or any assets until an event of default occurs in accordance with the terms of the floating charge or until the borrower goes into insolvent liquidation, at which time the floating charge 'crystallises' and attaches to all the assets.
• Assignment of receivables: Assignments may be granted on receivables from contracts, such as from a lease agreement or from a life insurance policy. The assignor may transfer its rights and benefits to a receivable to the assignee, which may be enforced to cover a debt.
• Guarantee: This may be a personal or a corporate guarantee and grants the lender permission to liquidate the personal assets of the guarantor in order to cover the debt. Guarantees generally grant the lender bank:
• • a general preferential lien over the assets of the guarantor in the control, custody or possession of the lender; and
  • the authority to offset the guarantor's accounts against liabilities of the borrower.
• Deposit guarantee (for financial institutions): This is a secure document where funds are deposited in a deposit account and the customer does not have access to use any amount of those funds until settlement of the amount secured, whereupon, by giving the agreed notice and with the bank's consent, the balance of the deposit account may be offset and/or withdrawn.
• General preferential lien (for financial institutions): This right generally exists in most banks' documents. This is a common law lien and gives the lender the right to retain possession of property belonging to another person until a debt has been paid. This type of lien lasts only for as long as possession is retained and is lost as soon as the asset is no longer in the possession of the lender.
• Right of set-off or banker's lien (for financial institutions): If there is no agreement to the contrary, the right of the lender to offset one account with another or to combine accounts of a customer generally applies.

2.2 How can those security interests be enforced (and what factors could complicate or prevent this process)?

To be enforceable:

• the security documents must be duly stamped with stamp duty; and
• the mortgage must also be registered with the relevant district land registry.

To be enforceable in the event of the appointment of a liquidator or against other creditors, the securities must also be registered with the registrar of companies.

Subject to the above formalities, the security documents may be enforced in accordance with their terms. The general procedure is that the lender must:

• send written notice of demand to the borrower and all security providers of the final amount due and payable; and
• terminate the facility and, if the creditor is a bank, close the account.

If the borrower continues to default (ie, fails to pay the amounts due within the notice period), the lender may proceed to enforce the securities held.

One obstacle to enforcement arises if there is a dispute as to the final amount, in which case the lender must apply to court to obtain a judgment on the debt due. The most common defence of debtors during court proceedings is challenging the bank's charges and interest calculations.

If, in the meantime, a receiver is appointed under the terms of a debenture/floating charge, the debtor may choose not to recognise the appointment and not to grant access to property and premises to the receiver. In this case, the receiver may be forced to apply to court to obtain a court order, which may be enforced against the debtor.

As regards a mortgage, under the Transfer and Mortgage of Immovable Property Law, the mortgagee may apply to the Land Registry to sell the mortgaged property via public auction. This is a straightforward procedure and a court order is not required; although obtaining a court order to this effect has become common practice in an effort to expedite the process (to avoid further unnecessary delays where a security provider may file an application with the Land Registry to suspend any proposed sale pending a court decision (under the Security Providers (Suspension of Sale of Property) Law). Alternatively, a mortgagee may proceed via auction by a series of notices to all interested parties (ie, the principal debtor, affected guarantors and any other interested parties). However, any such person may apply to the court to set aside the notice for sale by auction if:

• the notices were not sent within the proper time limits;
• the notices are not in the proper form; or
• there is a pending dispute in court regarding the actual amount owed.

The general preferential lien and right of set-off, being provisions within documents, are mechanisms that may be used immediately by the lender upon default.

3 Restructuring

3.1 Are informal workouts available in your jurisdiction? If so, what forms do they typically take, and what are the benefits and drawbacks as compared to formal restructuring proceedings?

The most common form of informal workout is the refinancing of the debtor's financial obligations through the same or a different financial institution, which could also entail the sale of a business asset to provide liquidity or a sale and leaseback option. Alternatively:

• a strategic investor or new business partner willing to invest in new shares or provide loans in order to aid the debtor facing financial difficulty and improve its long-term prospects may offer a workout; or
• an internal corporate restructuring of the debtor may be possible, which could include:
• • the laying off of redundant employees; or
  • the sale, division or amalgamation of certain business or assets of the debtor.

A combination of all or any of the above is also possible.

These workouts – if initiated early enough and especially if initiated by the debtor – may help the debtor to overcome temporary financial difficulties and ensure its viability. However, the debtor is usually reluctant to admit the need for rescue proceedings unless and until initiatives are instigated by the major lender – by which time the negotiations for restructuring will be mostly led and be in favour of the major lender, whose main focus is the recovery of its debt and not the long-term survival of the debtor.

Another drawback for the debtor is that any such workout will not stop creditors, lenders, shareholders, stakeholders, employees, employee representatives (unions) or the Tax Department from seeking alternative action and remedies for their rights and exposure against the debtor through court and possible execution measures.

3.2 What formal restructuring proceedings are available in your jurisdiction, and what are the benefits and drawbacks of each?

Formal restructuring proceedings are available in Cyprus under Sections 198 to 200 of the Companies Law through an arrangement or compromise to be entered into by the debtor with its creditors and/or its members. Arrangements or compromises are available for companies, irrespective of their state of solvency.

It is necessary for a simple majority (by value) of creditors or class of creditors or majority in terms of votes of members or class of members affected by the arrangement or compromise to approve the same. If sanctioned by the court, the arrangement or compromise will be binding on all creditors and/or members (as appropriate), including those that dissented.

If satisfied that all formalities have been met and that the arrangement or compromise has been duly approved by the members and/or creditors, the court will generally sanction the arrangement or compromise. Depending on the intentions of the parties involved and affected, this can be a relatively expeditious procedure.

However, unless otherwise provided in the court order, the existence of a court-sanctioned arrangement or compromise does not stop the debtor or any creditor from initiating insolvency proceedings. If the arrangement or compromise does not affect and bind all creditors of the debtor, any non-affected creditor that was not invited to vote may initiate insolvency proceedings. Therefore, it is important to keep creditors informed and acquiescent during this procedure.

3.3 How, by whom and on what grounds are formal restructuring proceedings initiated? What are the main preconditions for success?

An arrangement or compromise may be:

• between the debtor and its creditors or any class of creditors; or
• between the debtor and its members or any class of members.

It may be initiated, supervised and led by the debtor, any creditor(s) or member(s) or a liquidator (where the debtor is in liquidation), at any time; the law does not provide specific grounds pursuant to which the restructuring proceedings are initiated.

Once the terms of the arrangement or compromise have been drafted, the debtor, its liquidator, any affected member or creditor may apply to court to initiate the procedure for the approval of the arrangement or compromise by the affected classes of members and creditors and, following this, may request the sanction of the arrangement or compromise by the court.

The arrangement or compromise must be approved by a majority (in value) of the classes of creditors or members that are present at the respective meetings, either in person or via proxy.

If the court is satisfied of the following, it will generally sanction the arrangement or compromise:

• All members and creditors have been duly notified of the meetings and provided with a report on the consequences of the arrangement or compromise, which includes:
• • whether the directors or debenture holders have any specific interests in the matters arranged or compromised, as directors, members, creditors or otherwise; and
  • the effect of the arrangement or compromise for each class of members and creditors to the extent that it is different from the effect on similar interests of other persons;
• The respective meetings of the different classes of creditors and members have been duly held; and
• The arrangement or compromise has been duly approved by a majority in terms of votes by members and/or in terms of value by creditors.

3.4 What are the effects of the commencement of formal restructuring proceedings, both for the debtor and for creditors?

The directors of the debtor remain in control of the debtor unless a liquidator has been appointed.

The creditors are not bound by the arrangement or compromise until this has been filed, together with the court order sanctioning it, with the registrar of companies (filing must be made within seven days of the date of the court order).

3.5 Does a moratorium or stay apply and, if so, what is its scope? Are there exceptions?

No automatic moratorium or stay of proceedings applies on the commencement of or during arrangement or compromise proceedings.

3.6 What process do restructuring proceedings typically follow (including likely length of process and key milestones)?

There are no statutory timelines or restrictions regarding arrangements or compromises pursuant to Sections 198 to 200 of the Companies Law. This is a matter that is determined depending on:

• the complexity of the arrangement or compromise; and
• the parties involved and their individual focus or intentions.

The arrangement or compromise is flexible:

• It may affect all or some creditors and members of the debtor; and
• It may cover all or some of the assets, income, liabilities and obligations of the debtor.

The arrangement or compromise may also include:

• the reorganisation of the debtor; or
• a merger of the debtor with another company.

The process generally involves:

• negotiation and agreement between the debtor and/or member(s) and/or creditor(s);
• drafting of the terms of the arrangement or compromise;
• approval of the draft terms by the board of directors of the debtor;
• a court application to direct the meetings of the classes of creditors and/or members for the purpose of approval of the draft proposal. At this point, any stakeholder may come forward and raise objections. Court involvement at this stage may be bypassed if all creditors and members unanimously approve the draft terms;
• send/publish notifications of respective meetings of creditors and members in accordance with the court order and/or the Companies Law;
• hold the meetings of the classes of members and/or creditors;
• once the respective meetings of members and/or creditors have duly approved the proposal, filing of a court application requesting the sanction of the arrangement or compromise – at which point any stakeholder may come forward and object to the application; and
• if the court order is granted, filing of the court order together with the arrangement or compromise with the registrar of companies.

If the arrangement or compromise involves a merger and the dissolution of the debtor, audited accounts must be drawn up to the date of its dissolution and a tax clearance certificate must be obtained from the Tax Department.

The court application(s) are summary applications. The court process can be relatively short, taking anywhere from:

• three months in the case of a unanimously consensual and straightforward arrangement or compromise involving few stakeholders; to
• three years or longer in the event of dissenting stakeholders raising objections in court or initiating parallel court procedures.

3.7 What are the roles, rights and responsibilities of the following stakeholders in restructuring proceedings? (a) Debtor, (b) Directors of the debtor, (c) Shareholders of the debtor, (d) Secured creditors, (e) Unsecured creditors, (f) Employees, (g) Pension creditors, (h) Insolvency officeholder (if any), (i) Court.

(a) Debtor

The debtor is usually the party that:

• leads the negotiations;
• proposes an arrangement or compromise; and
• brings together the members and creditors and any other stakeholders to notify them and, if necessary, obtain their approval.

If there are employees who will be transferred to a new entity under the arrangement or compromise, the debtor must also notify them and their representatives (unions) of details of the transfer and the measures envisaged in relation to the employees.

The debtor is bound to:

• comply with the terms of any court order issued in the scope of any application made for an arrangement or compromise;
• prepare proposals to members and/or creditors and convene the respective meetings;
• file the final court order sanctioning the arrangement and compromise with the registrar of companies; and
• attach the court order to its memorandum and articles of association.

(b) Directors of the debtor

Provided that no liquidator has been appointed, the directors remain in control during the restructuring process. They will:

• perform all matters that the debtor is obliged to perform and act in the best interests of the debtor;
• examine the debtor's financial viability to enter into the arrangement or compromise;
• to the extent possible, ensure the debtor's continuation as a going concern; and
• resolve conflicts of stakeholder interests.

For the purposes of the proposal to be prepared for the members and creditors, each director must declare his or her interests in any arrangement or compromise.

(c) Shareholders of the debtor

The shareholders act in their own personal interests in the negotiations, approval or dissent of a proposed arrangement or compromise. Dissenting shareholders may be bound by an arrangement or compromise sanctioned by the court.

(d) Secured creditors

Secured creditors, due to the security interest held, will usually be involved in the negotiations and will be invited to vote on a proposed arrangement or compromise. A dissenting secured creditor may be bound by a court-sanctioned arrangement or compromise if the other creditors of its class, holding in value the majority votes, approve it.

However, until the court order sanctioning the arrangement or compromise has been issued, unless prevented from doing so by court order, the secured creditor may at any time exercise its rights under any security held.

(e) Unsecured creditors

Unsecured creditors may or may not be involved in the restructuring process; and they may, like other stakeholders, oppose the proposal(s) put to them through court proceedings in an effort to avoid being bound by the same.

The court has the discretion to make provisions for any persons that dissent to the arrangement or compromise (Section 200(1)(e)) of the Companies Law).

Until the court order sanctioning the arrangement or compromise has been issued and unless prevented from doing so by court order, judgment creditors may also proceed with enforcement measures against assets of the debtor.

(f) Employees

If there are employees, the proposal should cover:

• whether any of them will be made redundant under the Termination of Employment Law; or
• in the event of a merger or transfer of the business, whether their employment will continue under a new entity under the Maintenance and Safeguarding of the Employees' Rights in the Event of Transfer of Undertakings, Businesses, or Parts Thereof Law.

In the event of any changes to the terms of their employment, the employees or their representatives (unions) will need to be consulted and must agree to any changes.

Where the employment of an employee is terminated because of redundancy before the attainment by the employee of the pensionable age, the employee is entitled to a redundancy payment out of the redundancy fund. Alternatively, if the employee is of pensionable age, he or she will retain his or her benefits under the Social Insurance Law.

(g) Pension creditors

Employees no longer employed in the debtor's business at the time of the transfer maintain their acquired or prospective entitlement to old age or invalidity benefits, including survivors' benefits, under occupational or inter-occupational pension schemes (under the Maintenance and Safeguarding of the Employees' Rights in the Event of Transfer of Undertakings, Businesses, or Parts Thereof Law).

(h) Insolvency office holder (if any)

As the arrangement or compromise process is not, per se, an insolvency process, no office holder will be appointed or involved unless the debtor is in liquidation.

A liquidator may initiate and utilise the arrangement and compromise procedure to sell or dispose of any property or assets of the debtor. The role, rights and responsibilities of the liquidator are those set out in the Companies Law and analysed in more detail in question 4. Suffice to add that where a liquidator initiates a compromise or arrangement, the liquidator will be duty bound to undertake the restructuring process, including:

• preparing the proposals and negotiating with stakeholders;
• applying to court for an order to convene meetings of members and/or creditors;
• convening the respective meetings as appropriate;
• applying to court for sanction; and
• implementing the terms of the proposal as sanctioned by the court.

(i) Court

The court may, on application, direct the convening of meetings of the members, classes of members, creditors or classes of creditors accordingly, at its absolute discretion and as it may deem appropriate.

The court, on application, will examine and determine at its discretion whether to sanction the arrangement or compromise.

If the arrangement or compromise includes a reorganisation or a merger of the debtor, the court may, together with the sanction of the arrangement or compromise, in the same or in a separate order, also order:

• the transfer of all or part of the business, assets or obligations of the debtor to another company ('receiving company');
• the granting or issuing by the receiving company of any shares, debentures, securities or similar interests to any person in the context of the arrangement or compromise;
• the continuation of legal action by or against the debtor by the receiving company;
• the dissolution without liquidation of the debtor;
• provisions to be taken for any persons dissenting to the arrangement or compromise; and
• any related, consequential and supplementary matters as may be necessary to ensure the full and effective conduct of the reorganisation or merger.

3.8 Can restructuring proceedings be used to "cram down" and bind dissentient creditors to a transaction supported by other creditors? Are creditors separated into classes for the purposes of voting in the proceedings? What are the relevant voting thresholds? Is "cross-class cramdown" available?

There are no cramdown provisions in the Companies Law. A dissenting creditor may be bound by a court-sanctioned arrangement or compromise only if the other creditors of its class, holding in value the majority votes, approve it. Furthermore, the court has discretion to make any provisions for any persons that disagree with the arrangement or compromise (Section 200(1)(e) of the Companies Law).

However, until the court order sanctioning the arrangement or compromise has been issued, and unless prevented from doing so by court order, a secured creditor may at any time exercise its rights under any security held.

The Companies Law provides that meetings of the creditors or classes of creditors with which the arrangement or compromise is proposed must be held (Section 198(1) of the Companies Law).

Decisions are determined by the approval of a majority (in value) of those present at the meeting in person or by proxy.

There are no provisions in the Companies Law on cross-class cramdown. The majority of a class of creditors may reject the arrangement or compromise and the court does not have the discretion to overrule this.

3.9 Can restructuring proceedings be used to compromise secured debt?

A dissenting secured creditor may be bound by a court-sanctioned arrangement or compromise if the other creditors of its class, holding in value the majority votes, approve it. The court has discretion, in respect of property, assets and obligations transferred to another company, either via a merger or reorganisation, to declare that such assets or property are transferred free from any encumbrance, which ceases to have effect by virtue of the arrangement or compromise (Section 200(2) of the Companies Law). In practice, however, it is anticipated that a court will exercise such discretion only if the secured creditors would not oppose the compromise of their secured debt.

Moreover, until the court order sanctioning the arrangement or compromise is issued, and unless prevented from doing so by court order, the secured creditor may at any time exercise its rights under any security held.

3.10 Can contracts / leases be disclaimed or otherwise addressed through restructuring proceedings?

This is a matter governed by contract law, and as such will be possible only to the extent that provisions to this effect are included in the arrangement or compromise and the original contracting parties agree to this.

3.11 Can liabilities of third parties (e.g. guarantors) be released through restructuring proceedings?

There is no provision in Cyprus law providing for the release of liabilities of third parties through restructuring proceedings. The contractual provisions which regulate the relationship between the debtor and each third party (guarantor or professional adviser) will apply and cannot be amended (or released) merely because members or creditors vote in favour of a scheme of arrangement.

Any professional adviser providing a report (whether on a legal issue, financial data or valuation of property) on which any arrangement or compromise may rely or adopt will, as a matter of common practice, include disclaimers and provisions for the limitation of liability of the adviser on any party relying on such report. The extent to which such provisions will be upheld will depend on the diligent actions of the third party and the laws and regulations that may regulate any such third party being a member of a professional body.

As regards individual guarantors (not being directors of the debtor), the Protection of Certain Categories of Guarantors Law affords them a certain amount of protection to defeat the guarantee if they have not been adequately notified of the provisions of the guarantee and any changes regarding the obligations of the debtor.

3.12 Is any protection and/or priority afforded to the providers of new money in the context of restructuring proceedings (i.e. is "DIP financing" available)?

There is no provision for priority rescue financing in the context of arrangements or compromises, so such protection and/or priority will apply only to the extent that provisions to this effect are included in the proposal and will be governed by contract law.

3.13 How do restructuring proceedings conclude?

There is no formality for conclusion; this occurs with the conclusion of the obligations under the terms of the arrangement or compromise.

4 Insolvency

4.1 What types of insolvency proceeding are available in your jurisdiction, and what are the benefits and drawbacks of each?

Liquidation: This can take the form of:

• a members' voluntary winding-up (MVL) if the debtor is solvent;
• a creditors' voluntary winding up (CVL) if the debtor is insolvent;
• the continuation of either of the above forms of voluntary proceedings under court supervision; or
• winding up by the court (compulsory liquidation).

Once a debtor enters into liquidation proceedings:

• the powers and duties of the directors cease;
• generally, the debtor ceases trading;
• the assets must be located, realised and distributed among creditors; and
• upon completion of the administration of the liquidation, the debtor is dissolved.

A liquidator has:

• draconian powers allowing him or her to investigate the affairs of the company; and
• the power to apply to court for public examination of:
• • any person who was an officer of the company; or
  • any person who has taken part in the debtor's promotion, formation and management.

A liquidator can also, among other things, challenge certain transactions such as preferences and take action in respect of fraudulent trading.

Provisional liquidation: The most common ground for applying for the appointment of a provisional liquidator is where it is shown that:

• the assets of the debtor are being, or are likely to be, dissipated to the detriment of its creditors; or
• the appointment is otherwise necessary to protect the assets.

The court may appoint a provisional liquidator at any time in the period between presentation of a petition for the compulsory winding-up of the debtor and the making of a winding-up order or the dismissal/striking out of the petition accordingly. The provisional liquidator's powers will usually be set out in the order for his or her appointment. Generally, the role of the provisional liquidator will be to protect the debtor's assets until the appointment of a liquidator.

Receivership: A secured creditor holding a floating charge (debenture) over assets of a debtor can appoint a receiver manager to realise the assets that are subject to the charge. The receiver manager may operate the business on behalf of the debenture holder and discharge the debt out of the proceeds. A receiver manager acts as agent for the debenture holder and does not have investigative powers; his or her powers are set out in the floating charge appointing him or her.

This can prove to be an expeditious process for a debenture holder, given that it has become common practice for the appointment of the receiver to be made within hours of the service of a demand on the debtor.

The powers of the directors do not cease; they maintain certain statutory duties, among others, but they no longer have authority to exercise their ordinary business management functions.

Any creditor or interested party may, by court application, challenge the appointment or any act of a receiver manager; and the creditors of the debtor maintain all legal enforcement rights afforded to them by law and any document in respect of any debt due by the debtor.

Examinership: Applying for examinership results in a moratorium during which, under the protection of the court, an examiner assesses the viability of the business of the debtor and compiles a restructuring plan which must be approved by the majority (in value) of members (or class of members) and creditors (or class of creditors) before being confirmed by the court. Confirmation of the restructuring proposal by the court will allow the debtor to continue as a going concern and avoid liquidation and receivership.

However, to date, the examinership tool has primarily been used abusively in an effort to block the appointment of a receiver; no company has achieved an unchallenged or final order appointing an examiner since the introduction of examinership in Cyprus in 2015.

4.2 How, by whom and on what grounds are insolvency proceedings initiated? Can the instigating party (or any other parties) select the identity of the relevant insolvency officeholder?

Liquidation: In the case of an MVL, this is initiated by the board of directors resolving that it is desirable for:

• the debtor to be liquidated;
• a declaration of solvency to be sworn by the board of directors (or a majority of them); and
• a general meeting to be convened.

At the general meeting, the members will resolve that the debtor be placed in MVL and will choose an insolvency practitioner (IP) to be appointed as liquidator.

In the case of a CVL, the process is initiated by the board of directors resolving to:

• convene a general meeting and a meeting of creditors for the purpose of winding up the debtor as a CVL; and
• appoint a director to chair both meetings and prepare a statement of affairs.

The general meeting will resolve in favour of liquidation and choose an IP to be appointed liquidator. The creditors' meeting will also appoint an IP to act as liquidator. The decision of the creditors prevails in the event that different IPs are chosen.

A compulsory liquidation is initiated by application to the court made by the debtor, a creditor, a contributory, an examiner or the official receiver. The court may grant a winding-up order if:

• the debtor has resolved by special resolution to be wound up by the court;
• default is made in delivering the statutory report to the registrar of companies or in holding the annual general meeting;
• the debtor does not commence business within one year of its incorporation or suspends its business for one year;
• the debtor is deemed unable to pay its debts; or
• the court is of the opinion that it is just and equitable for the debtor to be wound up.

A debtor is deemed unable to pay its debts, for the purposes of winding-up, if:

• a statutory demand from a creditor for a debt exceeding €5,000 remains unpaid for more than three weeks;
• a judgment debt is returned unsatisfied in whole or in part;
• the court is satisfied that the debtor is unable to pay its debts as these fall due, taking into account potential and future liabilities; and
• the court is satisfied that the value of the debtor's assets is less than its liabilities, taking into account potential and future liabilities.

Upon the making of the winding-up order, the court may appoint, instead of the official receiver, an insolvency practitioner to act as liquidator if such an order is sought by the petitioner. When making an order for the appointment of a liquidator (for someone other than the official receiver), the court will have regard to the wishes or positions of the following in the order of priority set out below:

• the creditors and the majority in value thereof;
• the applicant; and
• the company's contributories.

If a liquidator other than the official receiver is appointed by the court, he or she must, if requisitioned by a creditor, a contributory or the company, convene respective meetings of members and creditors within 60 days of the request so that those meetings can appoint a liquidator of their choice.

If the official receiver is appointed liquidator by the court, he must convene meetings of the members and creditors for the same purpose as set out above within 40 days of appointment.

Receivership: The debenture holder may, upon crystallisation of the floating charge in accordance with the terms contained in the charge document, appoint any IP as receiver manager over those assets of the debtor secured by the debenture.

Examinership: The following parties may apply to court for the appointment of an examiner:

• the debtor;
• a creditor;
• member(s) holding not less than 10% of the voting shares; or
• a guarantor of the debtor's obligations.

The application is filed together with a report prepared by an independent expert (either an auditor or an IP) which includes, among other things:

• a statement of affairs of the debtor (drawn up by the directors);
• whether, in the expert's opinion, the debtor has a reasonable prospect of survival as a going concern; and
• a statement of the conditions which are considered essential to ensure such survival.

The applicant may nominate an IP to act as examiner in its application. The court will grant the order if it is satisfied that:

• the debtor is insolvent or there is a likelihood of insolvency;
• no resolution has been passed and no order has been made for the winding-up of the debtor; and
• there is a reasonable prospect of survival of the debtor and all or any part of its undertaking as a going concern.

4.3 What are the effects of the commencement of insolvency proceedings, both for the debtor and for creditors?

Liquidation: Liquidation is deemed to commence on the date of filing of the petition (Section 218(2) of the Companies Law); while voluntary liquidation is deemed to commence on the date of the passing of the resolution for winding up. As far as the debtor is concerned, after the winding-up order/resolution has been made placing it in voluntary liquidation, the powers of the directors cease except:

• in an MVL, insofar as the company or the liquidator sanctions their continuance; or
• in a CVL, insofar as the committee of inspection or creditors sanction their continuance.

In respect of winding-up by the court, for the debtor and creditors, the impact is as follows:

• Any disposition of the property of the debtor, including things in action, and any transfer of shares or alteration in the status of the members will be void, unless a validation order is obtained;
• No action or proceeding will be proceeded with or commenced against the debtor except with leave of the court; and
• Execution measures against the property of the debtor executed against or attached to the property of the debtor after the commencement of the liquidation are void.

Receivership: From the date of appointment of a receiver manager, the receiver manager has the power to deal with the assets which are secured by the debenture. As mentioned in question 4.1, the powers of the directors do not cease but are limited: their management functions are restricted to the extent of power and control granted to the receiver and manager as set out in the debenture. The debtor's existing legal and contractual obligations and undertakings continue and may be exercised; and any creditor may enforce any available legal or contractual measure against the debtor. The receiver's primary duty of care is to the debenture holder that appointed him or her.

Examinership: From the date of filing of the application for the appointment of an examiner, and for as long as the debtor is under the protection of the court, the directors retain their powers and control of the operations of the debtor unless, following a petition by the examiner, the court decides that it is just and equitable that all or any of the powers which are vested in or exercisable by the directors be exercised by the examiner. The debtor may not pay any prior existing debts without the authorisation of the examiner or recommendation of the independent expert or sanction of the court, with the exception of utility bills. The debtor is protected against actions of creditors by a moratorium.

4.4 Does a moratorium or stay apply and, if so, what is its scope? Are there exceptions?

Liquidation: No moratorium applies.

In respect of compulsory liquidation, no court proceedings may be continued or initiated against the debtor without the prior leave of the court and subject to any terms that the court may impose.

Receivership: No moratorium or stay applies.

Examinership: From the date of submission of the application for the appointment of an examiner, the debtor is deemed to be under the protection of the court. The moratorium will last for four months, but this can be extended by the court by up to a maximum of 12 months.

If the petition is filed without an independent expert's report and the court is satisfied that time is required to prepare the report which, due to circumstances outside the control of the applicant, it was not possible to prepare, the court may place the debtor under its protection for such time as the court deems appropriate, being no more than 15 days, to allow for submission of the report.

While under such protection:

• no petition may be presented and no resolution may be passed for the debtor to be wound up;
• no receiver can be appointed and any receiver in place can be required by the court to cease to act;
• no seizure, lien, attachment or execution shall take place against the property or goods of the debtor;
• no action may be taken to liquidate the whole or any part of any assets, goods or income secured by any mortgage, charge, lien or pledge;
• no action may be taken to recover goods held by the debtor pursuant to any hire purchase agreement;
• no proceedings can be commenced against any guarantor of the debtor's debts; and
• no proceedings can be commenced against the debtor, including in respect of the conduct of its affairs or the exercise of the powers of the directors.

4.5 What process do insolvency proceedings typically follow (including likely length of process and key milestones)?

Liquidation: A liquidator is appointed to identify, locate, secure and realise the assets of the debtor and discharge the debtor's debts to the extent possible.

Provided that all parties are amicable to the MVL or CVL process and there are no pending legal actions, it may take a year or two to complete the process.

The Companies Law provides that a compulsory liquidation process will be completed within 18 months of commencement. If this does not prove possible, an application must be made by the official receiver or liquidator to obtain an extension. However, in practice, the vast majority of liquidations are not completed within this period. In fact, if a winding-up petition is disputed, it will take longer than 18 months for the court to wind up the debtor. The length of the insolvency proceedings therefore depends on the circumstances of each case; where there are causes of action to be pursued (or defended), it will take several years before a liquidation can be completed.

Receivership: The debenture holder will appoint a receiver manager pursuant to the terms of a floating charge. The receiver manager appointed will take under his or her control the undertaking and assets of the debtor secured by the floating charge, and may trade to receive any receivables or realise assets to repay the sums due to his or her appointer, depending on the powers granted to him or her under the floating charge. This process may take any number of months or years, depending on:

• the realisation prospects of the assets; and
• challenges via court proceedings that may be made by, for example, either:
• • the directors of the debtor; or
  • any creditor against the appointment or any act of the receiver.

Another milestone in both of the above procedures – particularly where the procedure is not instigated by the debtor itself or where the debtor is opposed to the procedure – is the cooperation of the management of the debtor to provide to the IP complete and necessary information regarding the affairs of the debtor. There are many cases of receivership and liquidation proceedings in which the IP is forced to initiate court proceedings against the directors of the debtor and third parties to allow access to, or relinquish possession of, property of the debtor.

Examinership: To date, no examiner has been successfully appointed; therefore, there is no guidance as to how this procedure typically unfolds in practice. Under the Companies Law, the examiner will examine the independent expert's report and the affairs of the debtor; and, as soon as practically possible after his or her appointment, will present proposals for compromise or schemes of arrangement to be approved at least by the majority (in value) of each of the creditors (or class of creditors) and members (or class of members) of the debtor. If approved and ratified by the court, these proposals may, at the discretion of the court, bind all members and creditors of the debtor. The entire process must be completed within four months; however, the examiner may apply to court to extend this period, subject to certain requirements being met, by up to a total of a further eight months.

4.6 What are the respective roles, rights and responsibilities of the following stakeholders during the insolvency proceedings? (a) Debtor, (b) Directors of the debtor, (c) Shareholders of the debtor, (d) Secured creditors, (e) Unsecured creditors, (f) Administrator, (g) Employees, (h) Pension creditors, (i) Insolvency officeholder, (j) Court.

(a) Debtor

Liquidation: The debtor ceases to trade (expect for its beneficial winding-up); and from the date on which the debtor is in liquidation, all invoices and documents bearing its name must state that it is in liquidation.

Receivership: If the receiver manager so decides, the debtor's trading activities may continue. However, from the date on which the debtor is placed in receivership, all invoices and documents bearing its name must state that it is in receivership.

Examinership: The debtor continues trading and its directors retain their management and other powers unless the court orders otherwise. The debtor, where it is the party that applies for the appointment of an examiner, must appoint an independent expert who will prepare a report to the court vis-à-vis the debtor's financial position, to be submitted together with the examinership petition. From the date that the debtor is under the protection of the court, all invoices and documents bearing its name – including the company website and emails – must state that it is in examinership.

(b) Directors of the debtor

Liquidation: The duties of the directors cease. The directors must:

• provide the liquidator with a statement of the affairs of the debtor drawn up on the date of his or her appointment; and
• generally cooperate with the liquidator and his or her investigation and enquiries into the affairs of the debtor.

If the directors do not cooperate, the liquidator has the power to apply to the court for their public examination.

In the case of an MVL, the directors (or a majority of them) must provide a declaration of solvency of the debtor, which must be filed with the Insolvency Department and presented to the general meeting.

Receivership: The directors retain certain powers, as mentioned in questions 4.1 and 4.3; however, they no longer have the power to manage the assets secured by the floating charge debenture, as these are placed in the hands of the receiver. The directors must provide the receiver with a statement of the affairs of the debtor drawn up on the date of his or her appointment.

Examinership: The directors retain control of the affairs of the debtor unless, following a petition by the examiner, their powers are limited by a court order. If the application for the appointment of an examiner is made by the debtor, a creditor or a member, the directors of the debtor must cooperate with the independent expert for the preparation of the report. Once an examiner has been appointed, the directors must:

• produce all books and documents relating to the debtor which are in their possession or under their control;
• present themselves before the examiner, whenever requested; and
• provide all reasonable help to the examiner in carrying out his or her functions.

(c) Shareholders of the debtor

Liquidation: In the event of an MVL where the whole or part of the business is proposed to be sold to another company, the liquidator may proceed with the sanction of a special resolution, giving him or her the authority to enter into the transaction.

In the event of a CVL and compulsory winding-up, the shareholders may appoint a liquidator during a duly convened meeting of members, but the decision of the creditors prevails. In all liquidations, any proceeds that remain following distribution to all creditors are distributed to the shareholders subject to the rights attached to their shares.

Receivership: The shareholders have no power or say over the actions of or appointment of the receiver.

Examinership: Shareholders may petition for examinership of the debtor provided that they hold, at the time of the presentation of the petition, not less than one-tenth of the paid-up capital that carries, at the time, voting rights at a general meeting.

Shareholders (or classes of shareholders) will be invited to vote in respect of proposals put forward by the examiner for a compromise or scheme of arrangement. However, regardless of whether they vote for or against the proposals, the court can ratify the proposals, provided that:

• at least one class of creditors votes in favour; and
• among other things, the proposals are not unfairly prejudicial to the interests of any interested party.

Nevertheless, members whose interests are impaired by the proposals may object to their ratification at court.

(d) Secured creditors

Liquidation: Secured creditors will rely on their security and can proceed to foreclose and sell immovable property at auction irrespective of the appointment of a liquidator.

Any secured creditors that wish to submit a proof of debt must:

• surrender their security for the benefit of creditors; or
• value their security and prove for the difference.

Receivership: Secured creditors which have a floating charge debenture in their favour have a leading role in a receivership, as they are the appointors of the receiver, who acts primarily in their interests (and also has a duty of care to guarantors).

Any realisations made by the receiver will be paid in the following order of priority:

• expenses of the receivership;
• then preferential creditors; and
• then payment to the floating charge holders.

Any surplus after settlement of the floating charge holders will remain with the debtor; the receiver will not settle debts of unsecured creditors.

Examinership: All creditors have the right to be heard in an examinership application and can oppose the ratification of a scheme or proposal on the grounds set out in Section 202Ζ of the Companies Law.

(e) Unsecured creditors

Liquidation: In both a CVL and compulsory liquidation, the liquidator must act in the best interests of creditors.

Unsecured creditors determine who will be appointed liquidator; this will be the IP in whose favour a majority of creditors (in value) vote for, in person or by proxy. In the event of a CVL, a creditor may at any time apply to the court for the liquidation process to continue under the supervision of the court. At any point, any creditor wishing to bring any action against the debtor must obtain the prior leave of the court. In any type of liquidation, any creditor may at any time apply to the court for a review of the exercise of the liquidator's powers or to determine any question arising in the winding-up.

A committee of inspection may be appointed, which will be comprised of up to five creditors and contributories of the debtor, to assist and supervise the liquidator in the exercise of his or her duties and determine his or her remuneration.

Receivership: The receiver owes no duty of care to unsecured creditors. The unsecured creditors have all rights of recovery options against the debtor afforded to them under the law and may proceed with execution measures and/or the filing of a winding-up petition while the receivership is ongoing.

Examinership: All creditors have the right to be heard in an examinership application and can oppose the ratification of a scheme or proposal if they believe that their interests are impaired by its terms.

The court may, upon application by a creditor, authorise the payment of any obligation if it is satisfied that failure to pay it would substantially reduce the prospects of survival of the debtor as a whole or any part of its business as a going concern.

Utility providers – including providers of electricity, telephone services, water and internet services – will continue to provide services to the debtor, as long as they are paid for any costs incurred during the period that the debtor is under the protection of the court.

If a committee of creditors is appointed, this:

• may consist of no more than five members; and
• must consist of the three largest unsecured creditors.

The committee of creditors provides the examiner with its opinion in respect of the proposed scheme or proposal on behalf of the group of creditors that each member of the committee represents.

(f) Administrator

The Companies Law does not provide for or recognise an administrator.

(g) Employees

Liquidation: Employees have the same role, rights and responsibilities as unsecured creditors, but their claims rank as preferential claims.

Receivership: Sums due to employees – including wages, deductions from wages (eg, provident fund contributions) and compensation for injuries – rank in priority as preferential claims over any floating charge.

Examinership: Employees have the same role, rights and responsibilities as unsecured creditors. Additionally, the scheme or proposal should cover:

• whether any employees will be made redundant under the Termination of Employment Law; or
• in the event of a merger or transfer of the business, whether their employment will continue under a new entity under the Maintenance and Safeguarding of the Employees' Rights in the Event of Transfer of Undertakings, Businesses, or Parts Thereof Law.

In the event of any changes to the terms of their employment, the employees or their representatives (unions) must be consulted and must agree to any changes.

Where the employment of an employee is terminated because of redundancy before the attainment of pensionable age, the employee is entitled to a redundancy payment out of the redundancy fund; alternatively, if the employee is of pensionable age, he or she retains his or her benefits under the Social Insurance Law.

(h) Pension creditors

Liquidation: Pension creditors have the same role, rights and responsibilities as employees.

Receivership: Pension creditors have the same role, rights and responsibilities as employees.

Examinership: Pension creditors have the same role, rights and responsibilities as employees. Employees no longer employed in the debtor's business at the time of the transfer maintain their acquired or prospective entitlement to old age or invalidity benefits, including survivors' benefits, under occupational or inter-occupational pension schemes (under the Maintenance and Safeguarding of the Employees' Rights in the Event of Transfer of Undertakings, Businesses, or Parts Thereof Law).

(i) Insolvency office holder

Liquidation: The liquidator is responsible for:

• winding up the affairs of the debtor;
• identifying, locating and realising the assets; and
• distributing the proceeds by way of a dividend on a pari passu basis in accordance with the statutory order of priority.

The liquidator must adjudicate on proofs of debt filed and inform creditors of the amount of their claims accepted/rejected. The liquidator has extensive powers, including, without limitation, the right to:

• defend claims against the debtor;
• issue legal proceedings on behalf of the debtor;
• continue to trade in the name of the debtor for its beneficial winding-up;
• borrow on the security of the debtor's assets; and
• make compromises or arrangements with creditors and debtors.

In CVLs and compulsory liquidations, the liquidator has the power to investigate the conduct of persons involved in the affairs of the debtor, including the power to apply to the court for the public examination of any company officer or anyone involved in its promotion, formation and management. In compulsory liquidations, the liquidator must file with the Insolvency Department his or her receipts and payments accounts on a six-monthly basis. In a CVL, the liquidator files a statement of all receipts and payments of the liquidation at the end of the administration.

Receivership: The receiver manager has control of all property covered by the debenture and his or her powers are set out in the debenture under which he or she is appointed. The receiver manager must:

• notify the debtor of his or her appointment;
• submit the statement of affairs that he or she has received from the directors of the debtor to the registrar of companies; and
• submit statements of receipts and payments of the receivership to the registrar of companies, the debtor and his or her appointee on a six-monthly basis.

The receiver manager has a primary duty of care to the secured creditor which appointed him or her, but also has a duty of care to guarantors. Once he or she has settled the debt owed to the debenture holder and the preferential creditors, the receiver manager resigns.

The receiver:

• may be personally liable on any contract entered into by him or her in the performance of his or her functions, except insofar as the contract otherwise provides (and typically a receiver will exclude any such liability in any contract entered into); and
• is entitled in respect of that liability to indemnity from the assets of the debtor.

Examinership: An examiner must notify the registrar of companies of his or her appointment and ensure its publication in the Official Gazette. As soon as practically possible after his or her appointment, the examiner must prepare proposals to be put to members and creditors at duly convened meetings before proceeding to file the same at court for sanction (provided that the majority of members or creditors or a class of creditors approves the same).

The examiner may appoint a committee of creditors to help him or her in performing his or her duties. The examiner also has the power to:

• receive notice of, convene, set the agenda and preside over board meetings and general meetings of the debtor, give proposals or resolutions and speak at such meetings;
• take any action necessary to stop or prevent any matter to be done by any person in relation to the debtor's income, assets or liabilities which he or she deems detrimental to the debtor or any interested party;
• examine the officers and representatives of the debtor or any other person in relation to the affairs of the debtor; and
• perform any duties set by the court.

(j) Court

Liquidation: The court will decide whether to make a winding-up order, following a petition made for the winding-up of a debtor or for the continuation of a voluntary winding-up of a debtor under the supervision of the court.

In the majority of compulsory liquidations, the official receiver is appointed liquidator by the court by virtue of his office and the Companies Law provides that the official receiver can apply to court for an IP to replace the official receiver as liquidator. Alternatively, upon the making of the winding-up order, the court may appoint, instead of the official receiver, an IP to act as liquidator if such an order is sought by the petitioner.

A liquidator requires the sanction of the court (or a committee of inspection) to exercise certain powers and may apply to the court for directions. A liquidator can apply to the court for the public examination of any persons involved in the affairs of the debtor before the court.

Receivership: Any receiver manager appointed under the powers contained in a floating charge debenture may apply to the court for directions on any matter arising in connection with the performance of his or her duties.

Examinership: The court must be satisfied that there is a reasonable prospect of survival of the debtor and all or any part of its business, as a going concern, in order to appoint an examiner. To determine this, the court may take into account:

• whether the debtor has requested significant extensions of time from its creditors for the payment of its debts, from which it can reasonably be inferred that the debtor is likely unable to pay its debts; and
• whether the debtor has undergone a restructuring of its debts by any bank.

The court may also allow the removal from the independent expert's report of any information whose inclusion is likely to adversely affect the survival of the debtor or all or any part of its business as a going concern. The court may refuse to hear or continue an application if it considers at any time that the applicant or the independent expert failed to disclose any material information or did not act in good faith. The court will not ratify a scheme or proposal unless:

• at least one class of creditors whose rights are affected by the scheme or proposal accepts the same; and
• it is satisfied that:
• • the scheme or proposal does not adversely affect the interests of any party; and
  • the main purpose of the scheme or proposal is not the avoidance of tax due.

4.7 What is the process for filing claims in the insolvency proceedings?

Liquidation: Creditors must submit a statutory proof of debt form together with documents evidencing the debt with the liquidator. In respect of compulsory liquidation, the proof of debt must be filed within 35 days of publication of the winding-up order in the Official Gazette, unless the official receiver or liquidator grants an extension to this time limit following the making of a duly justified request.

4.8 How are claims ranked in the insolvency proceedings? Do any claims have "super priority" and is there scope for subordination by operation of law (e.g. equitable subordination)?

In liquidation proceedings, the debts are paid in the following priority:

• the petition costs (in a compulsory liquidation);
• the costs of the winding-up, including the fees of the liquidator (plus 3% of realisations to the official receiver in respect of compulsory liquidations);
• preferential creditors, which include:
• • all government and local taxes due at the date of liquidation and that have become due and payable in the 12 months before that date and, in the case of assessed taxes, not exceeding one year's assessment; and
  • all sums due to employees, including wages, deductions from wages (eg, provident fund contributions) and compensation for injury;
• all amounts secured by a floating charge, if any;
• unsecured creditors (non-preferential claims);
• deferred debts, such as sums due to members in respect of unpaid dividends; and
• any share capital of the debtor.

Τhere is no special provision in the law for super-priority debts or subordination of any debt.

4.9 What is the effect of insolvency proceedings on existing contracts? Is the counterparty free to terminate? Can they be disclaimed?

Liquidation: Any part of the property of a debtor being wound up consisting of the following may, with the sanction of the court, within 12 months of the commencement of the liquidation or such extended period as may be approved by the court, be disclaimed in writing by the liquidator:

• immovable property burdened with onerous covenants;
• shares or debenture stock in companies;
• unprofitable contracts; and
• any unmarketable property or property that is not readily saleable due to it binding the debtor to perform any onerous act or pay any sum of money.

Prior to sanctioning such action, the court may:

• require notices to be given to the persons concerned; and
• impose any terms or conditions it may deem fit, such as:
• • an order rescinding the contract; and
  • conditions as to the payment by or to each party of damages for non-performance of the contract.

In any case, this will not affect the rights or liabilities of any other person, unless this is necessary to exonerate the debtor and the debtor's property from liability. The liquidator will not be entitled to disclaim any property where:

• a written request was made to him or her by any persons having an interest in the property asking him or her to decide whether he or she intends to renounce it; and
• the liquidator, for a period of 28 days or such longer period as the court may allow, does not respond or responds negatively.

In this case, the debtor will be considered to have adopted the onerous property.

A charge over property, assets or receivables of the debtor that has not been lodged with the registrar of companies in accordance with Section 90(1) of the Companies Law is void against the liquidator and any other creditor of the debtor.

A trade creditor may have a general preferential lien granting the creditor the right to retain possession of property until a debt has been paid. However, this can be enforced only as long as the creditor has possession.

Set-off applies automatically in the event of liquidation and retention of title clauses may also be relied upon to retain title to goods.

Examinership: Where proposals for a scheme of arrangement are to be formulated, the debtor may, following approval of the court, affirm or repudiate any contract under which some element of performance other than payment remains to be rendered by both the debtor and the other contracting party. Anyone that suffers loss or damage as a result of such repudiation shall stand as an unsecured creditor for the amount of such loss or damage.

Where an examiner is appointed, no one will be entitled to:

• retain against the examiner any document, book, record, receipt, bill or invoice belonging to the debtor and relating to the accounts, trading, dealings or operation of the debtor; or
• claim any right of lien thereon.

With regard to retention of title goods, during the moratorium, they cannot be repossessed by the supplier without the consent of the examiner.

On exiting the examinership process, the debtor can elect to use and pay for agreed retention of title goods in full or return those goods to the supplier. Based on common practice in Ireland – where examinership is a more established insolvency tool and thus guidance and precedent are available on its practical application – the independent expert's report may deem the use of the goods subject to the retention of title necessary for the survival of the debtor as a going concern. The independent expert may therefore recommend that the supplier be paid in full. Otherwise, the examiner may choose to certify the use of the goods in question as a cost or expense of the examinership, necessary for the survival of the debtor – in which case the supplier should receive payment in full of this certified amount.

4.10 Can transactions entered into by the debtor prior to be insolvency be challenged and set aside? What are the relevant grounds / look-back periods / defences?

Liquidation: Any act relating to property made or done by or against the debtor in the six months before the commencement of its winding-up may be deemed a fraudulent preference and invalid against the liquidator if any such charge, delivery, conveyance, assignment or otherwise was made with the intention of preferring one creditor over the others.

Any transfer or assignment of the debtor of its property to a trustee for the benefit of all creditors is deemed invalid.

Where a debtor is being wound up, a floating charge on the undertaking or property of the debtor created in the 12 months before commencement of the winding-up will be invalid, unless it is proved that the debtor was solvent immediately after the creation of the charge, except for the amount of any cash paid to the debtor at the time of or subsequent to the creation of, and in consideration of, the charge.

Under the Fraudulent Transfers Avoidance Law:

• any gift, sale, pledge, mortgage or other transfer or disposal of any property made with intent to hinder or delay the debtor's creditors or any of them in recovering from the debtor will be deemed fraudulent and will be invalid; and
• the property purported to be transferred or otherwise dealt with may be seized and sold in satisfaction of any judgment debt due.

This does not apply to a future creditor – specifically, a creditor that was not on the transferor's mind at the time that the transfer was effected. This defence will not apply if, at the time of the transfer, the creditor had obtained a court order establishing that it was a judgment creditor or is deemed a creditor in the winding-up proceedings.

In all the above cases, the liquidator must apply to court to challenge and set aside the transaction.

Examinership: During the formulation of a scheme of arrangement, the debtor may, with the approval of the court, confirm or disclaim any contract under which performance (other than payment by the debtor) remains pending. The counterparty may be deemed:

• an unsecured creditor in respect of any loss or damage caused; or
• a judgment creditor if a court order is secured in respect of the amount of such loss or damage.

Also, if it can be proved to the satisfaction of the court that any property of the debtor was fraudulently (in respect of the debtor, its creditors or its members) disposed of – either by sale, transfer, mortgage, security, loan or otherwise; and either by act or omission, direct or indirect – the court may, if it deems it equitable to do so, considering any consideration that may have been given by the other person and whether the transaction has been made in good faith, order any person that appears to have the use, control or possession of such property or the proceeds of its sale or development to deliver it up or pay such amount in respect thereof to the examiner.

4.11 How do the insolvency proceedings conclude? Can any liabilities survive the insolvency proceedings?

Liquidation: In an MVL, once the creditors, if any, have been paid in full, all assets of the debtor realised, all liabilities discharged and any remaining assets distributed among the members, the liquidator will call a final meeting of the members (with one month's notice in the Official Gazette) and lay before it an account of the liquidation receipts and payments. Within one week of the meeting, the liquidator will notify the registrar of companies of the meeting that took place and the debtor will be deemed dissolved three months after submission of the notification.

In a CVL, once the assets have been realised and the funds distributed, the procedure is the same as for an MVL, with the addition that the liquidator will also convene a final meeting of creditors.

In a compulsory liquidation, once the administration of the liquidation has been completed, all assets have been realised and the funds distributed, the liquidator will apply to court for the dissolution of the debtor and his or her release. The debtor is deemed dissolved with effect from the date of the court order, which must be notified by the liquidator to the registrar of companies.

In both a CVL and compulsory liquidation, liabilities of the debtor do not survive dissolution, although the Tax Department may pursue the directors personally for tax/value added tax.

Receivership: Once the receiver has repaid the preferential creditors and the sum due to the debenture holder plus interest, and/or has concluded that it is uneconomical to continue the receivership, he or she will account to the debenture holder and the debtor and will resign, notifying the registrar of companies of the same. Unsecured non-preferential debts survive the receivership process.

Examinership: This concludes:

• with either the approval or rejection of the examiner's proposal for a scheme of arrangement; or
• if the moratorium period/any extension to the same lapses before the court can consider an application for ratification of a scheme.

If the court rejects the proposals or the examiner concludes that it has not been possible to reach agreement on a compromise or scheme of arrangement, the court may make any order it deems fit, including an order for the debtor to be wound up.

5 Cross-border / Groups

5.1 Can foreign debtors avail of the restructuring and insolvency regime in your jurisdiction?

Insolvency/liquidation: In accordance with Section 362 of the Companies Law, a company incorporated outside Cyprus or a company which has been carrying on business in Cyprus, or which ceases to carry on business in Cyprus, may be wound up by the Cyprus court notwithstanding that it has been dissolved or otherwise ceased to exist as a company under the laws of the country under which it was incorporated.

Pursuant to the EU Insolvency Regulation (2015/858), foreign debtors can avail of liquidation proceedings in Cyprus if their centre of main interests (COMI) is located in Cyprus. These debtors are entitled to file for the commencement of main insolvency proceedings in Cyprus. Secondary insolvency proceedings can be opened where foreign debtors have an establishment in Cyprus.

Restructuring: The Companies Law contains provisions for the cross-border merger of a Cyprus limited liability company with a limited liability company from another EU member state, adopting Directive 2005/56/EC on cross-border mergers of limited liability companies, which has since been repealed by EU Directive 2017/1132 relating to certain aspects of company law.

5.2 Has the UNCITRAL Model Law on Cross Border Insolvency or the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments been adopted or is it under consideration in your country?

No.

5.3 Under what conditions will the courts in your jurisdiction recognise and/or give effect to foreign insolvency or restructuring proceedings or otherwise grant assistance in the context of such proceedings?

Insolvency proceedings conducted in any member state (except Denmark, which opted out of the EU Insolvency Regulation (2015/858) are recognised in Cyprus through the EU Insolvency Regulation.

Where the regulation does not apply, under common law, any final decision issued by a court of foreign jurisdiction in the context of the foreign proceedings may be recognised and registered by a court order issued by the Cyprus court, rendering the decision enforceable in Cyprus under:

• the Foreign Judgments (Reciprocal Enforcement) Law; and
• the Foreign Judgments (Recognition, Registration and Enforcement by virtue of Treaty) Law.

5.4 To what extent will the courts cooperate with their counterparts in other jurisdictions in the case of cross-border insolvency or restructuring proceedings?

Parallel proceedings regulated by the EU Insolvency Regulation will be determined according to the regulation.

Where the regulation does not apply, conducting parallel bankruptcy proceedings in Cyprus is a matter of international law. In determining any issue of conflict that may arise, the Cyprus courts may consider the insolvency or restructuring laws of the foreign jurisdiction, but ultimately this is at the discretion of the Cyprus court.

5.5 How are corporate groups treated in the context of restructuring and insolvency proceedings? If there is no concept of a group proceeding (or consolidation), is there any regime through which insolvency officeholders must / may cooperate?

Insolvency proceedings of members of a group of companies regulated by the EU Insolvency Regulation will be determined according to the regulation.

Where the regulation does not apply, there are no provisions in the Companies Law regulating group proceedings or consolidation. In the case of restructuring proceedings, certain tax relief provisions may apply in the event of a merger or reorganisation concerning groups.

5.6 Is your country considering adoption of the UNCITRAL Model Law on Enterprise Group Insolvency?

No.

5.7 How is the debtor's centre of main interests determined in your jurisdiction?

As per Article 3(1) of the EU Insolvency Regulation, the COMI is the place where the debtor conducts the administration of its interests on a regular basis and which is ascertainable by third parties.

In the case of a company or legal person, the place of its registered office will be presumed to be its COMI in the absence of proof to the contrary. That presumption will apply only if the registered office has not been moved to another EU member state within the three-month period prior to the request for the opening of insolvency proceedings.

5.8 How are foreign creditors treated in restructuring and insolvency proceedings in your jurisdiction?

There are no distinctions between local and foreign creditors in the Companies Law.

Any foreign judgment creditor wishing to enforce a foreign judgment in Cyprus may have the foreign judgment recognised and registered by a court order issued by the Cyprus court rendering the decision enforceable in Cyprus under the Foreign Judgments (Reciprocal Enforcement) Law and the Foreign Judgments (Recognition, Registration and Enforcement by Virtue of Treaty) Law. Where the judgment is issued by a court of an EU member state, the Brussels I Regulation (Recast) Regulation (1215/2012) will apply.

6 Liability risk

6.1 What duties do the directors of the debtor have when the company is in the "zone of insolvency" (or actually insolvent)? Do they have an obligation to commence insolvency proceedings at any particular time?

Directors of a debtor do not have a duty to commence insolvency proceedings at any particular time. However, where there is a likelihood of insolvency, the directors of a company are duty bound to have regard to the following in the exercise of their powers:

• the interests of creditor, members and other interested parties;
• the need to take steps to avoid insolvency; and
• the need to avoid deliberate or grossly negligent acts that threaten the viability of the business of the company.

6.2 Are there any circumstances in which the directors could incur personal liability in the context of a debtor's insolvency?

Liquidation: Under Sections 307 and 309 of the Companies Law, any director of a debtor who, at the time of its winding-up or if it is subsequently wound up, fraudulently induces any person to give credit to the company or alienates, charges or conceals property of the company is deemed guilty of an offence and will be liable on conviction to imprisonment.

Under Sections 308 and 310 of the Companies Law, any director (including a former director) of a debtor which subsequently undergoes winding-up who destroys, alters or falsifies any books, documents or bonds, makes any false entry or omits any entry in any register, books or records belonging to the debtor, or does not maintain proper accounting records, is guilty of an offence and, on conviction, is liable to imprisonment.

Under Section 311 of the Companies Law, if in the course of the winding-up of a debtor it appears that any business of the company has been carried on with the intent to defraud creditors or for any fraudulent purpose, any directors who were parties to the fraud may be personally responsible and, on conviction, will be liable to a fine or imprisonment.

Under Section 312 of the Companies Law, if during the winding-up of a debtor it appears that, among other things, any director has misappropriated or retained any money or property of the company or is guilty of a breach of trust in relation to the company, the director may be held personally liable.

Examinership. Under Section 202ΛΣΤ of the Companies Law, if during the proceedings it appears that any person knowingly participated in the conduct of any business of the debtor with the intention of defrauding creditors or for any fraudulent purpose, the court may decide that such person is personally liable without any limitation of liability in respect of all or any part of the debts or other obligations of the company as the court may determine.

6.3 Is there any scope for any other party to incur liability in the context of a debtor's insolvency (e.g. lender or shareholder liability)?

Section 308 of the Companies Law regarding the destruction, alteration or falsification of any books, documents or bonds or false entry made in or omitted from any register, book or record belonging to the company, applies liability to any contributory who may make and be found guilty of such an offence; on conviction, such person will be liable to imprisonment.

Section 311 of the Companies Law extends and applies to any person (without limitation) who may have taken part in the matter constituting the fraud, being personally liable for any business of the company having been carried on with the intent to defraud creditors or for any fraudulent purpose.

Examinership: Section 202ΛΣΤ of the Companies Law, referred to in question 5.2, extends and applies to any person.

7 The Covid-19 pandemic

7.1 Did your country make any changes to its restructuring or insolvency laws in response to the Covid-19 pandemic? If so, what changes were made, what is their effect and are they temporary or permanent?

No changes were made in response to the COVID-19 pandemic.

8 Other

8.1 Is it possible to effect a "pre-pack" sale of assets, and is it possible to sell the assets free and clear of security, in restructuring and insolvency proceedings in your jurisdiction?

There is no concept of a 'pre-pack' sale of assets in Cyprus legislation. In theory, it is possible to sell the assets free and clear of security if this can be duly approved and the consent of all secured creditors is obtained in the context of the existing restructuring and insolvency frameworks and provisions.

8.2 Is "credit bidding" permitted?

There are no specific provisions on credit bidding in the law. However, under the 2014 and subsequent amendments to the Transfer and Mortgage of Immovable Property Law, mortgagees are given the lead role in the realisation of immovable property via public or private auction, which allows the mortgagee to onboard the immovable property against the debt or part thereof of the debtor in case the auction fails.

9 Trends and predictions

9.1 How would you describe the current restructuring and insolvency landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

While the examinership procedure has been available since 2015, it has enjoyed little success to date, largely due to the fact that following its introduction, it was used abusively as a tool to attempt to cease or obstruct an appointed receiver and manager or delay the appointment of a liquidator. Moreover, the courts became bogged down with applications by creditors and other stakeholders opposing the appointment of the examiner; often, by the time the oppositions were heard, the four-month (or, on extension, six-month) moratorium period had expired and the applications were withdrawn to avoid the possibility of the court winding up the debtor. As the moratorium period has now been extended to up to 12 months, it is possible that there will be renewed efforts to avail of the examinership tool in future.

10 Tips and traps

10.1 What are your top tips for a smooth restructuring and what potential sticking points would you highlight?

Every effort should be made to try to secure the support (or acquiescence) of members and creditors (as appropriate) to any restructuring efforts, whether it be through a scheme of arrangement or examinership. This is the only way to ensure a smooth and expeditious restructuring in Cyprus as the legal system currently stands.

Any interested party can oppose the restructuring process through court; this serves to delay (by months or, in more complex cases, even years) or even torpedo any restructuring or insolvency proceeding initiated, allowing or resulting in the dissipation or reduction of the value of any assets. It can also be detrimental and destructive to the business and its viability to continue trading as a going concern. There is no way to secure an efficient and speedy restructuring process if any opposition is filed with the court.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.