Liquidation

Liquidation

The liquidation of a Cyprus company should not be underestimated. One of the advantages of a legal entity is that it separates the company from the controlling persons and therefore limits personal liability of the individuals involved. However, unorthodox closure of the company can result in responsibilities one should avoid. Company liquidation and dissolution can be forced when the company cannot meet its obligations, or, voluntary when the owners decide to stop activities and terminate the legal entity, and, in exceptional circumstances subject to the supervision of the court. Rules on winding down a Cyprus company are discussed in insolvency and companies law and a simple strike off due to non-payment can have severe consequences for the individuals running the company.

The common law doctrine of corporate legal personality is derived from the UK landmark case Salomon v Salomon & Co. Ltd. It expressively separates the legal entity on one side from the natural persons such as directors and shareholders on the other side. This separation of the legal entity and its ownership and control forms the basis of international company law; in Cyprus referred to as CAP. 113.

Part V of the Companies Law provides for the legal framework for winding up companies in Cyprus. The structure of the private limited company divided by shares (Limited) is most used in Cyprus company formations. Shareholders in such companies are liable for the value of the shares or, in case contribution of share capital is incomplete, to the extent of the initial share value. It is the lawmakers duty to ensure that the liquidation of a Cyprus company follows the rules. Part of this process is that the court can appoint a (provisional) liquidator to collect the assets for distribution to creditors.

Where the court is involved in the liquidation, the creditor and insolvency hierarchy determines the ranking of claims. All debts and claims must be verified for approval and preferential payments might supersede the principle of pari passu. Offences by officers of the company, and even the failure to keep accounting records can trigger liability.

In case of a voluntary winding up, a declaration of solvency must be prepared by the company. Since there are mandatory accounting requirements to be followed, a Cyprus company cannot just be removed from the registry without following some procedures. Failure to comply with the provisions of the company law can result in extended liability for the controlling persons of the company. Therefore, failure to pay the annual fees to the corporate registrar does not refrain the controlling persons and beneficial owner from its responsibilities.