Insolvency Law at Cyprus
In Cyprus, insolvency law is governed by a combination of European Union regulations and national laws, with the primary legal framework being the Insolvency Law of Cyprus and the Bankruptcy Law, along with the Companies Law (Cap. 113). Cyprus is also a member of the European Union, so EU regulations play a significant role in insolvency proceedings. The insolvency landscape in Cyprus has been modernized to align with EU standards, particularly through the introduction of the Insolvency and Restructuring Laws that have been in effect since 2015.
Key Features of Insolvency Law in Cyprus:
Types of Insolvency Proceedings:
Liquidation (Bankruptcy): This is the formal process where a company’s assets are sold off to pay its creditors. It can be initiated by the company or its creditors.
Corporate Restructuring: Under the Companies Law, a company facing financial difficulties may enter into a restructuring procedure to avoid liquidation. This can involve negotiations with creditors to reduce or reschedule debts.
Rehabilitation (Debt Restructuring): Individuals and businesses can seek restructuring under the Restructuring of Greek-Cypriot Individuals Law. This allows for a debt settlement arrangement that enables debtors to negotiate terms with creditors to pay off their debts over time.
Insolvency and Restructuring Framework:
The Insolvency Law of 2015 established a new insolvency framework, which provides mechanisms for both individuals and companies to deal with financial distress through pre-insolvency procedures like Debt Repayment Orders and Debt Restructuring Orders.
The law allows for out-of-court debt settlements with creditors before formal proceedings are required.
Court-Involved Insolvency Procedures:
Insolvency proceedings can be initiated by the debtor or creditors through the District Court.
Once insolvency proceedings begin, the court may appoint an official receiver or liquidator to manage the debtor's estate and oversee the process.
Official Receiver (Liquidator):
A liquidator or administrator is appointed by the court to manage the bankruptcy or restructuring process. The liquidator’s role includes liquidating assets, investigating the causes of insolvency, and distributing proceeds to creditors in accordance with priority.
In cases of company insolvency, the liquidator also has the authority to investigate possible fraud or mismanagement and take appropriate legal actions.
Creditor Rights:
Creditors are categorized into classes (secured, unsecured, preferential) and are entitled to claim a portion of the assets. Secured creditors have priority over unsecured creditors in receiving payments.
In the case of liquidation, secured creditors (such as banks) have priority and can be repaid first, followed by preferential creditors (such as employees), with unsecured creditors receiving the remainder, if any.
Moratorium:
Moratorium on Legal Actions: Once insolvency proceedings are initiated, creditors are generally prohibited from taking individual actions (such as initiating lawsuits or garnishing wages) to recover debts. This allows the insolvency process to proceed without external interference.
Debt Restructuring and Agreements:
For companies, debt restructuring can be negotiated between the company and its creditors, where terms are agreed upon to restructure debt or implement a debt settlement plan.
Individuals can also enter into personal debt arrangements, subject to the approval of the court and creditors.
Corporate Voluntary Arrangement (CVA):
A Corporate Voluntary Arrangement (CVA) is a legal process allowing a company to propose a repayment plan to creditors over a period, which, if accepted, can lead to the company avoiding liquidation.
Bankruptcy for Individuals:
Individual Bankruptcy allows individuals who are insolvent to petition for bankruptcy and have their debts cleared, with a court-appointed trustee overseeing the distribution of assets to creditors.
Cyprus has introduced a Debt Settlement Mechanism for individuals, allowing them to negotiate settlements with creditors, which may include partial debt forgiveness, extended repayment terms, or restructuring.
Fraudulent Bankruptcy:
There are provisions in the law to penalize individuals or businesses found guilty of fraudulent bankruptcy or fraudulent activities related to insolvency. Penalties can include fines, imprisonment, or both.
EU Influence on Insolvency Law:
Cyprus follows EU regulations concerning cross-border insolvency, including the European Insolvency Regulation (EIR), which provides rules for the coordination of insolvency proceedings across EU member states. This is especially important for companies or individuals with assets or creditors in multiple EU countries.
Steps to Initiate Insolvency Proceedings in Cyprus:
Filing for Bankruptcy or Restructuring: Insolvency proceedings can be initiated by the debtor or creditors through an application to the District Court.
Court Appointment of a Liquidator: If the court agrees to the application, it appoints an official receiver or liquidator to take control of the assets and manage the insolvency process.
Debt Repayment or Restructuring Proposal: In the case of restructuring or rehabilitation, the debtor and creditors may enter into a repayment plan, which must be approved by the court.
Distribution of Assets: If the business is liquidated, the assets are sold, and the proceeds are distributed to creditors in accordance with their legal rights.
Final Discharge or Closure: Once all debts are settled or a liquidation is complete, the company is dissolved, or the individual’s debt is discharged, and the insolvency proceedings are officially closed.
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