This article focuses on two key aspects:
- Loss of Control: The legal consequences that arise at the commencement of the liquidation process, particularly the transfer of management authority and decision-making powers to the liquidator and how it affects the directors, UBOs and shareholders.
- Loss of Benefit: The limitation on the ability of UBOs and shareholders to derive financial or other benefits from the Company’s business activities during liquidation, including the priority of creditor payments over any distributions to shareholders.
Cyprus is a Common Law jurisdiction. The Cyprus Courts invoke on the fundamental legal principle stare decisis, meaning that the Courts honour precedents, and based on the hierarchy of courts, the decisions are considered binding for the first instance Courts. The English Case Law attained a pivotal role in the Cyprus legal system, as a persuasive authority in the Courts and essential reference source of legal consulting.
Liquidation results in a transfer of power to manage the Company’s affairs from the directors and shareholders to the liquidator and the creditors. It is the liquidator who occupies the central position in a compulsory liquidation. The powers of the liquidator are for the most part statutorily defined in the Companies Law, Cap. 113 (hereinafter referred to as “Cap.113”), and the subsequent sections will provide a detailed examination of relevant statutory provisions and case law that underpin these conclusions.
Compulsory liquidation by creditors is a form of equitable execution, a process whereby the assets of a company are seized in the hands of the liquidator and administered for the benefit of the creditors, who hold an absolute right which cannot be deprived from the creditor under any circumstances.
Furthermore, one of the effects of a company going into liquidation is to prevent it from carrying on business, except for the limited purpose of winding up and to impose a general prohibition (against anyone except the liquidator) on the disposal of company property. Such prohibition commences enforceability as from the issuance of the winding-up order.
(i) Loss of Control Over the Company’s Affairs
Under Section 226 of Cap. 113, upon the commencement of liquidation, all powers of managing the company’s affairs are transferred from the shareholders and board of directors to the liquidator. Once appointed, the liquidator assumes full control and has the authority to make all necessary decisions for the company’s winding up. This shift in authority is further reinforced by Section 233 of Cap. 113, which lists the broad powers of the liquidator.
With regards to the shareholders, upon the commencement of liquidation, the shareholders of the Company abolish all control over the Company’s affairs. The powers enjoyed by the shareholders under Cap. 113 are abolished and replaced by the powers granted to the liquidator in accordance with Sections 226 and 244 of Cap. 113. The liquidator takes full responsibility for managing the Company and making decisions regarding its assets and liabilities, leaving no decision-making authority with the UBOs or shareholders.
With regards to the UBOs, it should be further pointed out that usually the Articles of Association of a Cyprus company read as follows:
“Except as required by law, no person shall be recognized by the company as holding any share upon any trust, and the company shall not be bound by or be compelled in any way to recognize (even when having notice thereof) any equitable, contingent, future or partial interest in any share or any interest in any fractional part of a share or (except only as by these Articles or by law or by an order of a court of competent jurisdiction otherwise provided) any other rights in respect of any share except an absolute right to the entirety thereof in the registered shareholder”.
Such regulation, if indeed included in the Articles of Association of the company examined, together with the complete absence of any reference to “UBO” or “beneficial owner” in the Cap. 113, depicts the fact that the Cypriot Companies Law in general, does not recognize the statutory role of a UBO within a company. The role of the UBO was only introduced in the Cypriot legal system through the Prevention and Suppression of Money Laundering Laws of 2007 (as amended), for transparency reasons against money laundering activities.
Therefore, under the applicable laws, there is no power at all that was or is reserved and/or enjoyed by the UBO over the company (whether management, other investment power or any decision-making power regarding a company’s affairs).
A liquidator in compulsory winding up, when appointed by the court, acts as an officer of the court and is subject to its control. This ensures that the liquidator acts in the best interests of creditors and contributories, reinforcing the shift in control away from the UBOs and shareholders.
During the winding-up process, shareholders effectively become contributories, thereby losing their rights to manage the company’s affairs. A creditor’s petition for winding-up empowers the liquidator to seize and manage the company’s assets exclusively for the benefit of creditors.
The winding-up order terminates the management powers of the Company’s directors who are no longer permitted to retain management of the company. Their powers are transferred to the liquidator who takes full control.
The essential nature of the appointment of a liquidator is to displace the directors and effective transfer control over the company. Upon the appointment of a liquidator, the liquidator becomes the sole entity in control of the company’s affairs. The liquidator’s appointment automatically terminates the authority of any agent previously appointed by the directors.
In court-ordered liquidations, the powers of directors cease upon the liquidator’s appointment. While no explicit statutory provision details the cessation of directors’ powers, it is universally accepted that directors lose all authority in such proceedings.
Therefore, the initiation of liquidation not only strips UBOs and shareholders of control but also displaces the directors, a critical management body of the company. This reinforced the comprehensive nature of the liquidator’s control under Cypriot law and illustrates that, upon liquidation, all management authority is transferred to the liquidator.
(ii) Loss of Benefits from the Company’s Business Activities
Upon commencement of liquidation, shareholders[1] lose any entitlement to participate in the company’s business activities or receive financial benefits. Section 300 of Cap. 113 outlines a clear hierarchy for debt repayment, prioritizing various classes of creditors over shareholders.
It is clear that shareholders are the last group to receive distribution from a company’s assets. This structure protects creditors, recognizing that shareholders bear a greater financial risk.
In practice, particularly in cases of insolvency, there is often insufficient capital to cover all creditor claims, leaving UBOs and shareholders with no financial benefit from the liquidation. This is also emphasized by Section 246(3) of Cap. 113.
Additionally, Section 133 of Cap. 113, mandates that liquidators liquidate all assets to satisfy the company’s debts, ensuring that creditors’ claims are being prioritized over shareholders.
Therefore, the shareholders are effectively stripped of control over the company’s affairs and are not entitled to any benefits from its business activities until all creditor claims have been fully satisfied. In the case of insolvent liquidations, this typically means that shareholders are unlikely to receive any distribution whatsoever. UBOs never had any statutory company rights to begin with. UBOs never enjoyed and/or acquired any entitlement to participate in the Company’s business activities or receive financial benefits.
[1] UBOs never enjoyed and/or acquired any entitlement to participate in the Company’s business activities or receive financial benefits
Georgia Constantinou-Panayiotou
Founding / Managing Partner
Lawyer / Insolvency Practitioner/ CRMS-RS
For CONSTANTINOU PANAYIOTOU & CO LLC
