Rescue Culture within the Cypriot Legal System
̀ Failure is a part of taking risk; business failure is a consequence of the misjudgement of operating risk… Nonetheless, it is axiomatic that failure will always be a possibility of a business venture because it is one outcome on a range of possible outcomes for the taking of risk ́ .
The abovementioned quote perfectly describes the reality of the business sector. Indeed, carrying out a business is not an easy task and one must always be prepared for the possibility of failure. Nevertheless, it is not impossible for ailing businesses to avoid an unfortunate closure and trade out of their financial difficulties. Hence, the Rescue Culture exists in most legal systems and ultimately aims at achieving the best possible outcome for companies on the brink of insolvency.
Business failure, especially post the global crisis of the previous decade, is no longer an alien phenomenon. However, the establishment and promotion of a Rescue Culture is a necessary component of the insolvency systems in the 21st Century, for such a promotion will increase certainty and efficiency of restructuring mechanisms, but will also assist ailing companies to go back to profitability and avoid liquidation or winding up. Arguably, every country should be able to have resort at a framework of Rescue whereby the chances of survival of failing companies is highly increased.
Restructuring Mechanisms of the Cypriot Legal System
The Rescue Culture in Cyprus has never been extensively developed. Indeed, distressed companies have always opted for renegotiations which are generally concluded on an informal, out-of-court basis.
Therefore, a company that is currently facing financial difficulties but has good prospects of profitability in the long-term, will attempt to restructure its debts through an informal arrangement with its creditors in order to remain a ‘going concern’.
It has always been important for such companies, to save as much time as possible and of course to avoid all the bureaucratic procedures of formal restructurings. Formal procedures lack the flexibility that many companies in financial difficulties seek for. The need of simplicity and quick resolution, is essential for the successful continuance of the company. However, in cases where the informal route did not achieve a successful outcome, both the company and its creditors agree to enter into formal procedures, as a last resort before the winding up. Both restructurings and winding-up legal frameworks are now contained in the provisions of the Cypriot Companies Law 61, which is entirely based on the UK Companies Act of 1948 with a number of essential amendments introduced, in order to comply with the Regulations of the European Union.
The different options available in the Cypriot Legal System:
- Compromise or arrangement between the company and the creditors
Under Section 198 of the Cyprus Companies Law, an arrangement or a compromise can be proposed between a company and its creditors or members or any class of the two. In essence, Article 198 regulates the procedure by which the creditors attempt to achieve a set off with the company for the sums owed to each other. Such an agreement/ compromise usually entails the renegotiation of financing or the conclusion of a sale and lease back arrangement.
- Receivership
A further alternative to winding up under the provisions of the Cypriot Law is the process of appointing a Receiver Manager. Similarly to the arrangement/compromise, a receivership applies to all Cyprus-registered companies apart from banks and insurance companies, which are subject to special procedures. Pursuant to section 97 of the Companies Law 2015, a secured creditor with a charge over the company’s assets has the power to appoint a receiver manager, whose primary duty is to effectively realise the assets subject to the particular creditor’s charge, in order to discharge the debts owed by the company to the creditor who appointed him, out of the proceeds of the sale. The main purpose of receivership is to recover the secured creditor’s debt without ending the life of the debtor company recovery, as opposed to liquidation and winding up. Therefore, the company is essentially given a second chance to continue operating as a going concern.
- Examinership
Ultimately the main purpose of examinership is to provide to the distressed company a period of protection from its creditors, in order to facilitate its survival as a going concern. In particular, the company is placed under the court's protection for an initial period of four calendar months from the date of presentation of the court petition, which might subsequently be extended either by the examiner or by the court.
