When deciding to liquidate, some companies may take additional steps, such as reducing their share capital in order to ensure a simplified liquidation process, return capital to shareholders, achieve tax efficiency, or address other strategic considerations. While not uncommon, such a process might seem complicated from the outside especially when considering the accompanying legal requirements. Therefore, we outline below what the reduction of share capital and company liquidation in Cyprus looks like and how we can help you.
Reduction of Share Capital
The reduction of share capital is possible as long as it is permited under the company’s Articles of Association (AoA). If such authorisation exists, a special resolution by the Shareholders approving the reduction needs to be passed. In the resolution, the shareholders can decide on the method of share reduction, such methods, per Article 64 of the 2012 Cyprus Companies Law, include:
Extinguishing or reducing the liability on unpaid share capital;
Cancelling paid-up share capital lost or unrepresented by available assets;
Paying-off excess paid up share capital;
Cancelling paid up share capital to write off losses of the company; or
Cancelling paid up share capital by creating a reserve called “the capital reduction reserve fund”.
The resolution is to be followed by a court’s order that approves the reduction. When applying to the court, the application must be outlining the details of the reduction and containing relevant documents such as the company’s AoA, incorporation documents and the shareholders special resolution.
When reviewing the application, the court examines the rationale behind the reduction, whether shareholders have been treated equitably, the reduction proposals have been adequately explained, and whether any creditors and 3rd parties concerned have been sufficiently informed of the reduction and have consented to it. The reduction is effective when the registrar issues a certificate of the reduction outlining the company’s current share capital.
Company Liquidation
A company might wish to liquidate when it has finished performing its function and ceased to be relevant for the business objectives of its board and shareholders, when the owners have found a more attractive place of capital allocation, or for other reasons. There are two most popular methods of company liquidation in Cyprus which will be outlined below so you can decide which is most suitable for your enterprise.
Method 1: Strike-off
Per Section 327 of the 2012 Cyprus Companies Law, a company can be simply struck off the register of companies without the formal liquidation process. The strike-off method is a straightforward procedure for companies that have ceased all activities and do not plan to conduct future business. These companies must prepare financial statements up to the cessation date and submit the relevant income tax return to the Cyprus Tax Authorities. All tax liabilities must be settled, and a tax clearance certificate obtained. Directors must sign a declaration of solvency, confirming that the company has no operations, obligations, debtors, creditors, or assets, and is inactive. The statement of assets and liabilities must show sufficient funds to settle all debts and strike-off fees. The Registrar of Companies will then publish the company's intention to be struck off in the Official Gazette and notify the company of its removal from the records within three months.
Method 2: Members’ Voluntary Liquidation (MLV)
To kick off the MLV process, the company’s shareholders must first pass a resolution which sets the date of the commencement of liquidation and appoints the liquidator, responsible for the liquidation process - distribution of assets, debt pay-off, and other winding-up affairs. Following the commencement of liquidation, the company is to seize its operation apart from actions necessary for the successful winding-up and publish the notice of the resolution in a Gazette within 14 days of its passing. Moreover, a declaration of solvency must be made by the Directors at the district court and a Tax Clearance Certificate must be obtained by the auditors. After receiving the Tax Clearance Certificate, the liquidator must send a one-month notice of the Final General Meeting to the Registrar of Companies for publication in the Official Gazette, scheduling the meeting. At the Final General Meeting, the liquidator presents the final accounts for approval. Within a week, the liquidator must file a copy of the final accounts and the meeting report with the Registrar. The company is deemed dissolved three months after the report's registration, and the Registrar issues a Certificate of Dissolution.
Which Method to Choose?: Main Differences
Strike-off usually takes between 3-9 months, while the MLV might take around one year (or more if the company’s affairs are more complex) and is more costly. However, while the MLV is a more time-consuming and costly of the two methods, if a member or creditor is aggrieved by the strike-off, they can apply to the Court for reinstatement within 20 years of the notice publication, while the time-limit for MLV is 2 years instead. Therefore, the MLV ensures more certainty that the company's business will not be re-opened and brought up in the future. However, if your company is a rather small operation, has never had issues with 3rd party creditors, and has never entered any agreements that could end up in a lawsuit, a strike-off might be a sufficient and a reasonable solution. Whereas, in presence of a more developed enterprise with multiple agreements, significant influence by 3rd party creditors etc, an MLV might be more reassuring.
Conclusion
When a company decides to liquidate, it may first consider reducing its share capital to streamline the process, return capital to shareholders, or achieve tax efficiency. This step involves obtaining shareholder approval and a court order, and must be registered with the Registrar of Companies.
Once share capital reduction is complete, the company can choose between two main liquidation methods in Cyprus: strike-off or Members’ Voluntary Liquidation (MVL). The strike-off method is a quicker and more cost-effective option for companies with no remaining operations or liabilities, but it offers limited protection if issues arise later, as reinstatement is possible within 20 years. On the other hand, MVL, while more time-consuming and expensive, provides a thorough and secure closure, ensuring that the company will not be reopened in the future. This method is especially suitable for larger or more complex businesses with significant creditor relationships and ongoing obligations.
Ultimately, the choice between reducing share capital and selecting a liquidation method depends on the company's specific circumstances, including its size, complexity, and future needs. Each approach has its advantages, and careful consideration will help ensure a smooth and effective closure.
This article is written for information purposes only and it does not constitute legal advice. For further information, legal advice and assistance please contact us at zena@zsm.law.
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