Cyprus: Directors Duties In Insolvency And Its Vicinity- An Alternative Approach For Creditors To Recover

When a company enters insolvency or its ''vicinity''1, the fiduciary duties of directors are no longer owed to the company as a whole, and instead their duties shift towards the creditors. [Kinsela & Anor v Russell Kinsela Pty Ltd [1986] 4 NSWLR 722; West Mercia Safetywear Ltd v Dodd (1988) 4 BCC 30]

Pursuant to section 212 of Cap 113, under Cyprus law a company is deemed to be insolvent:

" a) If a statutory demand for an undisputed and liquidated amount, exceeding (€5.000), is left unpaid for more than three weeks; or

b) ...; or

c) If it is proved to the Court's satisfaction that the company is unable to pay its debts as they fall due, having in mind its contingent and prospective liabilities (''the cash flow test'') ; or

d) If it is proved to the Court's satisfaction that the liabilities of the company exceed the company's assets, having in mind its contingent and prospective liabilities; (''the balance sheet test'') "

According to the decision in Yukong Line Ltd v Rendesburg Investments Corpn (No 2) [1998] 1 WLR 294, despite this duty shift a director cannot be sued by individual creditors because he does not owe direct fiduciary duties towards them. Therefore, actions against them are brought by the liquidator on behalf of the company, which at this point is synonymous to the creditors and not the shareholders.

Cyprus law, in contrast with English law does not have a wrongful trading provision similar to section 214 of the Insolvency Act 1986 (IA 1986). In summary, pursuant to s. 214 a director may be found liable for contribution to the company's assets, if the company has gone into insolvent liquidation, and at some time before the commencement of the winding up proceedings, the director knew or ought to have known that there was no reasonable prospect of avoiding insolvency, and if he did not take every step to minimize the potential loss.

Even though Cyprus law does not provide a similar statutory provision, it is very likely that a similar result with that of s. 214 of IA 1986 can be achieved through the use of the West Mercia rule as a remedy. This function of the West Mercia rule is similar to that of the wrongful trading provision, but due to the fact that it is triggered earlier than the duty in s. 214, it manages to encompass managerial conduct committed at a much earlier point, and thus provides for an even more extensive application. Additionally, it is not limited to a compensatory remedy and it is not confined to winding-up proceedings. In general, when using the West Mercia rule as a remedy, to be able to recover against a director, the director must have received a benefit from the misapplication of the funds or his breach of duties.

An even more extensive application of the West Mercia rule as a remedy can be seen in the Australian case of Westpac Banking Corporation v Bell Group Ltd [2012] WASCA 157; (2012) 89 ACSR 1, which was concerned with the validity of transactions with creditors before formal insolvency proceedings were initiated. In short, there was a refinancing of some sort which disadvantaged some creditors over others, and the court even though it concluded that it amounted to preferences, it found that it was not susceptible to an attack under the Australian law preference rules, because it took place outside the period of six months prior to the commencement of the formal insolvency proceedings. Since no successful claim for recovery could be based on the preferences provisions, it was contended that the Bell Group's directors in going through with the refinancing were in violation of their fiduciary duties to the creditors, based on the Australian corresponding rule with that in West Mercia.

Unlike other cases which applied the West Mercia rule as a remedy, the Westpac v Bell Group decision is particularly important for the fact that it did not require as a condition, evidence that the directors had received an advantage from this scheme. Even though under this formulation of the West Mercia rule there can be no compensation order against the directors since the corporation does not suffer a loss and the directors have not benefited personally, it may nevertheless leave them vulnerable for disqualification and it also opens a route for recovery from creditors who dishonestly assisted in the breach.

In summary, the West Mercia rule can allow creditors to recover debt owed to them despite the lack of provisions like s. 214 IA 1986, statutory limitations and difficulties surrounding the area of insolvency. Its function as a remedy can allow a creditor to recover from the directors for breach of their duties, or even provide a way to claim against other creditors for dishonest assistance.

For now, this function of the West Mercia rule does not seem to have come for examination before the court, but the fact that authoritative cases like West Mercia v Dodd and Kinsela v Russell Kinsela have been cited with acceptance by Cyprus courts, shows promise that such an approach can be adopted.

Footnotes

* 1 The terms ''vicinity of insolvency'' or ''twilight zone'' are used interchangeably to refer to the gap that exists between the period when a company is regarded as doubtful solvent and up to the point it is found to be insolvent under section 212.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions