There are different reasons why a company may need to close down and different procedures that have to be followed depending on those reasons and the individual circumstances. In this feature we will focus on liquidation decided by the shareholders of a company, also known as Members’ Voluntary Liquidation. Yet, for the sake of clarity and for pointing out the differences with other procedures, we briefly present in the Statutory Background section, immediately following, the main characteristics of the other procedures with which a company may close down.
There are two main categories of winding up as follows:
• Compulsory Liquidation by the Court
• Voluntary Liquidation by the company or its creditors
A compulsory liquidation results from a winding up order obtained pursuant to a creditor filing an insolvency petition with the competent Court. A compulsory liquidation is conducted by an official receiver, or an insolvency practitioner.
A voluntary liquidation, on the other hand, results from a resolution passed by members or directors, subject to the approval of creditors, to wind up a company.
There are two kinds of voluntary liquidation, namely:
• Members' voluntary liquidation where a company is solvent (a statutory declaration of solvency is required by its directors)
• Creditors' voluntary liquidation where a company is insolvent
A voluntary liquidation is acceptable when:
• A statutory period related to a company's existence comes to an end or a statutory event occurs and as a consequence the company approves a winding up resolution in a general meeting.
• The company votes for liquidation on a special resolution.
• The company votes for liquidation on an extraordinary resolution because it is impossible to continue its business.
A voluntary winding up resolution needs to be published in the Official Gazette of the Republic of Cyprus and should be submitted to the Registrar of Companies within 15 days. The procedure begins on the day of the resolution.
The consequences of a voluntary winding up are that:
• the company cannot perform any activities except those necessary for its smooth liquidation;
• any change in the membership of the company or any sale of the company’s shares without the approval of the liquidator is invalid.
The liquidator has the following powers, subject to the approval of the Court or the passing of a special resolution of the company, depending whether the liquidation is a members' voluntary or a creditors' voluntary one :
• To satisfy fully any ranking of creditors.
• To reach a compromise with the creditors.
• To consider every claim, whether present or future, ascertained or unascertained, and every duty that can become a debt.
Once the decision to liquidate a company is confirmed, it is important to determine the present position as regards to the company’s accounting records.
To be able to move forward with the liquidation, any prior year accounts that are not finalised must be brought up to date, audited, approved by the directors and the shareholders at the Annual General Meeting and submitted to the Registrar of Companies.
Interim accounts are then prepared and presented before the District Court together with the Statutory Declaration by the directors of the company, confirming that the company is solvent, i.e. in a position to repay all its debts within 12 months of entering into liquidation.
Following that, the liquidator must be appointed within five weeks. It is advisable to clear the company of as many assets and liabilities as possible even before the appointment of the liquidator, leaving at least one bank account open for carrying out all necessary transactions.
After the publication of the appointment of the liquidator in the Gazette of the Republic, the auditors will send the audited interim accounts to the Tax Authorities for tax clearance, which is one of the most complex, and time consuming, steps of the liquidation procedure.
The Tax Authorities will only consider accounts for tax clearance that are made up to a recent date before the tax clearance is requested. Any delay could seriously jeopardize the liquidation procedure.
One of the key stages of the tax clearance procedure concerns the handling of queries that are raised by the tax officers about the financial affairs of the company. On receipt of the request for tax clearance, the tax authorities will review all of the company’s activities from the date of its incorporation, or since the last tax assessment (if applicable) to check whether the provisions of the relevant tax laws have been consistently applied.
This is the point at which the quality of the work of the accountants and the auditors of the company comes to light since they may be asked to explain the reasoning behind the accounting and tax treatment of certain past transactions. Therefore, the decision to appoint a reputable and professional accounting and auditing office from the very beginning of the company’s life will show its importance.
On completion of their assessment, the Tax Authorities may, or may not, depending on their findings, raise additional tax assessments against the company. Any such final tax liabilities will have to be settled by the liquidator of the company.
Final General Meeting
Once the Tax Clearance Certificate is obtained, a notice for the Final General Meeting will be sent to the Registrar of Companies. Upon the publication of the date of the Final General Meeting in the Gazette of the Republic, the liquidator will prepare and submit the final summary accounts. These must be filed with the Registrar within one week from the date of the Final General Meeting.
At that time the liquidator will proceed to close the bank account/s of the company, distributing any final balance to the shareholders as liquidation proceeds.
It is important to stress that the distribution of funds from the company (other than dividends paid from any available distributable profits) prior to the receipt of the Tax Clearance Certificate is not advisable. Such transactions may result in a debit balance with the shareholder(s) and create adverse tax implications.
Finally, three months after the Final General Meeting is held, the company is considered liquidated and the relevant publication is made in the Gazette of the Republic and the Certificate of Liquidation can be requested from the Registrar of Companies.
Voluntary liquidation is a lengthy procedure and it is important that a systematic and methodical approach is followed. In this respect, we would like to re-iterate the three areas which we consider as the most critical to ensure that the procedure can progress as effectively as possible.
Firstly, the importance of applying the provisions of all applicable tax laws consistently during the life cycle of a company cannot be stressed too much. This is to avoid any nasty surprises upon the tax clearance process, which may result in significant penalties and interest, depending on the length of time the assessed tax liability is outstanding.
Secondly, for the effective and swift liquidation of a company, it is essential to ensure that the company is freed from as many assets and liabilities and as quickly as possible.
Finally, prompt and effective communication between all parties is a must.
You can find more about our services related to Members’ Voluntary Liquidation and alternative forms of winding-up as well as other strategic operations under our relevant service page.
We are at your entire disposal to provide any further information or clarifications you may require on this procedure and to discuss any specific cases you may have in mind.