As part of its obligations under the Memorandum of Understanding signed between the Republic of Cyprus, Cyprus has undertaken to reform the legislation forming the existing insolvency framework which is rather antiquated, with some of the existing laws dating back to the 1930s.
The new insolvency framework will consist of five pieces of legislation and to a great extent follows the model which was adopted by Ireland. It is expected that the new regime will play a critical role in the reduction of the number of NPLs which is currently around 50% in respect of some credit institutions.
The regime applicable to companies is implemented by two pieces of legislation which amend the existing Companies Law Cap 113. The one relates to a new scheme called “examinership” under which companies which are viable and are capable of being rescued as a going concern are put under protection from creditor action for a short period until the examiner can devise and implement a plan for the company. In order for a company to be able to benefit from the provisions of this legislation the company must be or must be likely to become unable to repay its debts (balance sheet or cash flow test must be satisfied) and there must be a reasonable prospect of the company being rescued as a going concern.
The other piece of legislation changes the provisions on liquidation of companies. This legislation amends the existing legislation which was deemed to be inefficient, making the new insolvency procedure quicker and ensuring the return of assets back into the economy.
The regime applicable to natural persons is reformed by two pieces of legislation. One piece of legislation amends the antiquated provisions on bankruptcy for natural persons and notably allows for discharge of a bankrupt after a certain amount of years addressing the serious issue which arose under the existing regime where a bankrupt was effectively a “hostage” of the system and was never given a chance to a fresh start.
The other piece of legislation reforming the insolvency regime applicable to natural persons is the law implementing the provisions on debt relief orders and personal repayment plans. Under the new rules, persons who have very low or no income and assets of very low value or even effectively no assets are able to apply for relief from unsecured debts provided that these to dot exceed a certain threshold. The application for debt relief will be made to the Insolvency Service who will process the application and apply to the court for an order giving effect to the debt relief. Under the same piece of legislation, natural persons who meet certain criteria and are currently unable to repay all their debts as these fall due, but have some repayment capacity, will be able to seek to have their debts re-scheduled under a voluntary framework where the creditors will vote in favour or against a repayment plan proposed by an Insolvency Practitioner or, if certain additional criteria are met, will be able to apply to the court for a repayment plan to be imposed on creditors provided however that such an imposed plan would put the creditors in the same or better position that would be the case if the debtor were to be made bankrupt.
The fifth piece of legislation sets out the rules for obtaining a license to act as an Insolvency Practitioner and effectively regulates the role of the Insolvency Practitioner.
The new framework seeks to “square the circle” by providing solutions to the issues which arise out of the extensive use of guarantees by banks which creates a serious risk of a domino effect with increasing defaults of loans while at the same time balancing the interest of creditors, debtors and guarantors who each have certain rights and protections under the existing legal framework as well as the contractual arrangements existing between these parties.
