Overview (June 2010) - International Law Office

International Law Office

Company & Commercial - Cyprus

Overview (June 2010)

June 01 2010

Corporate personality and shareholder liability
Incorporation procedure - corporate forms and documentation
Share capital and different share classes
Shareholders
Directors
Accounts, auditing and annual returns
Dissolution and winding-up
Legalization and apostillation of corporate documentation


Corporate personality and shareholder liability

A Cyprus company is a separate legal entity that is established in order to separate legal responsibility for the affairs of the business from the personal affairs of the individuals who own or operate the business. Usually, companies are limited by shares, which entails that the liability of each member is limited to the value of the shares that he or she has agreed to take. If the shares are issued at a premium, each member is liable to pay, in addition to the nominal value of the shares that have been issued, the premium amount that has been agreed. Under this principle of limited liability, in the event that the company becomes insolvent or enters into an insolvent winding-up, each member will be liable only for any unpaid amount of his or her shares in the company.

A Cyprus company can be either a private limited company or a public limited company - the most common types of legal entity. In case of a private limited company, the minimum number of members is one and the maximum is 50, there are restrictions on the transfer of shares and there can be no invitation to the public to subscribe for any shares or debentures. Public companies need seven or more founder members, can invite the public to subscribe for their shares or debentures and do not restrict share transfers.

Incorporation procedure - corporate forms and documentation

Approval of company name
An application must be filed with the registrar of companies for approval of the company name. Any name that is identical or similar to an existing company name or that implies illegal activity will not be accepted by the registrar of companies. In addition, if the proposed name contains words such as 'insurance', 'banking', 'brokerage' or 'trustees', the consent of the relevant regulatory authority will be required.

Preparation of memorandum and articles of association
After the name is approved, the memorandum and articles of association must be prepared. The memorandum provides for:

  • the company's objects and intended activities;
  • the amount and currency of the company's proposed authorized and issued share capital; and
  • the number of shares held by each shareholder.

The articles of association contain the internal regulations for the management of the affairs of the company, the conduct of its business and the authority of the directors. They also constitute the contract between the company and its members in respect of their rights and liabilities as shareholders of the company. The memorandum and articles of association must be signed by each subscriber in the presence of at least one witness who must attest the signature.

Directors and secretary
Form HE3 must be completed to provide the names and details of the directors and secretary of the company. A sole member company may have only one director who can also be the shareholder and the secretary. The following information must be provided for each director and the secretary:

  • name and surname;
  • previous names (if any);
  • passport number or registration number in case of a company;
  • nationality;
  • date of birth or date of incorporation in case of a company;
  • occupation/business; and
  • address.

Registered address/office
The company must have a registered address in Cyprus at which the statutory corporate records are maintained. Thus, Form HE2, which specifies the registered address, must be completed and filed with all other company documentation to be registered.

Form HE1
In addition to the memorandum and articles of association and Forms HE2 and HE3 as stated above, a Form HE1 must be signed by the lawyer entrusted to incorporate the company and filed with the company registrar. The form must be signed by the lawyer before the court registrar and must be in the form of an affidavit swearing that the incorporation is in compliance with all provisions of the Company Law.

Share capital and different share classes

The Company Law provides for no minimum share capital, but each subscriber to the memorandum must subscribe for at least one share. The share capital may be divided into different share classes. The main types are ordinary shares, preference shares and deferred shares. In case of different share classes, reference must be made to the company's articles of association, which set out the rights, powers and duties attached to any share class.

Shares may be allotted by a company for cash or in-kind consideration, or both. They can be fully or partly paid or issued at a premium. The law specifies no timeframe within which the issued and allotted shares should be paid, partly or in full, by the members. However, if the shares are not fully paid, the member is obliged to pay when called upon to do so by the company, or the company may exercise a lien on the member pursuant to its articles of association.

Shareholders

A shareholder of a Cyprus company can be either a legal or a natural person. A subscriber of a company's memorandum will be deemed to have agreed to become a member of the company and on registration, will be entered as a member in the company's register of members. Any other person that appears to have become a member of a company and whose name is entered in its register of members will be deemed a member of the company. Where two or more persons jointly hold one or more shares in a company, they will be treated as a single member.

Even though the real power of a company rests with the board of directors, the general shareholders' meeting is the superior supervisory body. There are four types of company member meeting:

  • statutory meetings;
  • annual general meetings;
  • extraordinary general meetings; and
  • separate class meetings of shareholders.

The articles of association will specify the quorum required for meetings and may also provide for voting rights and proxies. The Company Law provides for three types of resolution - ordinary, special and extraordinary.

Directors

In general, the objects clause of a company's memorandum specifies the permitted activities of the company and thus those activities that the directors can perform on behalf of the company. The articles of association specify the directors' powers to act on behalf of the company. Any act that is deemed by the memorandum and the articles of association as beyond the company's legitimate powers (ultra vires) is considered invalid from the outset. If a director enters into a transaction which is beyond his or her powers, but within the powers of the company, the transaction can be ratified by resolution of the company's members.

Directors are agents of the company for which they act and owe the company fiduciary duties. These fiduciary duties are mainly to manage the company in accordance with Cyprus law and the company's memorandum and articles of association. Directors will be personally liable for any loss caused to the company through their own illegal or ultra vires acts.

Accounts, auditing and annual returns

Under Cyprus law, it is a legal requirement that every company keep books of accounts to record transactions and enable the preparation of financial statements. At a minimum, these books of accounts must show:

  • sales and purchases;
  • moneys received and paid; and
  • the company's assets and liabilities.

This set of financial statements must be prepared in accordance with the accounting standards of the International Financial Services Association. Every parent company with one or more subsidiaries, other than a company which is itself a wholly owned subsidiary, must prepare and present consolidated financial statements.

Furthermore, the Company Law requires that a statutory annual audit be performed for every company in accordance with International Auditing Standards. The law requires that the appointed auditor be authorized to practise under the profession under the laws of Cyprus, and thus local licensed or registered auditors must be appointed. Furthermore, it is a legal requirement that every Cyprus company prepares an annual directors' report and financial statements comprising certain minimum information. The company directors are legally responsible for the preparation and content of the accounts.

Every company must complete an annual return within 42 days of its annual general meeting date. The return must be signed by a director and the company secretary, be filed with the registrar of companies and be accompanied by the full set of financial statements.

Tax resident companies must prepare and submit their annual tax returns (IR4) to the tax authorities by December 31 following their financial year end. The IR4 must be signed by a registered auditor. In case of non-resident companies, although they are not required to submit an annual tax return, they are still subject to the provisions of the Company Law on the appointment of a Cyprus registered auditor.

Dissolution and winding-up

Under Cyprus law, the liquidation or winding-up of a company can be achieved in four ways:

  • compulsorily by the court;
  • voluntarily by its creditors;
  • voluntarily by its members (in case the company is solvent); or
  • under court supervision.

Liquidation by court order
A company will be wound up by the court when:

  • the company decides by special resolution that it should be wound up by the court;
  • in case of a public company, the statutory report is not filed with the company registrar or there is a failure to call for the statutory meeting;
  • the company has not started its operations within one year of its incorporation or has adjourned its operations for a whole year; or
  • the company is incapable of paying off its debts.

For the company to enter liquidation, a petition must be filed to the court by the company itself or by any creditor(s) or contributor(s).

Voluntary winding-up by creditors
If the directors decide that the company has no future and it is best for it to be wound up, an extraordinary resolution for voluntary winding-up is required, stating that the company is unable to continue its business due to its inability to pay its liabilities (Section 261 of the Company Law).

Since the company is insolvent, it is obliged to summon a meeting of its creditors on the same day or the following day on which the meeting at which the resolution for voluntary winding-up is to be proposed. Notices should be sent by mail to all creditors of the company simultaneously with the notices of the meeting. The meeting must also be advertised in the Official Gazette and in at least two local daily newspapers circulatation in the district in which the company's registered office or its principal place of business is located. Furthermore, the company directors must prepare a statement on the company's affairs that is supported by an affidavit and present it at the creditors' meeting (Section 276 of the Company Law). At the creditors' meeting, a liquidator will be appointed and the creditors may also decide to establish a committee of inspection (Section 278). The voluntary winding-up is deemed to commence on the day on which the resolution is passed and the company should carry out no business other than for the purposes of the winding-up.

Voluntary winding-up by members (in case the company is solvent)
The Company Law provides for a member-led voluntary winding-up of a company, provided that the company is solvent. Where it is proposed to wind up a company voluntarily, the majority of the directors of the company must make a statutory declaration to the effect that they have made a full inquiry into the affairs of the company and, having done so, have formed the opinion that the company will be in a position to pay its debts in full within no more than 12 months of commencement of the winding-up as it may be specified in the declaration. In order for it to have effect for the purposes of the applicable law, this declaration must be made five weeks before the date on which the resolution for winding-up is passed and be delivered to the registrar of companies for registration before that date. Furthermore, the declaration must embody a statement of the company's assets and liabilities at the latest practicable date before the making of the declaration.

Under court supervision
When a company has passed a resolution for voluntary winding-up, the court may order the winding-up to continue under the supervision of the court. Any creditors, contributors or other parties interested in the company may apply to the court on such terms and conditions as the court shall consider fair.

Legalization and apostillation of corporate documentation

'Certification' (the equivalent of 'notarization' in other jurisdictions) is the official witness to the signature affixed on a document performed by the certifying officer. The certification is recognized as official confirmation of the authenticity of the signature. The certifying officer must be a natural person who holds a specific licence from the government.

For use abroad, the documents are required to be legalized or apostilled for the purposes of confirmation. 'Legalization' is the affixment of an official seal to the official document which is recognized abroad and confirms the authenticity of the signature or of the document itself. The seal of the certifying officer is not recognized outside Cyprus.

If the other country to which the document will be sent is a member of the Hague Convention, the document is apostilled. In Cyprus, documents are apostilled at the Ministry of Justice. This has simplified the chain of document confirmation, which requires a number of seals and stamps. Documents that bear the specific stamp 'Hague Legalization Certificate' are admitted in all member countries to the Hague Convention and no other confirmation is required. If the other country to which the documents will be sent is not a member of the Hague Convention, the documents must be legalized at the embassy of that country in Cyprus.

Delegation of rights by directors via powers of attorney
Cyprus law permits directors to delegate their duties, and thus powers of attorney can be granted in either general or specific form, unless the articles of association provide otherwise. However, general practice is for a company's articles of association to permit the granting of powers of attorney, subject to the approval of the board of directors. Thus, it is necessary to ensure that:

  • the board meeting to authorize the granting of the power of attorney is properly convened;
  • proper notification is given;
  • there is a quorum;
  • the board of directors has the power to take these decisions (pursuant to the articles of association); and
  • the correct authorizations are given.

Powers of attorney can be general or specific and must be executed by an authorized person who is permitted to act on behalf of the company.

For further information on this topic please contact Stella Kammitsi at Chryssafinis & Polyviou by telephone (+357 22 67 9760), fax (+357 22 67 9750 ) or email (skammitsi@cplaw.com.cy).


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