Restructuring for companies affected by the cash flow freeze – Insolvency/Bankruptcy
Recent developments, sanctions and capital controls have disrupted financial deals and bond issuance passing through Cyprus, with many innocent parties caught in the crossfire.
Cyprus-based bond issuers and debtors find themselves unable to service their debts despite their strong liquidity position, while bondholders and other creditors stand helpless, witnessing actions more aggressive creditors who could jeopardize the overall chances of recovery.
In this article, we explore 2 mechanisms offered by Cypriot law, which help companies to protect themselves against the effects of a potential default and to protect creditors against the effects of an uncontrollable insolvency. The objective of these two mechanisms is to save companies in operation by restructuring their obligations.
plan of arrangement
A plan of arrangement is a court-sanctioned agreement between a business and its creditors to restructure the debts owed by the business, while allowing it to continue in business. Schemes of arrangement provide a flexible, operational, creative and personalized debt management mechanism that protects companies from potentially unavoidable insolvency.
Following amendments to Section 198 of the Cyprus Companies Act, Cap. 113, the creditor threshold required to approve a plan of arrangement is that of a simple majority by value (ie 50%+) for each class of creditors voting for the arrangement.
Schemes of arrangement can be sued by the troubled company itself, or one of its creditors and shareholders.
In order to pursue a scheme of arrangement, the following steps are as follows:
- Initially, the composition plan must be drafted, accompanied by the explanatory memorandum and the required insolvency report. This step will generally involve the assistance of legal and financial experts.
- Second, the plan documents will be presented to the court, which will consider its content, jurisdictional issues and classification of creditors. If approved, the court will authorize the calling of meetings of creditors.
- Third, affected creditors will be invited to vote on the proposed plan of arrangement.
- Finally, if a simple majority of creditors for each category of creditors approves the plan of arrangement, the court will consider the fairness of the plan – taking into account the position of creditors who oppose the plan – and, if satisfied, the court will sanction the plan. of layout.
Once a plan of arrangement is sanctioned by the Court, it becomes binding on all parties involved.
Finally, it is specified that concordats can be pursued by companies already in liquidation, by their liquidator. However, a higher threshold is required for the approval of compositions in the context of a liquidation (75% of creditors by value), thus making the procedure more accessible before entry and as a step to avoid liquidation.
The review is a judicial restructuring procedure suitable for companies facing immediate financial difficulties but which have a reasonable prospect of survival. The court shall appoint an examiner, who is a qualified insolvency practitioner, to propose a plan for restructuring the debts of the company, where (a) the company is, or is likely to be, unable to pay its debts, and (b) the company is not in liquidation, which in turn will save the business as a going concern.
The main benefit of the review is that it allows the struggling business to benefit from a temporary 4-month moratorium (subject to extension) on creditor claims, meaning that during the review period , no claim by creditors can be advanced against the company. At the same time, no encumbrance holder will be prevented from appointing a receiver/manager over the assets of the company, and the holders of any security or guarantee given by the company will not be able to enforce such security or guarantee (in in whole or in part) without the examiner’s approval.
During their tenure, the examiner, as well as any member, contributor, creditor or director of the company, may apply to the court for directions on matters raised during the examiner.
The examination procedure is initiated by a petition to the court, which may be filed either by the company, a creditor of the company, a guarantor of the obligations of the company or any member of the company holding at least 10% of its capital. paid-up shares with voting rights at the time.
Once the restructuring plan proposed by the Examiner has been implemented, the appointment of the Examiner and the moratorium offered to the company are terminated.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.