This article was written recently by the Managing Director of our Company, Mr. Socratis E. Socratous. In this brief writing piece, Mr. Socratous outlines his thoughts, experiences and educated opinions regarding the legal framework of the concept of Examinerships in Cyprus. Quite frankly, a form of concept for which an approval in court in various viable cases through the years has been interrupted for arguably false (or, to say the least, controversial) reasons. A very useful read that is to benefit readers of all backgrounds, either these are experienced stakeholders, or just individuals simply looking to gain more insights to the matter.
I worked in England between 1988 and 1992, where I completed my Chartered Accountancy Articles. I was working for Grant Thornton, London, and I managed to spend a good deal of my time as a trainee and then a senior accountant in the departments of Investigation and Insolvency. Audit and tax were, admittedly, not my favourite subjects. One thing that fascinated me as an idea in the world of Insolvency was that of Administration Order, i.e., the possibility of stepping in a company to put things right, before handing it back to its owners. A legal framework was in place for that action and still remains.
I thought at the time that all these developments will be introduced to Cyprus in the years/decades to come.
In Cyprus, the concept of Liquidation and Receivership existed for many years and it certainly came more on the limelight after the tragic events and economic disaster of 2013. A disaster which could easily be handed the title of ‘’A chronicle of a death foretold‘’, since problems pre-existed and the system pretended that everything was fine. Half of companies/businesses had been insolvent for years before, the directors/owners thought they knew everything and did not accept any form of advice, the banks were engaged in continuous bad lending based on questionable collaterals and very poor repayment ability, and so on.
The Companies’ Act has been reformed, including strong updates to the Insolvency Section of the Act. There is even legislation now for the Insolvency professionals delivering services under the provision of the law. New measures have been introduced, including the concept of “Examinership”, a similar concept to Administration Order, which gives the capability to a company to be placed under Court protection for some months, while a survival/recovery plan is being worked out to put it back to a road towards recovery. Our legal framework on Examinership has been based on the Irish model, which apparently enjoyed some success, as approximately 11% of companies in an insolvency state are utilising the measure. Without getting too technical, there are certain legal, practical and of substance criteria to fulfil for an Examinership petition. An Examiner is proposed, and an Expert’s report is prepared for the petition. The Expert could be the Auditor of the company, or an independent professional who is eligible to be an Examiner or Auditor. The main idea is to demonstrate that an insolvent company can become viable again, following a certain restructuring plan, dealing with its liabilities and using its cash generating ability and the introduction of new capital to reach an agreement with its creditors. This is subject to the approval of the latters’ various classes and/or stakeholders.
The petition can be made by the company, a director, a minority (more than 10%) or all shareholders, a creditor (present or future), an employee or a group of employees, even a guarantor of the liabilities of the company. If the company becomes healthy, this is beneficial for everybody, as employment is maintained, jobs may even be created, and economic activity in society improves and flourishes.
In a nutshell, the above is a description of the theoretical framework, yet this useful tool has failed completely to date, following some 30 applications, none of which has been successful. Because, among other things, the law was not properly and timely applied.
Therefore, one wonders if it is the fault of the law, the fault of the legal system, or the fault of the Cypriot culture and mentality that do not allow for facts and information to be taken at face value and to be acted upon in good faith and time, in order to raise the bar and move forward. Or is it maybe a combination of all the above?
Most cases were contested heavily, as the stakeholders who believed that their interests had been jeopardised immediately filed an objection against the Examinership. The Expert’s report is often questioned and not accepted by opposing sides, claiming that it is false, one-sided or even not acting in good faith.
To make matters worse, the Courts with their heavy load are not in a position to study cases immediately, nor is there adequate knowledge and experience of the concepts involved on behalf of the judges. In a small country, it proves difficult to specialise.
Worst of all is that the whole idea of Examinership has never been viewed in its real dimension, that is, a genuine effort to save a company. The simple reality remains that local Cypriot entities (for which the law seems to have been designed) do not carry attractive investments for new capital. It has been left on the shareholders to recover the money they had probably abused over the years (and wrongly invested in futile personal ventures of chance), in order to raise the new capital needed to save their own companies.
As a result, some petitions were made to put companies under the protection of the court, in order to buy time and prevent (even temporarily) the appointment of a Liquidator or Receiver (this is one of the provisions of the law). This is a short-sighted view and will not bring any long-term value added, other than consequently prolonging procedures.
In some other petitions, the shareholders did not agree with each other and fought fiercely between them in their overall struggle for power. One may wonder, what good does that bring to a company, its operations, its creditors, or its employees?
A petition for an Examinership cannot be a progression of bad events. We are, however, running the danger of making it so, due to the way we think and act as a whole. If a petition is successful, the judge can offer a short time period (4 months from filing the petition and possibly 2 additional months) to prepare a sound, feasible and reasonable survival plan. The judge can also give special instructions to that effect, too. How can this be harmful, especially since it will go through classes of creditors to be approved?
To conclude, I am very sceptical as I believe that a law which is supposed to do good should be able to actually work. It hasn’t until this very moment. We should keep trying towards this direction, despite all difficulties and drawbacks, if we wish to escape our comfort zone and proceed towards a healthier business life.
In Cyprus today, there exists 1 business for every 15-20 people, whereas for the EU as a whole the equivalent number is 1 for every 80-90 businesses. Cypriot businessmen should seek advice and healthy measures should be taken at early stage of disease.
All stakeholders, be it owners, partners, creditors, banks and employees should try moving in the same direction, abandon aggressive and ‘’I know everything” arrogant approaches and, who knows, maybe they could receive a pleasant surprise as to the results. Certainly, existing laws and practices are far from working smoothly at their current state.
“THE REVITA TEAM”
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