Merger or Liquidation? Practical comparison under Cyprus Law

We are often approached by clients who wish to simplify their corporate structures, with the question whether it is best to opt for a merger between their group companies, or the liquidation of companies which no longer they wish to keep alive.

As usually it is the case with legal questions, there can be no “one size fits all” solution. Each case depends on its specifics and what suits one situation may not suit another.

We have thus deemed it would be useful, to provide brief descriptions of the two processes and a practical comparison between the two.

• Merger:

It is possible under the Cyprus Companies Law, Cap.113 for companies registered in Cyprus which are of the same group to “amalgamate” between them. One of the existing group companies, or a new entity formed for the purpose of the merger, absorbs all assets and liabilities of the other companies which are dissolved without being liquidated.

The merger requires the approval of the Court. An application is submitted to the Court together with supporting affidavits by the directors of the companies involved. The application is accompanied by a “merger plan” that sets out the details of the reorganisation and which is approved by the directors and shareholders of the companies involved.

Financial statements of the merged companies must be prepared, and the companies should be up to date with their filings with the Registrar of Companies.

If the companies involved in the merger have creditors, consents should be obtained from them and be submitted to the Court. Where that is not possible, and there are creditors who did not provide a consent, those have the right to object. For the Court to issue the order approving the merger, it should be shown that the creditors’ position will be safeguarded.

With the order of the Court sanctioning the merger, the “absorbed companies” are dissolved without being put into liquidation. The Court order is filed with the Registrar of Companies.

Where there are no objections to the approval of the merger, the process takes about 2 – 4 months to be completed.

• Liquidation:

In this article we deal with “voluntary liquidations” either by the members or the creditors of Cyprus companies under the provisions of the Companies Law, Cap.113.

• Members Voluntary Liquidation:

For a company to be placed under a members’ voluntary liquidation, it must be able to pay off its creditors in full, within 12 months as from the commencement of the liquidation. The directors of the company must swear a “Declaration of Solvency” to confirm the aforesaid, which must be accompanied by a “Statement of Assets and Liabilities” of the company up to the date of the declaration. For the directors to be able to make the said declaration, financial statements must be prepared up to date.

Following the making of the declaration by the directors, the shareholders of the Company shall resolve by special resolution to place the company in liquidation and to appoint the liquidator (only insolvency practitioners licensed by the Cyprus Insolvency Department may be appointed as liquidators in Cyprus companies).

The liquidator shall make relevant publications and to carry out the liquidation process -tin short, to collect the company’s assets, if any, to realise them and pay the creditors, prepare liquidation accounts, and hold final meetings to approve the final accounts.

For the liquidator to complete the liquidation process, a tax clearance certificate must be obtained from the Tax Authorities.

Where there are no creditors, application for the tax clearance may be made in about 3 months after the commencement of the liquidation. Time needed for obtaining of the tax clearance depends on whether the company is up to date with its tax filings and from the complexity of its affairs. A rough estimate to obtain the clearance where no complexities exist, is 1 – 3 months.

The liquidator shall pay any surplus to the shareholders of the company and then to make the final filings to the Registrar of Companies.

The company is deemed dissolved within 3 months as from the filing of the final returns.

• Creditors Voluntary Liquidation:

Where a company is insolvent and cannot pay its debts, it can only be placed under a voluntary liquidation by its creditors. Shareholders’ and creditors’ meetings should be held to approve the liquidation to appoint the liquidator. Before the creditors’ meeting, the directors of the company must make a statement of their position on the company’s affairs with a list of the creditors and an estimate amount of their claims and notify the creditors and the shareholders.

Where the nominated liquidator by the shareholders is different than the one nominated by the creditors, the creditors’ nomination prevails. Creditors votes at their meetings, are counted based on the value of their claims, and decisions are generally approved by majority.

Similarly, as in a members’ voluntary liquidation, the liquidator shall collect the company’s assets, if any, liquidate them and pay the creditors pro rata, draw up liquidation accounts, obtain a tax clearance certificate and hold final meetings of shareholders and creditors to approve the final accounts. The liquidator then makes the final filings to the Registrar of Companies and the company is dissolved in 3 months as from the filing of the final returns.

• Comparison in a nutshell
  • For a merger, at least one entity shall remain in existence, to absorb the assets and liabilities of the rest of the companies. No such necessity exists in a liquidation.
  • A merger may be completed faster than a liquidation if there are no objections.
  • With a merger “continuity” can be achieved since assets and liabilities are being transferred to the absorbing – surviving company. Liquidation brings an end to the existence of the company.
  • The merger requires approval by the Court. The voluntary liquidation does not.
  • A merger may be delayed or blocked by non-consenting creditors. In a creditors’ voluntary liquidation, the majority of the creditors in value, can approve the liquidation and appoint the liquidator to carry out the process.
  • In both a merger and a liquidation, the company must be up to date with its statutory filings and must prepare up to date financial statements.
  • A merger may be possible to be approved by the Court without submitting a tax clearance certificate (since liabilities are being transferred to the surviving entity), noting though that the Court maintains discretion. For the liquidation to be completed, tax clearance must necessarily be obtained.
  • In a merger, the absorbed companies’ liabilities are being transferred to the surviving -absorbing company. In a liquidation, creditors are paid off pro rata and the company is dissolved without the creditors having any automatic right of recourse against other entities by reason that the debtor company has been liquidated.
  • The liquidation requires appointment of an insolvency practitioner.

Note: The above apply for mergers between Cyprus companies, so called “local mergers”. “Cross border mergers”, namely mergers between Cyprus company and other companies from different EU member states, are regulated by a different process provided by the EU Directive 2017/1132/EC which was incorporated in sections 201I-201X of the Cyprus Companies Law.