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Directors’ Liability in Cyprus

28-10-2014
 
Article by Sozos Papakyriacou
 

1) Yes they are. They are liable if they are found to have acted in a manner inconsistent with their common law duty of care, or in breach of fiduciary duty or if they have acted against the best interests of the company. The Directors are liable in tort to the company if they are found to have acted in a manner inconsistent with their common law duty of care. Furthermore they are also liable for breach of fiduciary duty if they are held to have acted against the best interests of the company especially if they have sought to gain personal benefits and profits out of their position, without first disclosing such an interest to the shareholders and/or other directors.
 
2) In cases of gross misconduct, negligence (liable in tort), fraud in relation to assets, they are liable vis-à-vis third parties for example if they have intended to enter into contracts with the purpose to defraud those third parties
 
3) Directors are not liable for company debts unless they are guarantors personally. They are also criminally liable if the company fails to pay social security or VAT obligations. With the new law amendment of January 2014, which was is a precondition for the release of the next bailout tranche by the Troika, directors of companies are now equally liable for overdue tax liabilities of companies. Consequently, company directors’ bank accounts are under threat as well if a company is in default with its tax payments. 
 
The Assessment and Collection of Taxes Law has been amended to render members of the Board of Directors of a legal entity criminally liable in their personal capacity for a legal entity’s fraudulent or willful submission of tax returns, statements, in connection with the entity’s income or any claims for allowance, deduction or relief, incorrect accounts or information, documentation or other related records and declarations. The liability is also extended to the entity’s executives, including the legal entity’s chief executive officer or any other executive with responsibilities as to the financial management of the legal entity, as well as any other person that is deemed to act in such a capacity.
 
The same would apply with regards to:
(a) fraudulent omission or delay of payment of tax due or
(b) no payment of tax withheld
 
4)Liability only attaches when the company has no realistic prospect of avoiding insolvent liquidation. If a company is in the course of winding up and it appears that any of its business has been carried on with the intention to defraud the creditors of the company or for any fraudulent purpose, then the Court may declare that any persons who were knowingly parties to the fraudulent trading to be personally liable for all or any debts or other liabilities of the company to the extent that the Court might direct. For fraudulent trading, it is necessary to first establish dishonest intention. This can be proven where for example, the directors caused the company to incur further debts at a time when they knew that there was no reasonable prospect of those debts being paid.  If the directors in good faith believed that the company was just about to turn the corner, then they would not normally be held liable for continuing to trade.
 
In practice, applications for orders in respect of fraudulent trading or in general insolvency of a company are rare because of the high burden of proof associated with fraud.
 
Personal liability may only be imposed on directors in the event of fraudulent trading, namely carrying on business with intent to defraud creditors. However due to the high standard of proof required, successful claims for fraudulent trading are extremely rare. However, directors involved with a company that could potentially be unable to pay its debts should abstain from engaging in any transactions that could be considered having any element of an intention to defraud creditors.
Cyprus law does not contain any wrongful trading provisions requiring directors to commence insolvency proceedings as soon as they know or ought to know that their company will be unable to pay its debts.
 
5) Yes they are. A Cyprus company may apply to the Registrar to be struck off the register if the company is not trading, has no assets or liabilities and no creditors and a Cyprus company must follow the liquidation procedure if the company cannot pay its debts.
 
6) Yes there are a number of different actions against a director both of civil and criminal nature such as for failing to act to preserve the assets, actions for unlawful profits, misappropriation of corporate opportunity cases, conspiracy claims and professional negligence claims, claims by shareholders or creditors for direct loss arising from wrongs by the directors.
 
7) The Secretary of the company can be liable.  Officers or managers etc cannot be liable unless they commit anything of criminal offence. 
 
8) Depends on evidence available.  Temporary enforcement may be really fast if based on strong evidence and obtaining a temporary court order could be achieved even within a couple of days.
 
9) Under Cyprus law is not feasible.
 
10) Fees for law suits like this depend on the value of the claim, the work that has to be done, the time , the scales of the Cyprus Bar Association.
 
11) The usual system on estimating the fees is based on the Scales of the Cyprus Bar Association.  But they are only indicative and charges are different on each case. 
 
PAPAKYRIACOU & PARTNERS LTD
Sozos Papakyriacou
28, Sofouli Street, Chanteclair Building
1096 Nicosia
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