Framework and procedure for company reconstruction

Sections 198-200 of the Cyprus Companies Law provide the legal framework for the facilitation of company arrangement and reconstruction schemes. In the absence of an express statutory definition, a reconstruction may loosely be interpreted as entailing the transfer, whether in whole or in part, of an undertaking from one company (the “transferor company”) to another (the “transferee company”) consisting of substantially the same shareholders with a view to its being continued by the receiving company, without necessarily dissolving the transferor company. For the purposes of section 30 of the Cyprus Income Tax Law 2002, mergers, spin-offs, partial divisions, transfer of assets, exchange of shares and redomiciliations amount to reconstruction schemes.

While reconstruction schemes are primarily capital or debt restructuring-motivated, they may also be used to remould corporate structures, particularly where the administration and ownership of assets held by a holding company is required for business (or tax) efficacy reasons to be scaled down to underlying companies. When a reconstruction scheme is sanctioned by the court, it ceases to operate as an agreement between the parties affected and is given statutory force. The court order effectively renders the scheme binding to the transferor company, in as much as its shareholders and creditors (or a liquidator).

Input of auditors

Any reconstruction scheme would invariably require the input of auditors. The involvement of the auditors of the transferor company is twofold: the preparation of the reconstruction plan; and further, its submission to, approval by and clearance from the Cyprus income tax authorities. Securing a tax clearance eliminates or fleshes out, as the case may be, any potential tax risks that may be associated with the reconstruction.