Coronavirus and the second change of Examinership

The unprecedented events which have been unravelling during the past weeks, both in Cyprus and abroad, with the spread of Coronavirus – Covid-19 – and the strict measures adopted by governments all over the world to combat it, are reasonably expected to have a negative impact on the Cypriot economy as well, which will face a second financial crisis within less than 7 years.

The imminent financial crisis bears some common characteristics with the one Cyprus faced in 2013; it differs, however, in terms of its extent and cause: in 2013, Cyprus’ problem was a domestic one, as most of the countries had already started to overcome the 2008 crisis, whereas the responsibility for the collapse of the two systemic banks was attributed – rightly or wrongly- almost entirely to the actions of Cypriot stakeholders. To the contrary, the recession which the Cypriot economy is expected to enter into in 2020 will spread globally and shall be attributable to the so-called “invisible enemy”, as Covid-19 has been described by many heads of states.

Part of the legacy of the 2013 crisis was the review of the existing insolvency framework in Cyprus. One of the most interesting proceedings which was introduced in 2015 into the Cypriot legal system in an effort to restart the Cypriot economy, is Examinership, which is provided for in sections 202A-202ΛΗ of the Companies Law, Cap.113.

Examinership is a restructuring and rescue procedure for companies, which are either unable or likely to be unable to pay their debts, with a view to examining whether there is a reasonable prospect of survival thereof as a going concern. For such an examination to be made, the Company is put under the protection of the Court for a limited period of time, so that its rescue is facilitated.

The ultimate purpose of Examinership, as this has been analysed in Irish caselaw – where this process originates from – is the preservation of jobs and the rescue of viable businesses. The aim of Examinership is, therefore, to benefit the community and it is not designed to help shareholders whose investment proved to be unsuccessful (Re: Traffic Group Ltd [2007] IEHC 445).

During the protection period no winding-up proceedings can be filed against the Company, no receiver can be appointed thereto, no execution measures can be taken against it, as well as, no steps can be taken for the realisation of mortgages or other securities which have been provided against the company’s debts.

The rationale behind this moratorium on creditors’ rights against the Company is to enable the Examiner, should he/she be appointed, to agree a scheme of arrangement with the company’s creditors, which would allow the company’s survival. Once the said scheme of arrangement is approved by the creditors, it must be sanctioned by the Court to be rendered binding in relation to the company and its creditors.

It is noted that Examinership was not well-received and used by the Cypriot market during the past years. This fact is mainly attributable to the realities of the judicial system and the delays in the procedure’s  implementation, which did not allow a de jure fast – track process (all the relevant steps need to be completed within four months from the day of the filing of the relevant Petition, with a possibility of a further extension for two additional months only) to be implemented and assist the rescue of viable business which were hit by the 2013 crisis.

It appears that in the upcoming months Examinership will have a “second chance” to be tested and established as a useful tool for the restructuring of viable businesses, which will be in a temporary inability or likely inability to pay their debts. We hope that this time all stakeholders will take advantage of this procedure and will treat the relevant petitions with the necessary seriousness and without suspicions, so that the Cypriot economy and, by extension, the society as a whole, will benefit from the proper applicability of this procedure.

The upcoming financial crisis which will follow the end of the Covid-19 pandemic will find the Cypriot market clearly more experienced and prepared in relation to the period 2013-2017, during which the insolvency definitions were abruptly, almost violently, introduced in the financial life.

The collapse of the banking system in 2013 created a generation of executives, accountants, financial experts and lawyers which was nurtured in the crisis and not in a period of constant prosperity and growth and which will, therefore, be in a much better position to manage the next day of the pandemic, as – besides the relevant experience- it will have at its disposal legislative instruments such as the Examinership. Provided that the problems pertaining to the need for a quick adjudication of the relevant petitions are resolved, the survival of viable businesses which will inevitably be affected financially by Covid-19 will be facilitated, enabling, therefore, the rescue of jobs and, consequently minimising the negative financial impact of the pandemic on citizens.

For more information on Examinership, please contact us.

[Written by Associate Dimitris Papapolyviou – first published in Phileleftheros newspaper, in Greek, on 30 March 2020]