THE Companies Law in Cyprus prohibits non-reinstated bankrupt company directors from acting as directors of any other company. Specifi cally, according to article 179, in the event that a person who is non-reinstated bankrupt director acts as a director or takes part or is interested in the administration of a company without the permission of the Court which declared him/her bankrupt, may be imprisoned or fined.
A relevant provision is also included in the model articles of Table A of the Companies Law, according to which the position of a director is vacated if he is declared bankrupt or enters into an arrangement or settlement with his/her creditors in general. The directors’ powers entail taking decisions for the appointment of a lawyer to act on behalf of the company. Such a decision is taken collectively by the Board, as already held by the Cyprus Courts repeatedly. In a judgment dated June 6, 2016, the District Court of Larnaca heard a case involving the appointment of a lawyer to act on behalf of a company upon the signing of the retainer by a bankrupt director and the defendant filed an application to dismiss the action on the basis that the procedure which was followed was invalid.
According to the judgement, it was not disputed that the person who signed the retainer was a bankrupt director of the company, but he alleged
that at the time that he had signed the retainer he had not been aware that he had been declared bankrupt. Examining this legal issue, the Court referred to the relevant provision of the Companies Law, according to which the actions of a director are valid irrespective of any deficiency which may be revealed later regarding his appointment or qualifications and stated that such a lack of qualifications may entail a bankrupt director who has not yet been reinstated, since declaring a person bankrupt does not automatically invalidate his/ her appointment.
The claimant – company based its argument on the aforesaid legislative provision in order to claim that the appointment of the lawyer was valid and binding for the company, despite the fact that the director who signed the retainer was bankrupt. Referring to Palmer’s Company Law, the Court noted that a bankrupt director may, under certain conditions, bind the company for actions carried out for the benefit of the company. Nevertheless, the actions of the said person have to be carried out for the benefit of the company, since the Companies Law does not allow persons who act as directors of a company knowing that they are bankrupt to invoke the aforesaid legislative provisions in bad faith in order to bind the company.
Conclusively, the Court stated that for the purpose of ascertaining the true intention of the director who was declared bankrupt but has not yet been reinstated, oral testimony needed to be heard and be assessed, especially in light of the fact that no action was taken by the company against the director for acting against the company’s best interests. Whether the said director acted in good faith or whether he knew that he was bankrupt were issues of fact and credibility of the said witness, which could not be examined within the narrow limits of the particular application or be decided on the basis of the affidavits supporting the pleadings filed for and against the aforesaid application.
Consequently, the Court held that the defendant’s request to dismiss the claimant’s action on the basis that the retainer was signed on behalf of the company by a bankrupt director could only be examined during the hearing of the action and hence the application was dismissed.
George Coucounis is a lawyer specialising in the Immovable Property Law, based in Larnaca, e-mail [email protected], www.coucounislaw.com (tel.:- 24818288).