A lawsuit against a company under receivership is served to the receiver or its registered office
A company’s receiver is appointed by a secured creditor, a debenture holder under a floating charge, and acts as a representative of the company. Their primary task is to liquidate assets to the benefit of the debenture holder. Their role is to serve the interests of the secured creditor, receiving the company’s assets as provided in the debenture of the floating charge and disposing them in order to repay its debt.
When a debenture covers the entire assets of a company, its directors must cease to carry out any commercial activity, even though the board of directors retains residue power. In the event that a lawsuit is filed against the company concerning assets which are covered by the debenture, the receiver as representative is entitled to be informed and the lawsuit must be served either to them or the registered office of the company.
An issue arises when a lawsuit against a company under receivership is served to a director instead. The service is invalid since the receiver has not been informed and a judgment issued due to non-appearance of the company may be set aside on the application of the receiver.
The Supreme Court in a unanimous judgment issued on April 6 stated that recent case law confirms that legal acts which are affected by a fundamental defect, such as the failure to serve a lawsuit to the receiver or the registered office of a company, the receiver having no knowledge of the proceedings, must be set aside as an act of justice.
The court of first instance, in a lawsuit filed by a banking institution, had dismissed the application of the receiver to set aside the judgment issued without his knowledge against the company. The court said that the application could not succeed because one of the directors of the company had knowledge of the service of the action.
The Supreme Court held that through his appointment, the receiver takes control of the assets of the company, while the powers of the company and its directors to act in relation to these assets are diminished. In the event that the debenture, under which the receiver was appointed, covers the entire assets of the company, as in the particular case, its directors do not actually control its commercial activity. However, it is acknowledged that the board of directors under receivership retains residue power, which includes the right to sue the holders of the debentures who appointed the receiver, as well as being responsible for the annual returns of the company.
The Supreme Court stated that the receiver became the administrator of the company’s assets and its representative with the power to do everything that is legally entitled and that could be considered necessary for the conduct of the company’s activities. The broad powers given to the receiver under the debentures clearly include any interim or ancillary action, such as filing or defending lawsuits or other legal proceedings.
The lawsuit brought by the respondents concerned the assets of the company. It was not substantiated that the receiver became aware of the writ of summons, since the lawsuit was not served to the registered office of the company and the receiver was the only person who had locus standing to represent the company in the lawsuit. The Supreme Court concluded that the issuance of a judgment without proper service is non-existent and invalid from the beginning. Therefore, it set aside the judgment of the court of first instance and gave the right to the receiver to file an appearance and defence for the company.
George Coucounis is a lawyer practising in Larnaca and the founder of George Coucounis LLC, Advocates & Legal Consultants, [email protected]