Stay of proceedings due to a liquidation application

The purpose of the stay is to protect the company’s assets and the rights of its creditors

Protecting the rights of the creditors and the assets of a company against which a liquidation application is pending may be a good reason for stay of a lawsuit or other proceedings pending against the company until the issuance of the liquidation order.

The application for stay may be filed by the company, a creditor or a contributor. The issue is regulated by article 215 of the Companies Law, Cap.113, which gives discretionary power to the court to which the application is submitted to stay or limit the proceedings.

The power to stay proceedings can be exercised in the interval from the filing of the company liquidation application until the issuance of the order, so as to ensure that all unsecured creditors receive equal treatment.

The purpose is for the court to safeguard assets under liquidation so they may be distributed between creditors in accordance with article 300 of the law determining the preferential payment. An additional element to be decided is whether the plaintiff can be considered a creditor in the sense that they can prove that the company owes them a debt.

The issue was examined by the District Court of Larnaca in a judgment issued on March 4 in a lawsuit against a defendant company concerning a claim arising from a tort. An application for stay of the proceedings was filed because a liquidation application was pending. The question was whether the plaintiffs whose claim was disputed by all defendants could be considered creditors under the provisions of article 298 of Cap.113.

The court agreed with case-law that this article was worded in the broadest possible way to include claims for damages arising from a tort. The purpose of the provisions of article 215 and 220 is to compel creditors to rush and prove their claim, to ensure a fair distribution of the assets. Therefore, the question was whether the plaintiffs could prove the debt owed to them in the liquidation process.

The claim of the plaintiffs arising from a tort was disputed, which inevitably implied a dispute regarding their status as creditors. The court concluded that if they did not pursue their action, they might not be able to adequately prove their claim in the liquidation process. It did not find a good reason why the lawsuit should not continue so that the competent court can finally decide whether the plaintiffs are creditors.

Moreover, and most importantly, even if a judgment was issued while a liquidation application, to which an application for stay is connected, is still pending, the plaintiffs would not be entitled to proceed with enforcement measures given the provisions of article 217. This article provides that when a company is liquidated by a court, any seizure, sequestration or execution involving the company’s assets that begins after the commencement of the liquidation is invalid. Liquidation according to article 218 commences from the time of the submission of the application for liquidation.

The court decided that the company’s creditors would not be affected by any judgment against the defendant company, nor would the order of the creditors’ ranking as defined in article 300. A judgment does not confer privileges on a creditor. Therefore, the issuance of the order was not justified. On the contrary, due to the time lapsed from the filing of the action, being a backlog case, the court considered that it was in the interest of justice to proceed and dismissed the application.

George Coucounis is a lawyer practising in Larnaca and the founder of George Coucounis LLC, Advocates & Legal Consultants, [email protected]