Liquidation of companies in TRNC

Which legislation is applied in the liquidation of companies?

The law in relation to liquidation, is a part of Company Law. The liquidation of companies can take place for many reasons. For example, if a company's assets do not meet its liabilities and, if it is financially incapable of paying its debts or have declared bankruptcy, the company's shareholders or the board of directors may demand the liquidation of the company, on the grounds that the articles of association and the constitution of the company are not fulfilled.

There are several legal rules and regulations applicable to the liquidation of companies. The main legal legislation to be applied for the liquidation of the companies in the TRNC is Chapter 113, Company Law.If a company has a special status of being setup under a specific legislation especially enacted for the purpose of setting up such companies, the law and/or procedure in relation to the liquidation of any such company is arranged under that specific law. An example to such companies would be co-operative societies setup under Chapter 114, Co-operative Societies Law. In addition, in the event of liquidation of banks, the relevant provisions of the 39/2001 Law on Banks, the bankruptcy charter set forth under the Rules of Courts of 1953, the 1933 Liquidation Regulation, the Chapter 5 Bankruptcy Law, the Rules of Procedure of the Civil Procedure and the principles of Equity Law and the Common Law are applied. In a decision related to liquidations, the Supreme Court stated that the 1933 liquidation charter and the jurisdiction of the jurisprudence constituted a whole.[¹]The legislation to be applied for liquidation is very complex and confusing, sometimes the implementation of which legislation is controversial. Therefore, it is very important to know what kind of company is the company whose liquidation is on the agenda, the reason of liquidation and who is demanding the liquidation.

What are the types of liquidation?

The Company Law of TRNC Article 113 is a counterpart to the 1948 UK Company Act and is the legislation that contains the basic rules for the liquidation of companies. In accordance with Chapter 113, Companies Act, it is possible to liquidate a company in three ways:

1. Liquidation by the Court;
2. Voluntary liquidation;
3. Liquidation carried out under the Court supervision.[²] These types of liquidation are determined according to the reasons on which liquidation is based.

In what cases can the company be liquidated by the Court?

Chapter 113 clause 211 regulates the circumstances in which the Court can decide on the liquidation of the company:

1. If the company is allowed to be liquidated by an extraordinary decision;
2. In the event that the first general assembly ( company general assembly) after the establishment of the company is not made in a timely manner or if the first general assembly report is not submitted to the Registrar of Companies;
3. If the company does not become operational within 1 year from the date of its establishment or if the company terminates its activities for a period of 1 year;
4. If the company falls below the minimum number of members required ( 2 members for private companies and 7 members for all others);
5. If the company is incapable of paying its debts;
6. The Court is of the opinion that it is just and equitable to wind-up the company. In the absence of the condition that it would be just and equitable to wind-up the company, the Court will not allow the company to be liquidated even in the case of other liquidation reasons. The following situations are considered as being just and equitable by the Supreme Court to wind-up a company:

"I. The disappearance of the company's main target or its core values,

ii. Having a deadlock in the management of company matters,

iii. In a situation whereby the company has been created for fraud purposes and the company is only a cover company,

iv. Pressures against the minority shareholders in the company or severe mismanagement of the company.[³]

Some of the examples of the rule that the winding-up should be just and equitable include, a situation where the company’s business damages the company,  inability of the company to pay its’ debts, in a case whereby the company's liquidation is the only way to get solve bankruptcy, or there is a conflict amounting to a deadlock amongst the directors, or the directors doing business without informing the shareholders and as a result causing the shareholders to justifiably doubt that the company shares will be sold to a lesser value than their real worth.[⁴]