Derivative Actions in the Republic of Cyprus / Protection Minority Rights

Derivative Actions in the Republic of Cyprus / Protection Minority Rights

Cyprushas been an English colony for over 78 years and the English custom and most of the English Laws were introduced inCyprus, and most of them are in force with minor or no amendments.

All decisions of the High Court of Justice delivered up to August 1960 are binding on the Cyprus Courts, unless there is a decision of the Cyprus Supreme Court on the same facts to the contrary. All others decisions of the High Court of Justice delivered after August 1960 may be cited before theCyprus Courtand are of substantive nature.

The English Companies Act 1948 was introduced inCypruswith minor changes and as the Companies Law chapter 113.

The relevant section of the Law relating to the Protection Minority Rights in Section 202 of the Cyprus Companies Law which provides as follows:

1)      Any member of a company who complains that the affairs of the company are being conducted in a manner oppressive to some part of the members (including himself) or, in case falling within subsection (3) of section 163, which provides for the company to wound up on just and equitable grounds by the Court, the Registrar of the Cyprus Companies may cause an application to be made to the Court by petition for an order under this section.

2)      If any such petition the Court is of opinion –

a)      That the company’s affairs are being conducted as aforesaid; and

b)      That to wind up the company would unfairly prejudice that part of the members, but otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up.

The Court in order to bring to an end the matters complained of, make an order:

a)      For regulating the conduct of the company’s affairs in future; or

b)      For the purchase of the shares of any members of the company by other members of the company or by the company.

And if the shares will be purchased by the company, the order for reduction of the company’s shares will be ordered.

Where an order of the Court is made under this section, and where this order makes any alteration in or addition to any company’s memorandum or articles and subject to the Court order, the company shall not have power without the leave of the Court to make any amendments or any alterations to the memorandum or articles inconsistent with the provisions of the order. Such alterations or additions made by the order shall be of the same effect as if duly made by resolution of the company and the provisions of the Law shall apply to the memorandum or articles as so altered or added to accordingly.

The Rule in Foss v. Harbottle is which was approved by the House of Lords in United Kingdom since 1843 and it is followed by the Cyprus Courts to the effect that if a wrong is done to a company, or if there is an irregularity in its internal management, which is capable of confirmation by a simple majority of the members, the court will not interfere at the suit of a minority of the members. The company itself should take proceedings if a simple majority of the members think fit.

The reasons for the rule are:

1)      Litigation at the suit of a minority of the members is futile;

2)      To avoid multiplicity of suits.

Under this rule, the Court will not interfere with irregularities at meetings at the instance of a shareholder.

In the following exceptional cases a minority of the members can sue:

1)      To restrain the company from doing an illegal act, or an ultra vires act.

2)      To prevent a fraud on a minority, e.g., to recover the company's property from persons who have taken it for themselves and, by use of their controlling interest in the company, prevent the company from taking action.

3)      To restrain a company which has power to do an act sanctioned by a special resolution from doing that act, by a resolution which was not properly passed. And see Baillie v. Oriental Telephone Co.

4)      To protect from invasion their own individual rights as members. In such a case a shareholder can sue in his own name, because the wrong is done to him as an individual and not to the company. See Pender v. Lushington.

The company may be wound up by the Court on the application of any shareholder or other person having interest or being a subsidiary to the Cyprus Company and whether resident or non-resident of Cyprus, on the grounds for the Protection of Minority Rights and based on the exception to the Rule in Foss v. Harbottle that is just and equitable to the company to be wound up.

Who can sue

Any shareholder or person having an interest in the company can sue the company and its Directors and other persons participating e.g. in the fraud to protect his rights which are injured by the majority shareholders. There are serious grounds to base the application under one or more of exceptions to the Rule in Foss v. Harbottle, the long established principle that the Court will not interfere if there is wrong done to the company or irregularity in its internal management, which is capable of confirmation by a simple majority of the members, the Court will not interfere at the suit of a minority of the members.

As the main provisions of the section 202 of the Law is based on just and equitable grounds, an application to wound up the company by the Court in cases within section 163 (3), it is wise to list out most of the grounds the Court have considered and approved application based on the following grounds.

Meaning of Just and Equitable

The words ‘just and equitable’ is the enactment specifying the grounds for winding up by the Court.

It may be just and equitable to wind up a company:

a)      Where its substratum is gone; or

b)      Where the company is a bubble company; or

c)      Where it is a bank, and its paid-up capital is exhausted, and its uncalled capital can only be called up in a winding up; or

d)      Where a loss has been made on the company’s principal adventure; or

e)      Where a company is fraudulent in its inception an carries on business at a loss, without a capital of its own ; or

f)       Where it is carrying on business at a loss and its remaining assets are insufficient to pay its debts; or

g)      Where it desires to go into liquidation with a view to a scheme which alone can save it from insolvency; or

h)      Where it is impossible to carry on the business of accompany owing to internal disputes which have produced a state of deadlock; or

i)        Where in case of a private company one director treats the business as his own; or

j)        Where the directors withhold information; or

k)      Where the misconduct of directors or promoters can only be successfully investigated in a winding up by the Court.

For further information on this topic please contact Mr. Demetrios A. Demetriades  at Demetrios A. Demetriades LLC, by telephone (+357 22 769000) or by fax (+357 22 769004) or by e-mail (dadlaw@cytanet.com.cy).

 The content of this article is intended to provide a general guide to the subject matter. Specialist advise should be sought about your specific circumstances.