spotlIGHt on CypRUs

spotlIGHt on CypRUs

The Role of the Cyprus Securities and Exchange Commission

The Cyprus Securities and Exchange Commission (CySEC) is the independent public regulatory and supervisory Authority of the securities market of the Republic of Cyprus – one of fi ve authorities supervising the fi nancial sector. The CySEC was established in accordance with section 5 of the Cyprus Securities and Exchange Commission (Establishment and Responsibilities) Law of 2001. It is assigned the responsibility for the overall supervision of the securities market and the transactions in transferable securities carried out in Cyprus. The scope of the supervision also extends outside the Republic, with regard to transactions carried out by investment fi rms that are under the supervision of the CySEC. The CySEC’s role is to protect the investors through ensuring market integrity, the eff ective and fair operation of the securities market, and the steady development of the securities market.

Entities Under CySEC Supervision

Entities under the supervision of CySEC include investment fi rms; regulated markets; companies with securities listed on regulated markets; Undertakings for Collective Investment in Transferable Securities (UCITS) and their management companies; and Credit Rating Agencies (CRAs) through delegation from the European Securities and Markets Authority (ESMA). ESMA is an independent European Supervisory Authority that contributes to safeguarding the stability of the European Union's fi nancial system, by ensuring the integrity, transparency, effi ciency and orderly functioning of securities markets, as well as enhancing investor protection. In particular, ESMA fosters supervisory convergence both amongst securities regulators and across fi nancial sectors, by working closely with the other European supervisory authorities competent in the fi eld of banking (European Banking Authority - EBA), and insurance and occupational pensions (European Insurance and Occupational Pensions Authority - EIOPA).

A Brief Overview of the Supervised Entities Cyprus Investment Firms (CIFs)

These are companies that operate under an authorisation granted by the CySEC, to provide one or more investment services to third parties and/or to perform one or more investment activities on a professional basis. The range of investment services CIFs off er include the reception and transmission of orders on behalf of clients; the execution of orders on behalf of clients; dealing on own accounts; portfolio management; investment advice; the underwriting of fi nancial instruments and/or placing of fi nancial instruments on a fi rm commitment basis; the placing of fi nancial instruments without a fi rm commitment basis; and lastly, the operation of Multilateral Trading Facility (MTF) Despite the recent fi nancial crisis, the interest for sett ing up CIFs is high and has remained undiminished for many years. While only 18 licensed CIFs were in operation in 2003, today the number has grown to 119. In addition to this, there are a substantial number of applications for CIF licenses under review at the CySEC, therefore the total number of licensed CIFs will grow in the next months and is expected to continue growing over the coming years. The CySEC receives on average 30 applications for granting CIF authorisation per year – around two thirds of which concern the sett ing up of CIFs for the provision of foreign exchange (FOREX) trading services. The CySEC's decision to proceed promptly and proactively with the regulation of the FOREX market has certainly facilitated these developments. According to the relevant EU Directive (MiFID), the CySEC has recently decided that the binary options will also be considered fi nancial instruments, which means that investment companies that wish to off er investment services in this fi nancial instrument are to be licensed and regulated by the CySEC.

Regulated Markets

The Cyprus Stock Exchange (CSE) off ers various advantages for companies wishing to list their fi nancial instruments. It is a recognised EU exchange that is open to any domestic and foreign private or public company that wishes to draw capital and reduce their dependence on the traditional credit institutions in order to develop and expand their activities. To further facilitate the listing of companies, the CSE has further introduced the Emerging Companies Market (NEA), which allows for companies to list their shares through simplifi ed procedures and at considerably lower costs. This is a non-regulated market and is authorised by CySEC as a Multilateral Trading Facility (MTF).

Listed Companies

At present, there are 119 companies listed on the CSE in Cyprus. Investors in the listed Cyprus companies benefi t from the low taxation rate of 10% applied on net profi ts of companies and from no withholding tax on dividends declared to non-residents. This is in addition to the double taxation avoidance treaties that Cyprus has signed with more than 50 countries worldwide. The listing of companies in the CSE has many advantages for both foreign companies and investors, due to the very competitive listing fees, the effi cient infrastructures, the skilled personnel, the access to EU market and the multitude of tax incentives. Such incentives also include the zero capital gains tax on profi ts from sale of shares, exemption of dividend income from taxation, the EU-wide low 10% corporate tax and the many double tax treaties.

Undertakings for Collective Investment in Transferable Securities (UCITS)

A UCITS management company is a company authorised to manage undertakings for collective investment in transferable securities. This refers to the open-ended undertakings for collective investment in transferable securities and/or other liquid fi nancial assets. This is using capital raised from the public and which operates on the principle of spreading risk – the units of which are, at the request of holders, redeemed directly or indirectly out of this undertaking’s assets. The arrangement of the national legislation with the UCITS IV Directive of the European Union creates a modern and fl exible regulatory framework that enables the growth of the UCITS sector in Cyprus. UCITS IV Directive provides for a number of important changes: Firstly, it extends the ‘Passport’ of the management company to include the possibility of sett ing up a UCITS in another EU member state which is licensed and supervised by the supervisory Authority of the host state, while directly managed by the management company without the need to maintain a local offi ce. Secondly, it simplifi es the ‘notifi cation procedure’ for the marketing of UCITS in other member states which speeds up the process and operates similarly to the cross-border provision of fi nancial services. This is done through an electronic notifi cation between the two supervisory authorities. Thirdly, it enables

the cross border mergers of UCITS through transparency and other requirements for the merger that are common to the whole of the European Union. Fourthly, it introduces the Key Investor Information Document (KIID) which replaces the simplifi ed prospectus and provides key information to the investors in a brief and straightforward manner. Lastly, it allows for many other improvements related to bett er cooperation between the national supervisors for the consistent application of the regulatory framework and the maintenance of a high level of investor protection across the EU. Cyprus is rapidly growing as a centre for private investment funds due to many comparative advantages, such as there is no capital gains tax on profi ts from sale of fi nancial instruments; dividend income is exempt from tax; interest income is taxed at 10% corporate tax but is exempt from defense tax; the liquidation of a UCITS is not taxable for non-tax-resident investors; lastly, there is no tax on deemed dividend distribution for non-tax resident investors. Double tax treaties with more than 50 countries include the UK, Mauritius, India, Russia, China and the USA. While UCITS Management Companies are subject to a unifi ed corporate tax rate of 10%, there is also no VAT on management fees.

Credit Rating Agencies

The CySEC is also responsible for the supervision of the two registered Credit Rating Agencies (CRAs) through delegation from ESMA. As a result of current developments and decision taken by the CySEC, the extended spectrum of CySEC supervised entities also includes or will soon include:

Alternative Investment Funds

These encompass a wide range of investment funds that are not already regulated at EU level by the UCITS Directive. They include hedge funds, private equity funds, real estate funds and a wide range of other types of institutional fund. Well ahead of other jurisdictions, the new legislation for the Alternative Investment Fund Managers is also being prepared, to give Cyprus a competitive advantage for att racting companies that manage alternative investment funds, such as Hedge Funds, Private Equity Funds and non-UCITS. This law transposes the EU Directive on Alternative Investment Fund Managers – the latt er aiming to create a comprehensive and eff ective regulatory and supervisory framework for the Managers of Alternative Investment Funds, applicable in the entire EU.

International Collective Investment Scheme

This means an international fi xed capital company, variable capital company, unit trust scheme or an investment limited partnership – the sole object being the collective investment of funds of unitholders, the units of which are at the option of unit-holders redeemed or repurchased directly out of the assets of the scheme. The Law of International Collective Investment Schemes (ICIS) is also being reformed to incorporate the latest developments in the regulation of Collective Investment Schemes. The ICIS, now under the supervision of the Central Bank of Cyprus, comes under the supervisory umbrella of the CySEC, thus bringing all types of collective investment schemes under the same roof, which enhances the growth of this sub-sector. Currently, there are around 80 ICIS in operation that are soon to be regulated by the CySEC.

Fiduciary Companies

These provide administrative and advisory services within the framework of the management of companies. The CySEC is responsible for the licensing and supervision of the companies providing fi duciary services, thereby ensuring a more wideranging supervision, which enhances the reputation of Cyprus as a well-supervised fi nancial destination.

EU and International Dimension

Being a member of the European Union (EU), Cyprus has fully transposed the EU Acquis into the national legal framework and is actively following up on the developments, transposing new EU legislation within the transposition deadlines. Furthermore, the CySEC maintains close ties with competent Authorities on an international level. The need for close cooperation between national supervisory Authorities is considered vital and for this purpose, the CySEC has signed more than 15 bilateral Memoranda of Understanding, as well as the ESMA and International Organisation of Securities Commissions (IOSCO) Multilateral Memorandum of Understanding. As Cyprus is to take over the Presidency of the Council of the European Union for the fi rst time later on this year, one of the immediate priorities of the CySEC is to contribute to Cyprus meeting the expectations that this important role entails. The CySEC is called to perform a key role during the Cyprus Presidency of the EU Council. It involves a constructive contribution to the reshaping of EU fi nancial legislation with the aim of strengthening the integrity of the fi nancial sector on a EU-wide scale.

The CySEC is strongly committ ed to this role, which involves the responsibility to chair, support and co-ordinate approximately 12 EU Council working groups dealing with fi nancial issues. There is a lot of work to be done and the CySEC has been preparing for several months. The priorities include reshaping crucial pieces of legislation such as Capital Requirements Directive and Regulation (CRD/CRR), Markets in Financial Instruments Directive and Regulation (MiFID/MiFIR), Credit Rating Agencies Regulation (CRA III), Market Abuse Directive and Regulation (MAD/MAR), Central Securities Depositories (CSD), UCITS V and Transparency Directive. To this end, the CySEC has already seconded an offi cer to the Permanent Representation of Cyprus in Brussels, to handle issues regarding the EU fi nancial services working groups, at the same time as closely cooperating with the Ministry of Finance for the bett er coordination and preparation for the upcoming presidency. More information about the CySEC and its activities can be found at www.cysec.gov.cy. You can also fi nd out more information on the advantages of doing business in Cyprus on the Cyprus Investment Promotion Agency (CIPA) website: www.cipa.org.cy or on the Cyprus Stock Exchange website: www.cse. com.cy.

Profi le of Mrs Demetra Kalogerou, Chairman of the Cyprus Securities and Exchange Commission

Mrs. Demetra Kalogerou was appointed to the position of the Chairman of the Cyprus Securities and Exchange Commission in September 2011. Her previous working experience includes working for the Cyprus Stock Exchange as a Senior Offi cer, where she was responsible for the Registration and Trading of Companies on the Cyprus Stock Exchange (CSE). Her responsibilities extends to the areas of supervision, securities trading and the various markets of the CSE, the monitoring of the compliance of the listed public companies with their continuous obligations, research and new product development, as well as operation and promotion of fi nancial markets. She has made many presentations in educational seminars on the operation of the CSE and the importance of investor protection, as well as the overall operation of the securities market. In her 15 years of working at the CSE, she acquired an in-depth knowledge of all aspects of the securities market and gained comprehensive experience in matt ers relating to the smooth and orderly development of securities markets and the protection of investors. Mrs. Kalogerou holds a Bachelor's degree in Economics and Business Administration (University of Wales, UK), a Master’s degree in Economics of Public Policy (Leicester University, UK) and a Graduate (MPhil) in Finance (City University Business School, UK).

Profi le of the Cyprus Securities and Exchange Commission

The Cyprus Securities and Exchange Commission (CySEC) is an independent public supervisory Authority assigned the responsibility for the overall supervision of the securities market and of the transactions in transferable securities carried out in the Republic of Cyprus. As one of the fi ve Authorities that supervise the fi nancial sector of Cyprus, its aim is to ensure high standards of investor protection, to safeguard the integrity, fairness and transparency of the operation of the securities market, as well as to promote the steady development of the securities sector. More information about the responsibilities and powers of the CySEC is available at www.cysec.gov.cy.

spotlIGHt on CypRUs

The Prominent Role of Cyprus Shipping

Located at the crossroads of three continents, Cyprus recognised as early as 1963 the political, economic and social importance of shipping. Since then, successive governments implementing the correct policy, have managed to develop the island into a fully-fl edged shipping centre, combining both a sovereign fl ag and a resident shipping industry, renowned for its high quality services and standards of safety.

Responsibility for the development of maritime activities lies with the Ministry of Communications and Works. Its authority and jurisdiction are exercised through the Department of Merchant Shipping whose activities include: the registration of ships, administration and enforcement of the Merchant Shipping laws; the control of ships and enforcement of international conventions ratifi ed by the Government of Cyprus (the ‘Government’); the protection of the marine environment; the vessel traffi c monitoring in the sea around Cyprus and information system implementation; the monitoring of living and working conditions on board Cyprus ships; the registration, training and certifi cation of seafarers; the control of coastal passenger vessels and small craft; the investigation of marine accidents; the continuous updating of the merchant shipping legislation and its harmonisation with that of the European Union; the coordination of the EU Integrated Maritime Policy; the administration of the State Aid Scheme for Maritime Transport and the Tonnage Tax System; and lastly, the promotion of Cyprus as an International Registry and base for international maritime operations. The Cyprus fl ag is a high quality fl ag, off ering numerous quality, service and economic benefi ts to shipowners who register their vessels in the Cyprus registry. Quality and Service Firstly, an EU fl ag classifi ed in the White Lists of the Paris and Tokyo MOUs and excluded from the ‘List of Targeted Flag States’ of the US Coast Guard, results in fewer inspections of the ships and less delays at the ports of both MOUs and of the USA. Secondly, there are maritime offi ces in New York, London, Rott erdam, Piraeus, Brussels and Hamburg, all off ering services to Cyprus ships. Thirdly, there are bilateral agreements of cooperation in Merchant Shipping with 23 countries, through which Cypriot ships receive either national or favoured nation treatment in the ports of other countries. Such agreements with labour supplying countries provide for specifi c terms of employment and resolution of labour disputes, which are benefi cial to both the shipowners and the seafarers. Lastly, there is the effi cient provision of services by the Department of Merchant Shipping at all times.

Economic Benefi ts There is no tax on profi ts from the operation or management of a Cyprus-registered vessel, on dividends received from a vessel owning company, or on capital gains from the sale of a vessel. There is also a new tonnage tax system that extends the benefi ts applicable to owners of Cyprus fl ag vessels and ship managers, as well as to owners of foreign fl ag vessels and charterers. In addition to this, there is no income tax on the wages of offi cers and crew; low set up, registration and operating costs for companies; a favourable tonnage tax scheme based on ship’s net tonnage; no stamp duty on ship mortgage deeds or other security documents, and lastly, protection for fi nanciers and mortgagees. A member of the Eurozone, Cyprus also has treaties on the avoidance of double taxation with 43 countries.

As a fully-fl edged maritime centre, Cyprus is considered one of the leading thirdparty shipmanagement centres in the world. As a result, a signifi cant number of shipmanagement companies have been established in Cyprus and manage a sizeable proportion of the merchant fl eet, as well as a large number of vessels under foreign fl ags. Among the ship management companies established and operating in the Republic of Cyprus, 87% are Cypriot and EU interests, employing almost 40,000 seafarers, of whom 5.000 are EU nationals. Furthermore, several of the shipmanagement companies operating in Cyprus, rank among the largest of their kind in the world.

The Cyprus Registry ranks tenth among international fl eets and third within the European Union. The Government’s Maritime policy is established on three pillars – quality, competitiveness and reliability. Maintaining a high quality fl eet and eff ectively implementing internationally applicable safety, security and environmental protection standards, is the foundation on which Cyprus builds its reputation as a serious maritime fl ag.

For further information and updates please refer to: Department of Merchant Shipping www.shipping.gov.cy maritimeadmin@dms.mcw.gov.cy

On 24th March 2010, the new Cyprus Tonnage Tax System was approved by the European Commission, as being compatible with the requirements of the EU Acquis, in accordance with the relevant guidelines on State Aid to Maritime Transport. The Merchant Shipping (Fees & Taxing Provisions) Law, which incorporates the new system in the national legislation, was enacted on the 14th May 2010 and was applicable as from the 1st January 2010. The main objective of the approved scheme was to align the two existing State Aid schemes regarding Cyprus Shipping, namely the tax alleviation for shipowners of ships registered in the Cyprus Register and for shipmanagement companies operating in Cyprus with the European Acquis. At the same time, the approved scheme adopted two new tax alleviation measures fully aligned with the EU Acquis – one for shipowners of foreign vessels and one for charterers.

The new tonnage tax system is available to any owner, charterer or shipmanager who owns, charters or manages a qualifying ship engaged in a qualifying shipping activity. However, those participating in the tonnage tax system are exempt from income tax and pay tonnage tax calculated on the net tonnage of the ship, according to a broad range of size categories and rates prescribed in the legislation. This system secures a long-term and stable fi scal environment for shipping in Cyprus. It not only provides a new impetus for the whole shipping industry of the island and creates great prospects for future growth; it provides Cyprus with a competitive advantage. It does this by improving the

pay tonnage tax calculated on the net tonnage of the ship, according to a broad range of size categories and rates prescribed in the legislation. This system secures a long-term and stable fi scal environment for shipping in Cyprus. It not only provides a new impetus for the whole shipping industry of the island and creates great prospects for future growth; it provides Cyprus with a competitive advantage. It does this by improving the already strong position of the country in the shipping world, and promoting as both an international ships’ registry and a high quality maritime centre. In addition to this, the Government has adopted a series of measures in order to fi rstly, maintain high safety standards for the Cyprus merchant fl eet, and secondly, to minimise the number of marine accidents. Age limits have therefore been set for the registration of certain categories of ships and strict requirements have to be fulfi lled at the time of registration. Furthermore, independent inspectors have been set up to provide a global network of adequate coverage. As a result, the eff ective implementation of these measures have enabled Cyprus to achieve and maintain a ‘White List’ status in the fl ag assessment system, maintained by the Paris and the Tokyo MoUs on port state control. It has also allowed the republic to be removed from the ‘List of Targeted Flag States’ of the U.S. Coast Guard. among others, the use of armed guards onboard Cyprus Flag ships in high-risk areas.

However, the shipping industry and the seafaring community have become increasingly concerned as a result of the continuing activities of pirates. As a result, the Department of Merchant Shipping has issued a number of circulars providing issued a number of circulars providing advice to ships on how to avoid, as far as advice to ships on how to avoid, as far as possible, piracy att acks. However, in view of possible, piracy att acks. However, in view of the continuous deterioration of the situation, the continuous deterioration of the situation, new legislation has been enacted regulating, new legislation has been enacted regulating, The Government also att aches considerable importance to the improvement of living and working conditions of seafarers on board Cyprus ships, in accordance with the international conventions currently in force. At the same time, action has also been taken for the continuous improvement of the existing infrastructure, the incentives available to both residents and non-residents, and the enhancement of the international reputation of the Cyprus fl ag as a ‘fl ag of progress’. Today, Cyprus is an active member of all international organisations regulating shipping, such as the International Maritime Organisation, the International Labour Organisation, the European Council and the Commission. Representatives of the Department of Merchant Shipping have also been elected to signifi cant positions to these organisations – a fact that demonstrates the key role Cyprus plays in international shipping. The presence of Cyprus in these international maritime fora strengthens the island’s entity and image, at the same time as ensures that it maintains a strong voice.

spotlIGHt on CypRUs

Patrikios Pavlou & Associates LLC

Patrician Chambers, 332 Agiou Andreou Str., 3035 Limassol, Cyprus P.O.Box 54543, 3725 Limassol, Cyprus Tel: +357-25871599, Fax: +357-25344548 info@pavlaw.com, www.pavlaw.com Stavros Pavlou, Senior & Managing Partner Co-author: Angeliki Epaminonda, Advocate-Legal Consultant

Cyprus and the Licensing of CIFs

Cyprus continues to focus on providing an excellent business climate for global investments, generating interest from having a well-known favourable tax regime and a European Union membership. With the introduction of the EU Markets in Financial Instruments Directive (‘MiFID’) and the codifi cation of the same under Cyprus law (Investment Services and Activities and Regulated Markets Law of 2007 – referred to as ‘Law 144(I)/2007’ or ‘Law’), the Cypriot investment industry has also opened a signifi cant two-way gateway to both EU and Non EU investors. The focal points of att raction for foreign investors are the low corporation tax rate that is currently maintained at a rate of 10%, and the Republic of Cyprus being used as a basis for access to the European Union. However, in order for a Cyprus company to be permitt ed to provide one or more investment services to third parties or/and perform one or more investment activities, it must be granted a license to register as a Cyprus Investment Firm (‘CIF’) by CySEC. The licensing process is regulated by Directive 2004/39/EC, Law 144(I)/2007, and the relevant guidelines issued by CySEC. It is a prerequisite under the Law that any company seeking a CIF authorisation must be established in Cyprus with head offi ces in the Republic. There is also a requirement to retain the initial capital of the company above the threshold levels outlined, which constitutes an ongoing obligation, not only while authorisation is granted but at all other times. Section 10 of the Law specifi es the minimum issued and the fully paid share capital required – depending on the nature of the CIF’s core activities.

It is also worth noting that the people who manage the company’s business have a good reputation and be suffi ciently experienced. Should the CIF applicant fail to convince CySEC of this, the licencing application may be rejected. As such, the CIF applicant must inform CySEC of the identities of the shareholders of the proposed company and satisfactorily show that they are suitable persons to be its shareholders. Furthermore, these requirements also extend to the employees of the CIF applicant. In addition to this, section 18 of the law imposes certain organisational requirements which include, inter alia, the establishment of adequate policies and procedures that enable the CIF to fully comply with the legal requirements, particularly in relation to: maintaining eff ective organisational and administrative arrangements for the avoidance of confl icts; taking reasonable steps in ensuring the continuity and regularity in the CIF’s performance; having robust governance arrangements and a clear organisational structure; and lastly, having sound administrative and accounting procedures and internal control mechanisms.

How We Can Help The above provisions demonstrate the high level of supervision and control over a CIF’s structure and performance required. However, the effi ciency of CySec, combined with our highly experienced team at Patrikios Pavlou & Associates LLC and the support of our professional associates who are leading experts in the fi eld, means we can assist any prospective applicant towards the eff ective compliance and operation of CIFs.

Firstly, our lawyers can assist you across the board with the formation and the maintenance of a Cyprus company; our associate company, PageCorp Groupoff ers in Cyprus – and in other jurisdictions – a broad spectrum of corporate services. Secondly, our Capital Markets department has completed and participated in numerous innovative and ambitious projects. This makes Patrikios Pavlou & Associates LLC well positioned to provide specialised support to our clients. We also off er professional services in the fi elds of both debt and equity capital markets, with specialisation in multinational and cross-border legal work. Areas of practice include: assistance in listing and fl otation of securities; arranging for public off erings and listings of securities on key international stock exchange platforms; compliance with applicable rules and regulations in relation to public off erings and listings; advising on and coordinating private off erings and placements of securities; and lastly, advising in relation to the rights of security holders. Stavros Pavlou, our Senior & Managing Partner, is an experienced consultant and specialises in cross-border securities, with extensive involvement in the transactions of multinational private and public companies. He has handled the listing of large companies in the Cyprus Stock Exchange and in major stock exchanges such as LSE, AIM and a fi rst-ever listing of a Cyprus company in the Hong Kong Stock Exchange (HKSE). Our Profi le With 49 successful years behind us, today we are a multi-award winning international law fi rm based in Cyprus. Our clients receive distinctive advice on corporate & commercial law, mergers & acquisitions, banking & fi nance law, capital markets, litigation & dispute resolution, tax law & international tax planning, real estate, trusts & asset protection, intellectual property, IT, internet & e-commerce, administrative & constitutional law and ship registration. Our fi rm is also a member of various professional international bodies, and has an esteemed network of associates worldwide, with particularly strong links in Europe, Russia, Middle East and Asia. Our clients include public and private companies; major local and international banks; multinational corporations that have their regional hub in Cyprus; institutions; entrepreneurs; and a host of individual clients from Cyprus and abroad. Over the last few years, we have been recognised worldwide as a top performance fi rm in respect of our professional legal services. Our aim at Patrikios Pavlou & Associates LLC is to provide clients with high-quality legal advice with integrity, professionalism and practical guidance, covering the full range of business activities in respect of both domestic and international transactions.

CoRpoRate ReCoveRy & InsolvenCy

Corporate Recovery & Insolvency

The Role of Insolvency Practitioners in Keeping a Stable Economy

Following a number of high profile collapses in the retail sector, the role of Insolvency Practitioners (‘IPs’) has come to our attention. We ask what role exactly do IPs play in our economy and, by extension, whether we need aneffective insolvency regime for the economy to function. Are business failures simply part of a healthy entrepreneurial economy? According to the Centre for Economics and Business Research (‘Cebr’), the insolvency industry‘plays a vital role in maintaining a business environment in which creditors are willing to lend, entrepreneurship is encouraged and the economy can flourish.’Here lies a fundamental question – what type of economy do we want? Our insolvency regime reflects the desire of policy makers, dating back to the introduction of the Enterprise Act (‘the Act’) in 2002, to encourage a culture whereby entrepreneurship is encouraged – where business leaders are allowed to try and, occasionally, fail. The purpose is to enhance the policy of creating a ‘rescue culture’, so that the underlying business of insolvent companies, as far as possible, can be saved before their assets are distributed to creditors. In essence, the Act has made substantial amendments to administration procedures for failing companies. This is also reflected within the retail industry, wherecurrently on average, of thosebusinesses which go into administration, 50% of the stores and 50% of the jobs within the business survive. This is a marked improvement on 2010, when more people lost their jobs with companies that were already ‘dead and buried’, such as Woolworths and Land of Leather. As shopping habits undergo fundamental change, this shedding of stores is likely to continue for the foreseeable future,as there are some real problems in the retail sector to be worked through. However, at least today we are witnessing more of a ‘recycling’ than a ‘massacre’ on Britain’s high streets. Looking at all sectors (aside from retail), (‘R3’s’latest ‘Business Distress Index’ showed a jump in the number of businesses that regularly use their maximum overdraft facility (up from 17% to 30%). This demonstrates the degree of difficulty outside the official insolvency statistics. It alsoshows that we have not had the spike in corporate insolvencies that tend to follow a recession, where asset values rise and creditors act on failing businesses. Unlike previous recessions, when creditors were much more ‘trigger happy’ to enforce debt recovery, today we are living in a different world.Government statistics tell us that the liquidation rate never rose above 1% during the last recession, compared to a peak of 2.6% in 1993. Today it stands at approximately 1 in 138 active companies (or 0.7% of all active registered companies). So does this mean we are going to bump along in the era of zombie businesses for a while? I fear so andexpect there to be slight increases in corporate insolvency this year. However, if the recovery picks up, the increases could be larger as ‘zombie’ businesses are finally laid to rest. Ironically, in a recovery period, we are more likely to see more corporate failures from start-ups.

Author: Lee Manning, President of insolvency trade body R3 and Partner in Deloitt e’s Restructuring Services R3 – The Association of Business Recovery Professionals 8th Floor, 120 Aldersgate Street, London, EC1A 4JQ Tel: 020 7566 4200 | Fax: 020 7566 4224 press@r3.org.uk

In 2009, the UK insolvency industry played the following role: it was responsible for rescuing just under 6,000 businesses (approximately 5,850); it helped to save nearly two million jobs (estimated at 1,951,743) in companies going through insolvency; it also provided assistance to businesses with a combined turnover of an estimated £363 billion.

There are 1,735 Insolvency Practitioners (IPs) in the UK, 23% of which are based in Central London. This is fewer than in 2007–despite the fact the number of insolvencies IPs have to deal with has increased markedly since then. The majority of Insolvency Practitioners work on corporate insolvency,with many of those also working on personal insolvency. However, only 5% of IPs work exclusively on personal insolvency. Those who work on both, spend nearly twice as much time on corporate cases, and nearly a quarter of their time on rescue work, turnaround and preventing insolvencies. This is the primary goal for the IP – to try and rescue the business, or parts of the business, that can be saved. Given the business has already ‘failed’, or essentially run out of money, this is often a huge challenge. IPs have a number of tools at their disposalincluding, trading under an administration, a ‘pre-pack’ admin sale, a Company Voluntary Liquidation (CVA) and, as a last resort, a liquidation. When appointed to an insolvent business, an IP is tasked with maximising returns to its creditors. They essentially have to ‘pick up’ the business and decide what to do with it. This may involve taking over the company’s reins to reverse its decline; selling it–or part of it – on; continuing to trade the business to increase returns to creditors; or – in cases where the company is extremely weak – close it down.

Informal Re-structure/Turnaround

However, it may not be necessary for businesses to enter into a formal insolvency procedure, if management seeks advice from an IP or debt advisor as soon as they think they may be facing fi nancial diffi culty. IP’s are not only able to conduct an in-depth review of a business and off er advice on the steps they think should be taken, but they can also provide suggestions on how to make a business fi nancially viable. Given their experience and independence, insolvency practitioners are typically in an excellent position to negotiate an arrangement with the landlords, fi nancial creditors and suppliers. For the most part, banks, suppliers and landlords are far more likely to agree to informal measures, if independent work is being undertaken to identify problems and restore a failing business to fi nancial health.

Administration

Administration provides distressed businesses witha period of breathing space to restructure its fi nancial structure and operations. An Insolvency Practitioner (‘the administrator’) managesthe aff airs of the business and property of the company. During this process,the administrator’s key objective is to rescue a company as a going concern. Where that is not possible, they are charged with trying to get more money back for the company’s creditors, than would happen if the company were wound up (usually by trading the business on in order to sell all – or part of it – to a willing buyer).

Company Voluntary Arrangement (CVA)

A CVA is a legally binding agreement between an insolvent company and its creditors. It allows a company to put a proposal to its creditors under which they agree to accept a certain sum of money, or a full/part repayment schedule over an agreed period of time.This procedure is extremely fl exible as, for example, a CVA may involve delayed or reduced payments of a compromise debt or a disposal of assets. This proposed arrangement requires the approval of at least 75% (in value) of the creditors, and also a majority (50%) of the unconnected creditors. Any dissenting creditors are also bound by the CVA.

Liquidation Member’s Voluntary liquidation (MVL)

An MVL is sometimes known as a ‘solvent liquidation’ and can be a tax effi cient process. The appointment is made by the shareholders, and pays all creditors in full with any surplus paid back to them.

Creditors Voluntary Liquidation (CVL)

A CVL occurs when the shareholders – usually at the request of the directors – put a companyinto liquidation because it is insolvent. This means either the company cannot pay its debts as they falldue, or it has more liabilities than assets. The liquidator will collect the company’s assetsand distribute them among the creditors.

Compulsory Liquidation

A compulsory liquidation occurs when a company is wound up by order of the court, andis started by a petition presented to courton the grounds that it is unable to pay its debts. A creditor, the company itself, or the other parties can then present a petition. The World Bankannually publishes a series of measures on the ‘ease of doing business’ across 183 countries. Some of these indicators relate directly to the insolvency sector and regime within each jurisdiction (e.g. the time it takes to close a business). The 2008 Cebr report states that ‘of all 39 indicators reported on by the World Bank, the recovery rate when a business is closed (i.e. the pence on the pound recouped by creditors through the bankruptcy or insolvency proceedings) is the most strongly correlated to a country’s prosperity (measured as gross domestic product per capita). The time it takes to close a business is also strongly related. Likewise, the recovery rate and speed of closure are also strongly correlated to rates of investment in an economy, and overall rates of economic growth’. With the cost (% of estate) low at 6% and the recovery rate (cents on the dollar) high at 88.6 cents, the UK does well on an international comparison. In fact, the World Bank Data June 2011 states that the UK's recovery rates are the sixth best in the world. Our insolvency regime also performs bett er than USA in terms of both speed and returns to creditors. Therefore, while it may not be themost obvious thing to celebrate, let us be proud of our insolvency regime and the chances it aff ords our entrepreneurs.