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Challenging past transactions in liquidation: fraudulent preference

Challenging past transactions in liquidation: fraudulent preference

An effective weapon in a liquidator's and creditor's arsenal to ensure the fair and equal treatment of all creditors of a failing company is the ability to challenge past transactions that sought to favour one creditor to the detriment of others.

Transactions entered into by Cyprus companies that are being wound up may be voided if they constitute fraudulent preference and took place during the statutory claw-back period.

What constitutes fraudulent preference?

Pursuant to Section 301(1) of the Companies Law (Cap 113), any transfer, charging, mortgaging, delivery of goods, payment, execution or other act relating to property made by or against a company in the six months prior to the commencement of its winding up – which would be considered fraudulent preference if it had been done by or against a natural person within six months of the bankruptcy application which led such person to be declared bankrupt – will, in the event of the company's winding up, be deemed a fraudulent preference of the company's creditors and will be void.

Under the Bankruptcy Law (Cap 5), to which the abovementioned section refers, a transfer or charge of property will constitute fraudulent preference if it is made with a view to preferring one creditor over others.

Statutory claw-back period

As referred to above, the claw-back period with respect to fraudulent preference is six months from the commencement of a company's winding up.

The date of commencement of a company's winding up is as follows:

If the company has approved a resolution for its voluntary winding up, the date of commencement of the winding up is the date on which the relevant resolution was passed unless, upon proof of fraud or a mistake, the courts think it proper to order otherwise (Section 218(1) of the Companies Law (Cap 113)).
If the company is being wound up by the courts, the date of commencement of the winding up is the date on which the relevant winding-up application was filed in the court (Section 218(2) of the Companies Law (Cap 113)).
Any period during which a company is under the courts' protection by virtue of examinership does not count towards the above claw-back period (Section 301(1) of the Companies Law (Cap 113)).

Effects of voided transactions

Pursuant to Section 302 of the Companies Law (Cap 113) where a transaction is voided as a result of fraudulent preference, the preferred creditor will be personally liable for the company's debt up to the value of the benefit received from the fraudulent preference as if such person were a surety for that debt.

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