We address key issues relating to private limited liability companies which are governed by the Cyprus Companies Law Chapter 113, as amended.

We refer to private companies limited by shares. They are by far the most common type of legal entity registered in Cyprus and used in international tax structures. They have Articles of Association (Charter) that specifically:

• restrict the number of members to less than 50

• restrict the right to transfer its shares

• prohibit any invitation to the public to subscribe to its shares or debentures

• prohibit the issue of bearer shares

Key features of Cyprus private companies

Incorporation and capacity to contract

A company comes into existence as a legal entity as soon as it is incorporated by the Registrar of Companies. This is evidenced by the Registrar issuing a Certificate of Incorporation that is conclusive evidence that the company has satisfied all legal requirements in respect of incorporation and that the company is duly registered under the Companies Law.

A company cannot contract or enter any other obligation under the law until it has been incorporated. It cannot become liable on, or entitled under contracts purporting to be made on its behalf prior to incorporation. It cannot ratify contracts that were made prior to its existence. In practice, companies should enter new contracts to give force to agreements that were made prior to incorporation.

Memorandum of Association

The company's objects and powers are defined in the company's Memorandum of Association. Any act beyond a company's legitimate powers as defined in its Memorandum is void. Consequently, the Memorandum of Association is normally drafted as widely as possible to enable the company to engage in any type of business.

Articles of Association

The Articles of Association set out the administrative regulations and procedures for running the company. They stipulate and define how meetings of shareholders and directors are held, the powers bestowed on directors, the method of appointing and removing directors, determine the minimum number of persons that must be present for a quorum, set out the procedures for issuing new shares, transferring shares, borrowing powers and so on.

Although the Articles of Association can often be in standard form, they are also drafted to take into account the specific needs and requirements of the shareholders.

Shareholders and directors

The powers in a company are distributed between the board of directors and the shareholders as stipulated in the Articles of Association. The power of the directors can therefore be as wide or narrow as the Articles provide except that the exercise of certain powers are specifically reserved for the shareholders. For example, the shareholders always have the right to remove directors.

The Memorandum of Association and the Articles of Association are filed with the Registrar and are therefore public documents available for inspection by everybody.

As previously stated, an action outside the objects of the company is void and therefore unenforceable. The remedy commonly available to the other contracting party is to recover money or property paid or transferred under the void transaction to the extent that it is possible to trace it.

However, the situation regarding an action that is within the objects of the company but made by directors acting outside their powers as stated in the Articles of Association may be very different. The "indoor management rule" as it is often called, accepts that persons dealing with directors are entitled to assume that the directors have the authority which they claim to have. Under common law principles, the company is bound by the actions of a director where that director acted within the usual, apparent or ostensible scope of the "director's authority".

Directors and secretary

A private company may have only one director and a secretary. A director may also be the secretary. From an administrative point of view it is advisable for the secretary to reside in Cyprus and be conversant in Greek as all communications and filings with the Registrar of Companies are required to be made in the Greek language.

Procedural requirements

All companies are required to hold in each calendar year, an Annual General Meeting (AGM). Not more than 15 months must elapse between one AGM and the next. The first AGM must be held within 18 months of incorporation. Failure to comply makes the company and each director liable to a fine not exceeding €250.

The Articles of Association normally provide that the directors may call an Extraordinary General Meeting at any time. Notwithstanding the provisions of the Articles, the law states that the holders of 10 percent of the paid up capital of the company have the right to require the directors to call an Extraordinary General Meeting.

The notice period for an AGM or the meeting for the passing of a special resolution is 21 days. The notice period is 14 days for every other case. These notice periods may be shortened if 95 per cent of the members entitled to attend and vote agree to so do, except in the case of AGM where all the shareholders must agree to the shorter notice period.

The Cyprus law contemplates 3 types of resolutions: ordinary, special and extraordinary. The minimum notice period and majority required in each case, are summarised

*21 days if the resolution is to be passed at an AGM

The Cyprus law details the nature of resolutions for each type of decision required

Obligations to maintain accounting records and to prepare audited financial statements

- The directors are obliged to ensure that the company maintains accounting records that enable the preparation and audit of financial statements that show a true and fair view of the company's financial position and performance in accordance with International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS).

- The accounting records must be held either at the registered office or at another place in Cyprus and must always be available for inspection by the directors. Where the bookkeeping function is maintained outside Cyprus then arrangements must be made for those accounting records to be sent to Cyprus in regular intervals not exceeding 6 months.

- Every company that has subsidiaries is obliged to prepare consolidated financial statements in accordance with IFRS and IAS and to present these financial statements to the members in general meeting. Additionally, those financial statements must disclose the following:

• remuneration of auditors
• amounts paid to directors as compensation for loss of office
• the total amount paid to directors in fees and emoluments
• directors holdings in shares and debentures
• loans granted to directors

It is important to understand that one company is considered to be a subsidiary of another only if that other company controls the constitution of its board or holds the majority of the voting rights either directly or through an appointed agent or trustee.

The financial statements must be accompanied by a report of the board of directors which includes:

• details of any changes in the nature or volume of operations
• any changes in the share capital
• any significant change in the constitution of the board of directors or the duties assigned to its members
• directors' proposals regarding the distribution or not of the retained profits

Failure to comply with these requirements leaves the directors open to prosecution with the possibility of a fine of up to €10.000 and imprisonment of up to 12 months.

• The financial statements must be audited by a registered auditor.