Cyprus Law: Business Structures And Legal Issues

Law and Application

1.The main concern is whether Charlie should continue his business as a sole trader, a partnership with Peter or a Limited Liability Company?

2.The main issue in the given section is whether Wooden Mania Limited can claim the profit made by Alex on the property transaction?

3.The main issue is whether the company should amend the Memorandum of Association. If yes, then what is the procedure?

The present case study has evaluated the law that prevails in Cyprus. The assignment is divided into three heads. The first head deals with various kinds of business structures that prevail in Cyprus and the best kind of business structure that will be appropriate for Charlie. The second head evaluates whether Charlie is eligible to recover the secret profits that is attained by Alex, his promoter, while promoting the company. Lastly, the third head evaluates whether Charlie can amend the Memorandum of the company in order to carry out new activities.

The assignment is supported by primary and secondary sources.

In Cyprus, if any person wants to carry on his business, then there are three basic options, that is, sole trader ship, partnership or a Limited Liability Company.

Charlie is the manufacturer of handmade garden furniture and operates from the back of his yards. He is a sole trader.

Mainly, Charlie operates a structure wherein he is a single person who owns/controls the business without the involvement of any other person (IBP, Inc., 2015). When Charlie continues as a sole trader then there are various advantages, such as, it is the simplest form and does not requires any proper procedure for its establishment. He has complete control and the set up cost is also very less. The tax expense is very low (if the personal taxable income is less than €60,000 p.a.) and there is no requirement of any statutory audit (if turnover is less than €70,000 p.a.). (InfoCyprus, 2017)

But, if he intends to convert, then, he has two options to select from, that is, a partnership or a company.

If Charlie forms a Limited Liability Company, then, mainly he intends to carry on business in the form of an independent legal entity which is an artificial legal person in the eyes of law. The shareholders are the owners and the directors manage the affairs of the company. (D Cambell, 2009)

Once a company is formed then the main advantages are that a company has perpetual succession and it never dies. He can leave the company by transferring his shares. Investments can be raised easily by issuing shares. The liability of Charlie will be limited to the extent of his shares. (Usa Ibp, 2006)

Advice

But, Charlie also suffers from few disadvantages, that is, a company must make an AGM at least every 15 months and must file an annual return every year to the RoC and OR. Proper meeting amid the directors and shareholders should be carried out and it must meet the requirements of the quorum. Ordinary or special resolutions are required in certain cases which is a time consuming tasks. The registration is very expensive and time consuming. The administrative expense is very high. (InfoCyprus, 2017)

Considering the disadvantages of a company, it is advice to Charlie that he should establish a Partnership. As per section 5 of CAP 116, in a partnership two or more (max 20) people carry on business jointly with common intention to earn profit. A partnership is not a legal person, thus, the partners and the business are same and share all the rights/obligations (IBP, Inc., 2015). The main benefits that are attained by Charlie are that it is a simple structure where the duties/ responsibilities of the partners are divided and their skills complement each other. People can be employed and are eligible to incentives. Also, the tax expense is very low unless the income exceeds €60,000 P.A. (Cambell & Netzer, 2009)

But, there are few disadvantages, that is, every partner is jointly and severally liable to the firm and thus there are chances of conflicts. The partners must share losses and their personal assets are at risk if the partnership assets fall short of the liabilities (Cyprus, 2000). Retirements or death of the partner results in automatic dissolution incurring unnecessary burden on the remaining partners. Tax investigations can be carried out and are prone to tax expenses. (InfoCyprus, 2017)

Advice

It is advised to Charlie that he should convert his business from the sole trader ship to partnership because:

1. Continuing the business as a sole trader will invite various disadvantages, such as, he suffers with all the liabilities of the business which may extend to his personal assets. It is very difficult for him to acquire investors and has to rely on his personal savings. He is registered as self employed and has to pay contributions. If the profits from the business exceed €60,000 P.A, then, the tax is high. Personal Tax returns to be filed and accounts books should be prepared. (InfoCyprus, 2017)
2. Also, if a company is opted then it will involve high registration costs, administrative expenses and various statuary responsibilities which are not suitable for Charlie who is a small businessman.

• A partnership will Peter will not require high set up costs. The chances of conflicts will be less as Peter is his cousin and is in the business for 30 years , thus, will bring required skills.

It is thus suggested to Charlie, that he must carry on his business by way of partnership with Peter because it will be costs effective and is a best choice for a small businessman like him.

2. As per 15A, a promoter is a person who can conclude any contract prior to the registration of a company and who is authorized to sign the memorandum in the name and on behalf of the company (B Splitz, 2003). But, as per section 113 such contracts are of temporary in nature and will bind the company only when the company is formally incorporated. After the date of incorporation, the agreements which are formed by the promoter will be binding upon the company like any contract established post incorporation. (Office of law Commissioner, 2012)

Now, in 2014, Charlie decided to form a Limited Liability company as “Wooden Mania Limited”, to which he is the sole shareholder and director. Alex was appointed as the promoter of the company and was assigned with the task of formation and to find the premises to locate the business.

So, as per section 15A, Alex is authorized to fond the premises. But, he also has fee duties to comply with.

Every promoter should act in such a manner as he is in the fiduciary relationship with his master. Also, he must carry out the activities as per the will of the master and must not indulge in any activities that are contrary to the interest of the master. He must not make any secret profits or misappropriate the money of the company Gluckstein v. Barnes (1900). (Marshall, 2009)

Now, Alex found the location @ EUR200,000.00 but offered the same to Charlie @ EUR250,000.00 without disclosing the profit he would made out of this transaction.

Now, if a promoter while undertaking his promotional activities undertake actions whereby he make secret profits then as per section 312, if it appears at the time of wining up that the promoter has retained the income or money or property which is that of the company, then, he is considered to be in breach of the trust and for misfeasance. Then, the court, on receiving an application can examine the acts of such promoter and may then force him to restore or repay the money that is misappropriated by him along with the rate of interest the courts think fits. The company may also impose compensation on such defaulter on the account of breach of trust and misapplication. (Evangelou and Tsikouris, 2012)

In such situation, by applying section 312, it is submitted that an application can be filed to the court wherein Charlie can establish that Ales has made secret profit while serving the duties of the promoter. He has violated the duty of trust and misappropriated the money and thus is compelled to pay back the same to Charlie under section 312.

Advice

It is advice to Charlie that Alex can be compensated and can be forced to return the money back by making an application under section 312 of the Act. he is an authorized representative under section 15 A but has not comply with his duties adequately and is thus liable to compensate back the loss that is suffered by Charlie under section 312.

3.  Whenever a company is incorporated, then, it is necessary that the company must carry out activities that are within its Memorandum of Association. As per CAP  113, section 33A Any actions that are outside the memorandums are Ultra Virus (‘beyond the powers of the company’) and are not binding upon the company (Ashbury Railway Carriage and Iron Company Limited v. Riche (1875)) (D Campbell, 2000). The memorandum contains the object clause and the company must carry out its functions within the object clause otherwise are considered as ultra virus actions. (CPlaw, 2014)

Now, what if the company wants to carry out activities which beyond the object clause?

In such situation, it is necessary that the object clause (memorandum) must be amended.  As per section 7 (2), the memorandum can be altered by passing a special resolution only for i) to conduct business more effectively and economically; ii)  to carry out the purpose with more efficient means; iii) to enhance the areas of working; iv) to carry another business which can be combined with the current business of the company; v) to abandon/restrict the current object; vi) to dispose/sell any part of the company; vii) to amalgamate. The amendment can only be carried on after the confirmation from the court provided adequate notices are provided. (Office of Law Commissioner, 2012)

Now Advice

As per the facts, the company which is operated by Charlie has an object clause according to which then company is in manufacturing of garden furniture from wooden pallets. Now, he intendeds to import barrels for wine bottling. In order to do so he has to amend the memorandum as per section 7 of the Act and he has to comply with the requirements of subsection 2.  Charlie has to pass a special resolution for the amendments of the object clause if he wish to import wine provided the new activity is within the framework of section 7 (2) of the Act.

References

Books/Articles/Journals B Splitz (2003) International Tax Havens Guide

CPlaw (2014) The liability of the directors and the ultra vires principle under Cyprus Law.

Cambell & Netzer (2009) International Joint Ventures.

Cypruis (2000) Turkish Press on Cyprus, Volume 13

D Cambell (2009) International Protection of Foreign Investment [2009] - II, Volume 2

D Cambell (2000) Introduction to Cyprus Law.

Evangelou and Tsikouris (2012) Corporate governance, Board structures and directors’ duties in 34 jurisdictions worldwide.

IBP, Inc., (2015) Cyprus Investment, Trade Laws and Regulations Handbook Volume 1 Strategic Information and Basic Laws.

InfoCyprus (2017) The Sole Proprietorship Structure.

InfoCyprus (2017) The Partnership Structure in Cyprus.

InfoCyprus (2017) The Corporate Structure in Cyprus.

Marshall (2009) Company Law.

Office of Law Commissioner (2012) The Companies Law cap 113, Section 15A.

Usa Ibp (2006) Cyprus Business & Investment Opportunities Yearbook, USA International Business Publications, Usa Ibp, Int'l Business Publications, 01-Apr-2006