Under the current Cyprus insolvency framework, there is no general statutory obligation requiring directors to commence insolvency proceedings or wind up a company within a prescribed period once it becomes insolvent. That is set to change.
Directive (EU) 2026/799 on harmonising certain aspects of insolvency law, introduces a duty on directors to act once their company becomes insolvent, together with a framework for personal civil liability if they fail to do so. Cyprus, like other Member States, must transpose the Directive into national law by 22 January 2029.
That current gap runs deeper: Cyprus also has no general statutory equivalent of the English “wrongful trading” regime, under which directors may become personally liable simply because they continued to trade after they knew, or ought to have known, that there was no reasonable prospect of avoiding insolvent liquidation.
The one avenue that does exist is the fraudulent trading regime under section 311 of the Companies Law, Cap. 113, but only where the business was carried on with dishonest intent to defraud creditors or for a fraudulent purpose. Insolvency, continued trading, or failure to commence insolvency proceedings does not, in itself, establish fraudulent trading.
Title V of the Directive sets out the new duty to act and its accompanying civil liability framework in detail. The starting point is establishing when a company is treated as insolvent under Cyprus law.
When is a company insolvent?
The Directive deliberately does not establish a single EU-wide definition of insolvency; the relevant threshold is left to national law. In Cyprus, the two principal concepts are cash-flow insolvency, where a company is unable to pay its debts as they fall due, and balance-sheet insolvency, where its liabilities exceed the value of its assets. Under s212 of Cap. 113, both concepts are recognised, with the court also taking into account contingent and prospective liabilities.
The question of when insolvency occurred may become critical in assessing a director’s responsibilities under the new EU framework.
The new EU duty to act
Article 40 of the Directive requires Member States to ensure that directors of a company which becomes insolvent under national law have a duty to submit a request for the opening of insolvency proceedings, other than preventive restructuring proceedings. That request must be made within a maximum of three months from the point at which the directors become aware, or can reasonably be expected to have become aware, that the company is insolvent.
The “ought to have known” element is particularly significant. A director will not necessarily avoid the consequences of the duty simply by saying that they did not actually appreciate the company was insolvent, the circumstances and information available to them will be relevant in determining when they could reasonably have been expected to know. The Directive recognises that directors are generally responsible for the management of the company, they are among the first persons able to recognise its financial deterioration and delay in commencing insolvency proceedings can result in lower recoveries for creditors.
This does not mean every insolvent company must immediately be liquidated. The Directive is not intended to prevent genuine restructuring or rescue: Member States may provide that the duty to commence insolvency proceedings is suspended where directors take measures designed to avoid damage to creditors, and those measures provide the general body of creditors with protection equivalent to that which would result from commencing insolvency proceedings.
This distinction will matter in practice. A director who continues trading as part of a properly considered restructuring strategy, supported by objective evidence that it is capable of producing an equivalent or better outcome for creditors, is in a very different position from a director who simply continues to incur liabilities in the hope that fortunes will improve.
Potential personal liability
Perhaps the most significant development is Article 42, which requires Member States to ensure that directors of an insolvent company are liable, in accordance with national law, for damage caused to creditors as a result of failing to comply with the duty to request the opening of insolvency proceedings. The Directive’s recitals explain that this is intended to address the deterioration in recovery value available to creditors as a result of late filing.
In practical terms, the question will be: what would creditors have recovered had insolvency proceedings been commenced when the directors should have acted, compared with what they actually recover following the delay? If continued trading during that period results in the company incurring additional liabilities, dissipating assets or otherwise worsening creditors’ position, the resulting deterioration may potentially form the basis of a claim against the directors, subject to the national implementing legislation.
Importantly, the Directive leaves the calculation of damages and burden of proof to national law and permits Member States to adopt or maintain stricter rules.
Why should advisers take notice?
This development should be on the radar of anyone advising a company in serious financial distress. For lawyers, accountants and restructuring advisers, it will become increasingly important to identify and document:
- when the company became, or may have become, insolvent
- what information was available to the directors at the time
- when the directors knew, or ought reasonably to have known, of the insolvency
- what restructuring or rescue measures were being considered
- whether continued trading was increasing the company’s liabilities
- why the course of action adopted was considered to be in the interests of creditors
For creditors and their advisers, the same information may become increasingly relevant when pursuing recovery from an insolvent company.
Where a company has continued trading and accumulated significant additional liabilities despite clear indications of insolvency, creditors may need to consider not only the company’s remaining assets, but also whether there was a point at which the directors should have commenced insolvency proceedings and whether the creditors’ position deteriorated thereafter.
Financial statements, cash-flow forecasts, unpaid creditor balances, statutory demands and  correspondence with lenders and suppliers may all become highly relevant to establishing when that point was reached.
Looking ahead in Cyprus
For Cyprus, the transposition of the Directive will mark an important step in the evolution of directors’ responsibilities in insolvency and determine the precise duties and liabilities applicable.
For directors and their advisers, the message is simple: recognise financial distress early, establish when insolvency has occurred, take appropriate advice and document the reasons the course of action taken and why continuing to trade was justified.
For creditors and their advisers, the message is equally important: where a company has continued to incur debts after it should have entered an insolvency process, the conduct of its directors may warrant examination alongside the company’s ability to pay, potentially opening a new avenue for creditors to hold directors personally accountable.
Andri is on the list of approved Insolvency Practitioners of the DIFC and ADGM. She is a solicitor, Member of the Law Society of England and Wales and a Licensed Insolvency Practitioner in Cyprus.
