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Court recognises fraud as grounds for involuntary winding-up

Court recognises fraud as grounds for involuntary winding-up

In the recent judgment in Re SARE Public Company Limited, Petition 554/2017, 19/05/2023, the District Court of Nicosia ordered the involuntary winding-up of a Cyprus company on grounds of fraud. The fraud had been orchestrated by the persons controlling the company and had resulted in the alienation of company assets to the detriment of some of its minority shareholders. This is the first time the courts have recognised shareholders' standing to seek relief in the form of a winding-up order in instances where they had been convinced to invest funds in a company controlled by other persons and who were defrauded as a result of that investment.

Furthermore, despite the company having been led to insolvency, the Court was satisfied that the shareholders had sufficient locus standi to promote winding up proceedings.

Facts

The petitioners were investors, who collectively held less than 7% of the company's issued share capital. The company's operations were centred around the real estate market in India. By 2014, it had become clear to the petitioners that the company was not meeting the investment expectations.

Upon further investigation, it was discovered that the assets of the company had been alienated for improper and unlawful purposes, which eventually led the company to financial ruin.

Decision

On 19 May 2023, the Court issued an involuntary winding up order against the company on just and equitable grounds.

Given the limited case law on the matter, the Court looked to English judgments for guidance. Thus, the Court concluded that the use of the company by those controlling it to conduct fraud to the detriment and without the knowledge of the petitioners, justified the issuance of an order of this nature.

Beyond this, the Court found that, to maximise the prospects of the alienated funds being returned to the company, there was a need for a comprehensive investigation into what has taken place. This would also allow the interested parties to determine the actual extent of the fraud. This investigation would be rendered possible once a liquidator was appointed in the company.

Comment

In this landmark judgement, the Court has, for the first time, acknowledged that fraud constitutes grounds for involuntary winding up and effectively affords minority shareholders an additional means of protection when the company is ultimately controlled by others. Furthermore, the Court found that the fact that the company was led to insolvency as a result of the fraud cannot, in itself, preclude the minority shareholders from promoting proceedings of this nature.

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