Separate Legal PersonalityPrior to the UK’s Companies Act of 1907, a private company was not recognized as a form of corporate organization. Luckily for us Section 3 of the Companies Law, Chapter 113 defines the manner in which a legal person may be formed in Cyprus. Once the Cyprus Company is formed, and in accordance with Section 3, the liability of the members may be limited to the amount unpaid on the shares held by each member or to the amount each member guarantees to pay in case the Cyprus Company is wound up. From the principal of separate legal personality comes one of the most famous corporate law cases available, and that the case of Salomon v. Salomon & Co Ltd  UKHL 1. In this case the House of Lords firmly upheld the doctrine of corporate personality.
Facts of the Case
Mr Salomon made leather boots or shoes in a large establishment. His sons wanted to become business partners, so he turned the business into a limited company. The company purchased Salomon’s business on an excessive price for its value. His wife and five elder children became shareholders and the two elder sons became directors. Mr Salomon took 20,001 of the company’s 20,007 shares which was payment from Salomon incorporated for his old business (each share was worth £1). Transfer of the business took place on 1 June 1892. The company also gave Mr Salomon £10,000 in debentures. On the security of his debentures, Mr Salomon received an advance of £5,000 from Edmund Broderip.
Soon after Mr Salomon incorporated his business there was a decline in boot sales. Salomon’s business failed, defaulting on its interest payments on the debentures (half held by Broderip). Broderip sued to enforce his security. The company was put into liquidation. Broderip was repaid his £5,000. This left £1,055 company assets remaining, of which Salomon claimed under his retained debentures. This would leave nothing for the unsecured creditors. When the company failed, the company’s liquidator contended that the floating charge should not be honoured, and Salomon should be made responsible for the company’s debts.
Whether, irrispective of the seperate legal identity of a Company, a shareholder/controller could be held liable for a Comapny’s dept
The Court of Appeal held that Salomon abused the provisions of the Law and that the Comapny was an agent of Salomon. This was overruled by the House of Lords and unanimously held that, a validly incorporated company is a seperate legal personality with it’s rights and liabiltiies
The case of Salomon v. Salomon & Co was adopted in Cyprus in the following cases:
By being a separate legal personality a Cyprus Private Company can be the right tool to ensure that your new business venture will not affect your existing wealth since your liability is limited to the value of shares held or amounts guaranteed
In accordance with Section 4 of the Companies Law, Chapter 113, it is a legal requirement for the name of the Company to have the word Limited or LTD as the last word of its name as a notice to the world that they are dealing with a limited Company
Although separate legal personality is enjoyed between the Company and its shareholders, the shareholders are not risk-free. The memorandum of association of every company formed in Cyprus limits the liability of the shareholders to the value of the unpaid shares he holds and in the case of shares which have been issued to the value of the investment made.
Typically the shareholder would be the last to take any funds out of a company, in winding up, and that is because they are unsecured creditors of the Company. However, as seen above such shareholder’s cannot be held liable to pay for the assets of the company out of there own pocket. This, in turn, allows business promoters to take risks and invest or being entrepreneurial in a controlled environment.
In the case of Edwards v. Halliwell  2 ALL ER 1064 the Court of Appeal held that a shareholder of a Company could not be required to contribute beyond the limits initially undertaken. This case was adopted in the high profile Cypriot case of LITONOR FINANCIAL LIMITED ν. RGI RESIDENTIAL HOLDINGS LIMITED κ.α., Αρ. Αγωγής: 3073/14, 29/12/2016 which considered shareholders’ dispute.
A Cyprus Private Company limited by shares has the power to issue shares. This means that the board of directors is able to give to someone an asset in exchange for the company receiving certain benefits, cash, shares in other companies or any other quantifiable assets.
The uniqueness of this mechanism cannot be matched by any other legal arrangement and the same is only available to those types of companies that are able to issue shares.
With the issue of shares, the registered shareholder receives rights. Such rights may relate to the right to receive a dividend, vote in shareholder meetings, the redemption of shares, return on capital in case such capital is available and many more.
Variation of Capital
Once the company has been formed the shareholders and directors have a plethora of options and manners in which they can alter the share capital. In accordance with Section 60 of the Companies Law, Chapter 113, they can:
- Increase the share capital of a Cyprus Company so as to create sufficient capital for a new issue
- Consolidate the share capital of a Cyprus Company, so that two or more shares become one
- Subdivide the share capital into shares of smaller value
When joint stock companies were established the great object was that the shares should be capable of being easily
Transactions Involving Shares
With shares being an asset the possible transactional use that they have cannot be undermined.
Transfer of Shares
Once shares are held they may be transferred to another person. Section 29 restricts this right to a certain extent and we will look at this further down.
Allotment of Shares
The board of directors may allot and issue (give) shares to any party in consideration of other assets or even a promise to pay (un-paid shares) typically thought Cypriot companies do not use this function.
Other Cyprus Companies Posts
If you are looking for other Cyprus Companies Law content please visit this link
If you have a specific matter in mind please let me know by pressing on the contact us button.
Very useful and well writen article