Directors’ Liability in Cyprus

From a corporate law perspective civil liability may arise from common law and equity as well as from breach of statutory provisions set out in the Companies Law, Cap. 113. Risks arising out of common law relate to:

• the duty of care and skill;
• the duty to act honestly and bona fide in the interests of the company;
• he duty of diligence.

Generally such duties are owed to the company; this means that directors should have regard to the interests of the shareholders as a whole and not to the interests of individual shareholders.

Under the Companies Law, Cap.113, statutory liability of directors who were in default may arise:

• on misuse of the corporate seal;
• on misstatements in a prospectus;
• on irregular allotments;
• in the case of failure to repay application money for shares or debentures if the minimum subscription has not been subscribed;
• by an order of court in the winding up or other procedure, under the fraudulent trading provisions.

Personal civil liability may arise as to fraud and other torts such trespass, negligent misstatements, patent infringement etc. A director will not be held responsible for the fraud or tort of his co-directors unless he has expressly or impliedly authorised it.

From a corporate law perspective, the duties of directors are owed to the company thus the claimant would be the company and not individual shareholders. An exception to this general rule is the derivative action: an action commenced by a shareholder on behalf of the company where what had been done amounts to fraud on the minority and the wrongdoer controls the company. Under certain circumstances the liquidator, the official receiver, an administrator, a creditor or a contributory may initiate proceedings e.g. in the case of fraudulent trading where the business of the company has been carried on with intent to defraud creditors etc.

Criminal liability may arise for breach of obligations under the Companies Law, Cap.113. It may also arise under other statutes relating to financial markets in which companies operate e.g. the statutes regulating takeovers, transparency requirements, the Cyprus stock exchanges, insider dealing etc.

Statutes not regulating corporate issues often provide for criminal liability not only for the company but also personally for the directors; these are numerous, and they entail a very wide range of issues. Indicatively criminal liability of directors may potentially arise under statutes on competition law, consumer law, consumer credit, employment law, taxation, customs and excise legislation as well as laws environmental law, health, and safety laws. Typically for liability to arise on the director, the director must have consented or connived to the commission of the offence by the company, or the commission of the offence by the company is attributable to the neglect on the part of the director. In some cases, such as the legislation on value added taxation, the liability may be strict and arises if an illegal act is committed by the company.

As general rule, criminal proceedings are initiated by the Attorney General or the police. Provided certain conditions are met, criminal proceedings - known as private prosecution - may be initiated privately by individuals or entities who were victims/suffered loss as a result of the criminal act. Private prosecutions may be initiated only where the rights of the victim were directly affected by the criminal act. In relation to specific offences, the consent of the Attorney General will be required before a private prosecution be initiated.

For civil cases the general limitation period is 10 years from the date the cause of action accrued. With regard to claims in tort the limitation period is 6 years or, in the case of negligence, nuisance or breach of statutory duty, 3 years from the date the cause of action accrued except if the person incurring personal injury became aware of the personal injury on a later date, in which case the limitation period starts from such date.

Criminal proceedings for serious offences are not subject to limitation periods. However, a delay in the initiation of proceedings or the time lapse between the offence and the charge may be a factor to be taken into consideration by the court when deciding the imposition of a charge and/or penalty. Non-serious offences are subject to limitation periods. Except if there is a specific law which provides otherwise, the limitation periods for criminal cases are as follows:

1. 6 months from the day of the offence in relation to offences which may be punished with imprisonment for a term not exceeding 3 months or a fine not exceeding 854 euros and/or both;
2. 12 months from the day of the offence in relation to offences which may be punished with an imprisonment for a term not exceeding 12 months or a fine not exceeding 1.708 euro and/or both.
   

Directors and officers’ liability policies are usually used in Cyprus for listed companies, investment companies and large and medium sized companies. It is common for the company to be also included as beneficiary of the policy and to cover the cost of such policies.

Typically such policies would cover for claims for negligence, misstatements, errors and omissions and breach of duty. Coverage includes advancement of damages awarded by courts (including exemplary damages), expenses and interest adjudicated by courts, reasonable defence costs and expenses (in civil, criminal, and administrative proceedings) and reasonable sums paid in the context of a settlement, reasonable costs of experts employed for the purposes of the defence. Also they include reimbursement for indemnification for any judgments, settlements and defense costs associated with covered claims when the company has indemnified the insured for loss. As a matter of policy typically they would not cover penalties resulting from criminal liability e.g. money laundering offences, offences arising from the General Data Protection Regulation etc.

Generally, the statutes do not provide for different liability, and this was held also by courts for liability under common law. The courts will judge on the basis of the facts before them. A director is required to exercise that degree of skill which might be expected from someone having both his own particular knowledge and experience; and the general knowledge and experience which might be expected of a person carrying out the same functions as those carried out by that particular director. Therefore the standard of skill will differ for highly qualified and experienced directors. It has been ruled that a director is not bound to give continuous attention to the affairs of his company. It is expected that the standard will vary in the case of an executive director who is reasonably expected to devote the daily working hours and a non-executive director who is not expected to give the company so much of his time.

The holding company shall not be responsible for the actions or omissions of the directors in a subsidiary company due to its decision making power with regard to their appointment. The principle of separate legal personality is applied with the exception of cases where the courts consider that piercing the corporate veil is justified. According to caselaw, courts may consider disregarding the separate personality where the holding company is under an existing legal obligation or liability or subject to an existing legal restriction which it deliberately evades or whose enforcement it deliberately frustrates by interposing a company under its control. The purpose of depriving the subsidiary or the holding company of the advantage that they would otherwise have obtained by the subsidiary's separate legal personality would be the driving force for piercing the veil.