COMPANY LAW - INSPECTORS PROTECTING MINORITY SHAREHOLDERS

Under the Companies Act in Cyprus, the Ministirial Cabinet or the Court has the authority to appoint one or more inspectors to investigate the affairs of a company upon receiving a request from its members. This process is vital for ensuring transparency and accountability within corporate operations.

 

Key Provisions for Appointment of Inspectors

 

1. Eligibility to Request Investigation: For companies with share capital, from those holding at least 10% of the issued shares can request an investigation (Minority Shareholders)

2. Supporting Evidence: The request must be accompanied by evidence to demonstrate that the applicants have valid reasons for seeking the investigation. The Cabinet or the Court may require security to cover the investigation costs before appointing an inspector.

3. Additional Grounds for Appointment:

(i) that its operations are conducted with the intention of defrauding its creditors or the creditors of any other person, or otherwise for fraudulent or illegal purposes, or in a manner that oppresses any part of its members, or that it was established for fraudulent or illegal purposes;

(ii) that the individuals involved in its formation or the management of its affairs are guilty of fraud, misconduct, or other wrongful behavior towards it or its members; or

(iii) that all relevant information regarding its affairs that its members reasonably expected was not provided to them.

4. Comprehensive Authority: The appointed inspectors have the right to examine the affairs of related companies, which can include subsidiaries and holding companies.

5. Information and Evidence: Corporate officers and representatives are required to present all relevant books and documents to the inspectors. They must also provide assistance during the investigation, including giving sworn testimony when requested.

 

Responsibilities Following the Investigation

 

1. Reporting: Inspectors must submit interim and final reports to the Cabinet. These reports must detail the company's assets, liabilities, creditor information, and any discrepancies found during the investigation.

2. Legal Consequences: If inspectors uncover misconduct that warrants criminal prosecution, the matter will be referred to the Attorney General for further action.

3. Corporate Accountability: Companies are obligated to inform their members about the appointment of inspectors and must comply with any subsequent orders from the Cabinet.

 

Financial Implications

 

1. Cost Coverage: The expenses incurred during the inspector's investigation are typically borne by the parties who requested the appointment. However, any costs incurred by the government during the investigation process, including legal fees, may impose a financial burden on the state.

2. Evidence in Legal Proceedings: A certified copy of any inspector's report is admissible as evidence in court, reflecting the inspectors' professional opinions on the matters investigated.

 

Supreme Court Judgment Regarding the Appointment of Inspectors in Companies has established the following:

 

The case involved the appointment of inspectors to investigate the affairs of a private limited liability company, following allegations of misconduct by one of the directors. The request for investigation was initiated under Article 158 and 159 of the Companies Law, which allows shareholders to seek an examination of corporate conduct when certain thresholds are met.

 

Key Points Leading to the Decision:

 

1. Legal Framework: The Cabinet is required to appoint inspectors to investigate a company's affairs upon the request of members holding a specified percentage of shares, provided that valid reasons for the investigation are demonstrated by the applicants.
2. Allegations of Misconduct: The allegations included serious claims against the director regarding:
   • Failure to convene general meetings as required.
   • Negligence in preparing and submitting financial statements.
   • Engaging in unauthorised transactions that could potentially harm the company's interests.
   • Non-payment of dividents
   • Oppression of the minority
3. Consideration of Evidence: The Court emphasised that the evidence presented must demonstrate enough grounds to justify an investigation. Specifically, the court referred to the principle established in R. v. Board of Trade ex p. St. Martin Preserving Co Ltd [1965], which states that while the court should act on a "suspicion of some grave impropriety," this suspicion must be well-founded.
4. No Requirement for Proof of Wrongdoing: It was clarified that the tribunal does not need to establish definitive wrongdoing to justify the need for an inspection. Instead, reasonable grounds for suspicion are adequate.
5. Rejection of Appeal Grounds: Arguments presented by the appellant, which contended that the trial court misjudged the evidence, were dismissed. The Supreme Court maintained that the trial court's role was to determine whether the circumstances warranted further inquiry rather than to substantiate the allegations of misconduct.

 

Conclusion

 

The Supreme Court's decision supports the mechanisms available to minority shareholders in Cyprus for prompting investigations into corporate misconduct. This ruling reinforces the necessity of protecting shareholder interests and fosters transparency in company operations. By establishing a clear pathway for shareholders to request inspections based on reasonable suspicions, the judgment contributes to the integrity of corporate governance in Cyprus. The decision underscores that it is not the court's duty to prove misconduct beforehand but to ascertain whether there are legitimate grounds to warrant an investigation into the affairs of the company.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.