A security interest over shares in a Cypriot company under Cyprus law is normally established by a share pledge agreement entered into between the registered shareholder of the said shares (the “Pledgor”) and the person in whose favour the security interest is taken (the “Pledgee”). All matters related to Cyprus Share Pledges are regulated by the provisions of the Cyprus Companies Law, Cap. 113, and the Cyprus Contracts Law, Cap. 149.
A pledge is a possessory security interest, which attaches to the assets and provides the Pledgee with a right in rem against the Pledgor. It thus requires the delivery of possession to the Pledgee of the assets, whether actual or constructive. The security interest is valid and enforceable if it has attached to the relevant assets and all perfection requirements have been complied with. This article aims to focus on the procedures and actions a Pledgee should take in the case of enforcement of a Cyprus Share Pledge and all issues arising in this respect.
Validity and enforceability
The Cyprus Contracts Law, Cap. 149, sets out the following requirements that need to be met in order for a Cyprus Share Pledge to be valid and enforceable:
- It must be made in writing;
- It must be signed by the Pledgor; and
- It must be signed in the presence of two witnesses each having contractual capacity.
Section 138 of the Cyprus Contracts Law, Cap. 149, also lays down the perfection requirements that ought to be satisfied for a Cyprus Share Pledge to be enforceable, namely:
- The Pledgee should deliver a notice of pledge accompanied by a certified copy of the deed of pledge to the company whose shares are being pledged;
- A memorandum of pledge needs to be entered in the register of members of the company whose shares are being pledged in respect of the pledged shares; and
- The secretary of the company whose shares are being pledged issues a certificate confirming that a memorandum of pledge has been entered in the register of members of the company.
Steps and timing of enforcement:
Cyprus law does not require enforcement to take place through public auctions, and recourse through court proceedings is not necessary. A Cyprus Share Pledge will usually provide for the events that will trigger the enforceability of the security e.g. the occurrence of an event of default. Therefore, the Pledgee under a Cyprus Share Pledge must be aware of the enforcement clauses in the relevant pledge agreement, which generally contain the specific mechanics agreed by the parties that will facilitate the efficient out-of-court enforcement of security.
The abovementioned mechanics refer to the delivery of certain documents to the pledgee upon execution of the Cypriot law pledge agreement, and enforcement is effected through implementation of those documents, in particular the instruments of transfer and the share certificates. The actions to be taken are namely the following:
- The Pledgee will have to date and complete the blank instrument of transfer for the pledged shares, and in this way transfer them to the Pledgee’s name or to the name of the person it nominates;
- The Pledgee must notify the secretary of the company of this event;
- The secretary will then cancel the original share certificates, held by the Pledgee for the pledged shares, and issue a new share certificate in the name of the person named in the instrument of transfer as the transferee;
- The secretary will amend the company’s Register of Members and register all necessary amendments with the Registrar of Companies;
- The Pledgee, if it chooses to do so, will date the blank letters of resignation for the existing directors and secretary and appoint other directors and secretary.
Submission of amendments at the Registrar of Companies
Regarding the filing of all of the above amendments with the Registrar of Companies, it is important to note that recent procedural amendments have introduced the obligation to submit to the Registrar of Companies confirmation letters, by the secretary of the company, informing of any change regarding the members of the company. In the case of a replacement of the secretary herself, the Registrar requests that both the previous secretary and the new one execute the relevant confirmation letters.
Therefore in the case of filing any share transfer and/ or replacement of officers in a Cyprus company pursuant to the enforcement of a share pledge, the Pledgee will also have to obtain the abovementioned confirmation letters from the secretary of the company.
Best price possible
In case the pledgee decides to proceed with the sale of the pledged shares, it owes a duty to act reasonably and, if enforcing by way of sale to another party, it owes a duty to obtain the best price possible. A Pledgee, however, is under no obligation to wait until market conditions improve. The ‘best price possible’ is the best price obtainable on the day of enforcement. In the case of private companies, it is the best price the Pledgee could obtain acting reasonably – i.e. the price a willing buyer is prepared to pay.
If the Pledgor does not agree with the price obtained then it can be challenged in the courts, however the Pledgor /borrower will have the burden of proving that the Pledgee acted unreasonably.
Enforcement through a receiver
Cyprus law does not impose any restrictions as to who can enforce a share pledge, though this may effectively be regulated by the provisions of the agreement between the parties. It is common for Cyprus Share Pledges to provide the Pledgee with the power to appoint any other person as its agent, trustee or nominee in order to deal with the pledged shares in the Pledgee’s name.
There are no requirements as to who can be a receiver or enforcement agent. Any entity nominated by the Pledgee may, acting in the interest of the Pledgee, transfer the charged assets in its name and proceed with the sale of those assets at a reasonable market value to any third party buyer. The proceeds of such sale will be deemed to be held on trust by the said agent for the Pledgee, based of course on the terms of their agreement (between Pledgee and agent/ nominee).
The remedy of appropriation is available to a Pledgee under a Cyprus Share Pledge, provided that all conditions and requirements set out in the Cyprus Financial Collateral Arrangements Law N.43(I)2004 (the “FCL”) are observed. The FCL incorporates into Cyprus law the Directive 2002/47/EC of the European Parliament and of the Council of June 6th 2002 on financial collateral arrangements (the “Directive”), which allows the Pledgee, on the occurrence of an enforcement event, to appropriate the pledged shares and set off their value against the relevant financial obligations of the Pledgor, without having to apply to the court for an order.
However, it is provided by the FCL and the Directive that appropriation is only allowed where this has been explicitly agreed upon by the parties in the share pledge agreement, and if the parties have agreed on the valuation of the pledged assets. Also, it is important to note that the FCL and the Directive is applicable to:
- Financial collateral arrangements where one of the parties is either a supervised financial institution, a public authority, a central bank or a central counterparty;
- Financial collaterals that consist of cash or financial instruments, primarily shares and other transferable securities and interests in securities; and
- Financial collateral arrangements evidenced in writing.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought on your specific circumstances. For further information, please contact Lorena Charalambous.