Since its independence in 1960, Cyprus managed to attract shipping business and develop into a renowned, high quality shipping centre combining both a sovereign flag and a resident shipping industry. The country’s accession to the European Union, in 2004, further boosted the reputation and overall image of the Cyprus flag and the infrastructure of Cyprus’ shipping.
Cyprus combines a legal system based on the English model, an efficient civil service, and an outstandingly high level of professionalism in the legal and accounting sectors that form the solid foundations for any kind of business. A number of fiscal and economic advantages such as the competitive ship registration costs and annual tonnage taxes, the favorable tax regime for ship management and other international businesses, the availability of competent local employees and the generally low operation and construction costs prompted the establishment by many European and international businesses of local companies with fully fledged offices on the island.
Shipping finance forms an inevitable part of the Cyprus shipping industry with international as well as local financing institutions playing a key-role in the shipping industry development. Under Cyprus ship financing transactions, financial obligations are usually secured by providing a mortgage on the ship or a pledge on the shares of the ship-owning company by following the procedures described below.
A ship is personal property and the rules relating to the creation of interests in personal property, e.g. a mortgage, apply. Once a ship has been registered under the Cyprus flag, a mortgage is usually created thereby securing a loan or other financial obligations under the conditions agreed to by the parties without any exchange control restrictions. The creation of a mortgage under Cyprus laws is not allowed on vessels registered parallel-in in the Register of Cyprus Ships.
A mortgage once created, must be deposited to the Registrar of Cyprus Ships or to a consular officer at the instructions of the Registrar. Whether deposited to the Registrar or to a consular officer, the mortgage is recorded thereafter in the Register as of the date and time of its deposit and it remains an encumbrance on the vessel until it is discharged by the mortgagee. A mortgage may be created regardless if the ship is provisionally or permanently registered.
If the ship on which a mortgage is created belongs to a Cypriot company, the mortgage also has to be registered with the Registrar of Companies within a maximum period of 42 days after its creation. By registering the mortgage the security is protected in case the ship-owning company goes into liquidation. The mortgage may be transferred by completing the statutory form of transfer and submitting it to the Registrar of Cyprus Ships or to a consular officer.
In order to discharge a mortgage a memorandum of discharge needs to be duly executed by the mortgagee. The memorandum of discharge is then attested and delivered to the Registrar of Cyprus Ships or to a consular officer at the instructions of the Registrar.
The pledging of shares in a company is a widely used tool, because it offers commercial security in Cyprus. It is also used as security in the shipping finance area in cases where the ship is owned by a Cyprus company. The pledge of shares is created by the execution of a share pledge agreement, which governs the terms of the pledge and specifies that upon signature specific documentation must simultaneously be provided to the pledgee.
The documentation shall enable the pledgee to enforce the pledge in case of default without the need for recourse to courts. This means that the documents given to the pledgee by the pledgor permit the pledgee to transfer the shares into his name if the obligations specified in the share pledge agreement fail to be discharged. Pledged shares should be fully paid up and have no other charges registered against them. The Articles of Association must authorise the pledge and all the relevant resolutions must be passed based on the provision as set out in the Articles.
A pledge is a form of real security giving the pledgee proprietary rights over the shares belonging to the pledgor. The possession of the pledged property may be actual or it may, more commonly, be constructive. Actual possession of the property brings concerns regarding risk and the duty of care. Therefore constructive possession is a much more commonly used practice.
The firm gives legal advice and assistance in relation to transactions concerning shipbuilding, the sale and finance of ships, the formation and maintenance of a Cyprus ship-owning or management company as well as the registration of vessels under the Cyprus flag in the Cyprus Ship Registry and other related matters such as chartering and insurance.
This article was published in the third issue of Standards Magazine, The Investor’s Guide to Cyprus. For more details and to access the digital edition of the magazine please click here.