Pledges over Cyprus Shares

Contributed by Harris Kyriakides LLC. [www.kyrlaw.com.cy]

Transactions and structured financing are commonly used by Cyprus companies. Therefore, it is usual that securities are taken in Cyprus by way of a pledge over shares. Based on the corporate structure of the holding company the decision will be made regarding which shares are being pledged as security.

Pledges are a form of security to assure that a person will repay a debt or perform an act under contract. In a pledge one person temporarily gives possession of property to another party. In the case of a pledge of shares, the pledgor must deliver to the pledgee: a shares certificate in respect of the shares pledge, a blank undated executed instrument of transfer, letters of resignation from the director and secretary, irrevocable proxy and power of attorney, and a letter of understanding signed by the directors and secretary.

In that regard, it is also crucial to have a shares pledge which is valid, effective and enforceable. In order to meet these requirements, it is necessary that a Cyprus shares pledge is: in writing, signed by the pledgor and the pledgee, and is signed in the presence of two witnesses each having contractual capacity. Further, to be able to enforce the shares pledge, the perfection requirement outlined in s.138 of the Contract Law, Cap, 149, needs to be satisfied. The perfection requirement requires a notice of pledge together with a certificate copy of the deed of pledge which needs to be granted by the pledgee to the company whose shares are being pledged. Subsequently, a memorandum of the pledge is required. This is entered in the register of members of the company whose shares are being pledged in respect of shares pledges. Moreover, a secretarial certificate should be issues wherein it is confirmed that a memorandum pledge has been entered in the register of members of the company whose shares are being pledged. Further, in order to be enforceable as against creditors or a liquidator a pledge must be perfected. Therefore, the perfection requirement is such as to give notice to the public of the existence of the charge.

With bear reference to the date of effectiveness of Cyprus shares, it is worth mentioning that a security interest is valid and enforceable once it has attached to the asset and is perfected. Thereby the security interest that has been attached is enforceable between the pledgor and pledgee. The effect of attachment is that the security interest fastens on the asset so as to give the creditor rights in rem against the debtor himself, though not necessarily as against third parties. In the case of pledge of shares this involves delivery of possession, actual or constructive.

Consequently, a pledge over a Cyprus company’s shares and all rights deriving from the said pledge as well as agreements for the provision of financial security within the ambit of the Agreement for the Provision of Financial Security Law of 2004 as amended, no longer need to be registered according to the law with the Department of Registration of Charges of the Registrar of Companies and Official Receivers. This provision is only affecting shares that a Cyprus company holds in another Cyprus company. However, it does not cover shares or assets that Cyprus companies maintain abroad in a foreign company. The before mentioned also applies to charges and pledges created over assets which are situated and registered as a foreign company in Cyprus by a company incorporated outside Cyprus.

In the event that there is a pledge over the shares of a Cyprus Public Company and where these shares are listed in a foreign market, the provision of the Contract Law Cap 149 as to the pledge of the share certificates of the said shares shall not apply. In relation to the pledge of such shares the regulations of the foreign markets are applicable.

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