Companies incorporated in Cyprus are widely used in connection with structuring financing and other transactions. Typical structures involve a Cypriot holding company holding 100% shares in a foreign subsidiary. Where finance is granted to the foreign subsidiary, it is common for the lender to request that security be granted directly or indirectly on more than one level of the borrower’s group (two-tier security). Structures of this kind involve security being granted at the Cypriot level of the group, typically in the form of:
- a guarantee;
- a pledge of shares in the Cypriot company; or
- bank accounts held by the Cypriot company either in Cyprus or abroad.
The experience of practitioners in the field of banking and finance indicates that the parties in whose favor security is granted will request a pledge of shares held in a Cypriot company. This is particularly observed in cases where the Cypriot company serves as a holding of subsidiaries in Russia and the Commonwealth of Independent States countries. Enforcement in these countries can be inefficient and complex, since in most cases national legislation requires public auctions involving court procedure. Currency issues may also arise. Therefore, it is recommended that enforcement be made outside such jurisdictions and Cyprus has been widely used for such structures.
Cypriot law does not require enforcement to take place through public auctions and recourse through court proceedings is not necessary. However, parties may freely decide to involve the courts or sell shares through public auction. Unlike the laws of many jurisdictions, Cypriot law does not restrain the appropriation of shares by the party in whose favor the security has been granted (the pledge) (ie, as illegal foreclosure); however, it is necessary to consider the enforcement clauses in the deed of pledge. The pledge is obliged to seek and obtain the best price when selling its shares. If the proceeds of sale exceed the total amount secured, then pursuant to the principle of unjust enrichment, the difference should be returned to the pledgor.
Deeds of pledge governed by Cypriot law usually contain provisions expressly agreed by the parties to the pledge which allow for efficient enforcement of security. In general, enforcement by a creditor will usually depend on whether the creditor is secured (ie, has a registered interest or security such as a mortgage or pledge). Where the entity granting security in the form of a pledge of shares in a Cypriot company is also a Cypriot company, subject to the terms of the deed of pledge, a registrable charge under the Companies Law (Cap 113) is often created and the pledge is treated as a secured creditor with a first-ranking security interest. If a judgment is obtained against the debtor, a creditor can enforce it by:
- a writ of movables;
- garnishee proceedings;
- registration of a charging order over the debtor’s property;
- a writ of delivery of goods;
- a writ of possession of land;
- a writ of sequestration; or
- bankruptcy proceedings.
The appointment of a receiver is also possible under Cypriot law, either by obtaining a court order for the appointment of a receiver or manager of the property of the Cypriot company or by appointment under any powers contained in any instrument. Within seven days of the order or appointment under the said powers being granted, notice must be given to the registrar of companies. On payment of any specified fees, the registrar will enter the fact in the register of charges.
In light of the current financial crisis, the enforcement of security in Cyprus is becoming increasingly significant. In the absence of an abundance of material in the form of binding precedent and Cypriot court decisions, security is enforced according to common law practice.
February 2009, by Aristodemou Loizides Yiolitis LLC
