Enforcement of a Pledge over the Shares of a Cyprus Company (“Cyprus Pledge”)

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A. Pledge

A pledge is by
definition a possessory security interest and thus involves the delivery of
possession, actual or constructive. A
security interest is valid and enforceable once it has been attached to the
asset and is perfected. A security
interest that has been attached and perfected is enforceable as 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

B. Charge

Unlike a pledge, the charge
is a non-possessory security. It
involves the creation of new proprietary rights of the creditor. The essence of a charge is that the secured
property is made liable for the repayment of a debt without there being any
transfer of ownership or possession from the chargor to the chargee.
The chargor retains both ownership and
possession of the asset; the chargee obtains neither. Instead the creditor
obtains a new form of proprietary interest, a charge, over the secured
property. Upon default by the debtor,
the chargee is generally entitled by the terms of the security agreement to
assume possession of the secured asset, sell it, and recoup the outstanding
debt from the proceeds of sale.

C. “Second Ranking Pledge”

Since the Cyprus
Pledge as explained above creates a possessory security interest, there can be
no “second ranking pledge” in the strict sense. What can be done, is a
conditional pledge agreement to the effect that the pledgor undertakes to
pledge the shares to the prospective pledgee once and provided the existing
pledge over the shares is discharged. Thus, the enforceability of such a “second
ranking pledge” is limited and becomes enforceable so far and provided the “first
priority pledge” is discharged, the share certificate representing the pledged
shares is released in favour of the prospective pledgee and necessary
conditions of the law are met.

D. Validity and Registration of a Pledge under Cyprus

(a) Validity

According to section 138(1) of Contract Law, Cap. 149, in order for a
Cyprus Pledge to be valid,
the pledge must be:

  • made in writing
  • signed by the pledgor; and
  • signed in the presence of two witnesses each having
    contractual capacity

(b) Enforceability

In addition to the above
requirements, in order for a Cyprus share pledge to be enforceable, the following requirements need to be
satisfied, as stated in section 138(2) of Contract Law, Cap.149, namely:

(a) Notice of the pledge together with a certified copy
of the deed of pledge needs to be given by the pledgee to the company whose
shares are being pledged;

(b) A memorandum of the pledge needs to be entered in
the register of members of the company whose shares are being pledged in
respect of the shares pledged; and

(c) A secretary’s certificate is issued confirming that
a memorandum of pledge has been entered in the register of members of the
company whose shares are being pledged, evidencing the pledge.

(c) Capacity and Authority

Apart from the above, it
must also be secured that (i) the pledgor has the corporate capacity to enter
the relevant pledge agreement, (ii) it has taken all necessary corporate
decisions to approve it, (iii) appointed a specified individual to execute the
pledge agreement, and (iv) is in good standing and solvent.  For instance, the existence of a winding up
petition against the pledgor  , provided
the pledgor is a company incorporated in Cyprus, at the time of execution of
the pledge agreement renders the pledge void unless a Court order is received
validating the transaction.

(d) Registration/Priority

In the situation the pledgor is a Cyprus Company, apart from the
registration of the pledge in the register of members of the company whose shares are being pledged (see above D (b) (b)), the pledge should be also
register with the mortgages and charges registry of the pledgor.

The perfection
requirement is such as to give notice to the public of the existence of the
charge created.

Pursuant to section
90 of the Cyprus Companies Law, Cap 113, a charge created by a Cyprus company is
registrable with the Cyprus Registrar of Companies. To the contrary, where the
chargor is a foreign company, the charge does not need to be registered with
the Cyprus Registrar of Companies

A registrable charge and
any amendment, assignment thereto must be registered with the registry of
mortgages and charges of the Registrar of Companies (a) within 21 days, if
executed in Cyprus, or (b) within 42 days if executed outside.

A pledge created by
a Cyprus company
over the shares of a Cyprus company, is now
exempted from the obligation to be registered with the Registrar of Companies,
noting that this does not dispense with the other perfection requirements for a
pledge over shares in a Cypriot company. It is still however necessary to
register with the Cyprus Registrar of Companies a pledge created by a Cyprus
company over the shares of a foreign company. It is highlighted that very often
even share pledges over shares of Cypriot companies are still registered with the
Registrar of Companies due to the fact that the document creating the pledge
and/or charge usually provides in addition for the assignment of dividends,
rights etc. which can be considered to be a form of charge not covered by the

E. Enforcement and Procedure

The Cyprus Pledge
will usually provide for the circumstances in which the pledge and the security
created thereunder becomes enforceable e.g. the occurrence and continuation of
an event of default.

When drafting a
share pledge agreement it is common to provide that certain documents will be
delivered to the pledgee enabling the pledgee to enforce the pledge when the
need arise (see section F below). Enforcement under a
Cyprus Pledge is effected through implementation of the documents delivered
under the relevant pledge agreement, (in particular the undated instrument of
transfer and the share certificate).

Hence, the
enforcement of the pledge can take place without the intervention of any
other person or the need for a Court order
It is not usual or indeed required to appoint a receiver since the
pledge is enforced through implementation of the documents delivered under the
pledge which allow the pledgee or whomever it nominates to become the
registered owner of the pledged shares.

However, the pledgee
owes a duty to act reasonably and if enforcing by way of sale to another party,
owes a duty to obtain the best price possible. 
A pledgee, however, does not owe a duty to wait until conditions
improve.  The “best price possible” is
the best price obtainable on the day of enforcement. If the shares are listed then this is
obviously the average price of the day. In the case of private company, it is the best price the Pledgee could
obtain acting reasonably – i.e. the price a willing buyer is prepared to

If the pledgor does
not agree with the price obtained then the pledgee is entitle to challenge it
in the courts. In such a case the pledgor will have to prove that the pledgee
acted unreasonably.  Such challenge in
any case does not invalidate the sale of the shares unless there is fraud

All cost incurred in
the enforcement of the pledge are for the account of the pledgor and are
recoverable out of the sales proceeds of enforcement.

On enforcement, the pledgee
owes a duty to account to the pledgor for any surplus realised.

F. Practical issues in drafting and enforcing a Cyprus

      (a)  The
following document (the “Pledge
) should be released to the possession of the Pledgee to allow
and safeguard swift  and out of Court enforcement:

(i) Original
share certificate representing the pledged shares;

(ii) Executed but
undated Instrument of transfer in respect of the pledged shares;

(iii) Executed
undated board of directors’ resolution of the company whose shares are being
pledged approving the transfer of the shares.

The articles of association of a Cyprus company normally provide that a transfer
of the company’s shares must be approved by its directors. This is why in the
absence of such resolution the enforcement of the pledge may be prevented;

(iv) Irrevocable
proxy by the pledgor to the pledgee;

This proxy is used in case directors of the company whose shares are
being pledged refuse to resign or have not provided resignation letter in order
to allow the pledgee to remove them from office.

(v) Executed but
undated resignations of the company’s directors and secretary.

(vi) Executed
resolution of the board of directors of the company (whose shares are being
pledged) approving the share pledge agreement and the transfer of the shares in
case of an enforcement event.

(vii) An undated
certificate from the secretary that the changes in the structure of the company
(expected to be made in case of enforcement) are in compliance with the records
kept by the secretary;

(viii) a
certified copy of the register of members of the company;

(Drafts of the
majority of the abovementioned documents are usually included as appendixes in
the share pledge agreement so that the format and content of them is agreed
between the parties (the “Appendixes”)).

 (b)  In
addition to the delivery of the abovementioned documents to the pledgee,
special attention must be drawn to the following:

(i) Make
sure that the Appendixes
especially the documents mentioned under point F (a) above, are properly drafted
and that relevant documents to be executed are executed correctly. Numbers
and dates must be checked
. Also
documents should be in original and handed over on execution. The
instrument of transfer, the board of directors’ resolution approving the
transfer of shares, the directors’ resignations and secretary’s certificate
(that the changes correspond to the internal records) must all be undated.
These documents will be dated and used if and when the pledge will be enforced.  Make sure you know where they are kept;

(ii) If
administration of the company (whose shares are being pledged) is managed by a
corporate administrator/“register agent” in Cyprus, it would be advisable such
agent to be replaced by an independent one, preferably a reputable law firm, which
will not be under the control of the pledgor.

(iii) Make sure
that the enforcement clause provides that the pledgee is entitled to buy
the pledged shares and not only to register them in its own name
or  its nominee in view of a sale
to a third person.

(iv) Change of
the directors and the secretary of the company (whose shares are being
pledged) should be restricted without the pledgee’s approval during the period
of validity of the pledge. This is because some of the Pledge Deliverables may
be rendered ineffective in case of such a change. Thus, it is important, in
case of a change to ensure that the new secretary and/or director will execute
on their part, undated resignation letters and a new board of directors’
resolution approving the transfers.  It
is also advisable to monitor regularly (online) the public records of the
Registrar to ensure that no change has been made without the pledgee’s consent.

allowed in the articles
of the Company whose shares are being pledged (which do not allow a shareholder
to transfer its shares to a third party unless, these have been first offered
to the existing shareholders and the existing shareholders rejected his offer) need
to be modified.  Unless the articles are
so modified and any change to the articles of associations is prohibited
without the pledgee’s consent, the pledgee may face difficulties in disposing
of the shares pledged.

of association of the Company whose shares are being pledged
is advisable to be amended in a way that the company’s
directors will not have any discretion in approving a transfer of shares made
in the context of the pledge enforcement. 
Instead, they should be obliged to approve and ratify such transfer.

(vii)The pledge
is advisable to be over 100% of the issued share capital
or at least 75% to avoid the company being
controlled by a third party as well as to ensure that in case of enforcement the
pledgee/the buyer of the pledged shares will not be a minority

sure proper registrations
the Company’s books and records and with the Registrar (if applicable) are made.

(ix) Separate
and Independent Security
: the
pledge shall need to be clearly a standalone document capable of being enforced
by itself without any reference to any other security document.

(x) It is
advisable to be provided with an undated letter from the secretary of the
Company addressed to the Cyprus Registrar of Companies confirming that any
transfer of shares, removal or appointment of any officials of the Company is
in accordance with the statutory books and records of the Company, which as per
the requirement of the Cyprus Registrar of Companies, may be needed in case
there will be such changes in the structure of the Company.

(xi) Stamp
: a pledge over share in a
Cyprus Company is subject to stamp duty which is dependent on the value of the
transaction with a maximum of €20.000. 
Failure to pay stamp duty does not affect the validity of the document/s
but merely its admissibility as evidence before the Cyprus courts.

(xii)/,U> Governing
Law/Jurisdiction:  Use Cyprus law as the governing law of a pledge
over the shares of a Cyprus company and provide that Cyprus Courts will have
non-exclusive jurisdiction over any dispute arising under such a share pledge

(xiii) Event
of Default:
make sure to
include as an event of default any breach under the pledge agreement itself not
only under the underlying facility or loan agreement.

(xiv) Commercial
Clearly state that
the pledge provides commercial benefit to the pledgor and not only to its group
or affiliates etc. and make sure that such acknowledgement is reflected in the pledgor’s
resolutions approving the pledge.

(xv) In case
out of Court enforcement

cannot be achieved then as a necessity a Court action will need to be filed. Under
certain circumstances, on an application made by the pledgee, it may be
possible for an interim mandatory injunction to be issued ex parte (without
notice to the other side), forcing the pledgor to register the shares in the
name of the Pledgee.  The interim
mandatory injunction can be issued without delay i.e. the same day the
application is filed. A summary judgment is also possible in these cases allowing
the case to come to a full conclusion in less than six months.

(c)  The pledgor’s interests are safeguarded by a number of common law
and equitable principles that have been developed through the case law. Amongst
others the pledgee’s duties on a sale of the pledged shares are to:

  • Act in good faith (Downsview
    Nominees Ltd and another v First City Corporation Ltd and another [1992] UKPC
  • Take reasonable steps to obtain
    a proper price for the shares (Cuckmere Brick Company Ltd v Mutual Finance Ltd
    [1971] Ch 949).
  • Obtain the best price
    reasonably obtainable (Den Norske Bank ASA v Acemex Management Co Ltd [2003]
    EWCA Civ 1559).
  • Act with reasonable care and
    skill (Standard Chartered Bank Ltd v Walker [1982] 1 WLR 1410).
  • Act fairly towards the pledgor
    (Palk v Mortgage Services Funding plc [1993] Ch 330).
  • While there is no statutory
    obligation to obtain a valuation, a prudent pledgee would make a valuation in
    order to be able to show that it has discharged its duty to obtain a proper
  • If the pledgee is to sell the
    shares to an affiliate, the pledgee and the purchaser will need to show that
    the sale is made in good faith and reasonable precautions are taken to obtain
    the best price reasonably obtainable at the time of the sale (Tse Kwong Lam v
    Wong Chit Sen [1983] 1 WLR 1349).
  • While a secured party is free
    to consult his own interests on whether and when to exercise his power of sale
    (Raja v Austin Gray [2002] EWHC 1607) it was held that a secured party cannot
    act in a way that unfairly prejudices the pledgor (Palk v Mortgage Services
    Funding [1993] Ch 330).

 (d)  Appropriation

The issue of
whether the pledgee has acted in good faith may arise where it retains the
shares over which security has been granted, in discharge or reduction of the
secured debt (in essence, the Pledgee is exercising the power of sale in favour
of itself), (see Royal Bank of Scotland plc v Highland Financial Partners LP
and others [2010] EWHC 3119).

(e)  Sale Notice

It should also
be borne in mind that the pledgee before enforcing the pledge by selling the pledged
shares it must give reasonable notice to the pledgor (i.e. it must call on the
Pledgee to pay the secured obligations and only if he fails to do so within the
time specified the Pledgee will be entitle to sell). Our suggestion is to have
respective periods fixed in the pledge agreement allowing no grounds for
interpretation. Article 134 of the Contract Law Cap. 149 provides that “if the
pawnor makes default in payment of the debt, or performance, at the stipulated
time of the promise in respect of which the goods were pledges, the pawnee may
bring legal proceedings against the pawnor, upon the debt or promise, and
retain the goods pledged as a collateral security; or he may sell the thing
pledged, on giving the pawnor reasonable notice of the sale.

The pledgor is
also protected by the principle of “equity of redemption” which allows the pledgor
to discharge the secured obligations at any time prior to the sale of the
shares and seek to release the pledge.

G. Financial Collateral Arrangement Law, Law 43(7)/2004 (the “FCL”)

The scope of the FCL is
limited to financial collateral arrangements evidenced in writing in which the
financial collateral consists of cash or financial instruments and in which the
parties are certain categories of legal entities (such as supervised financial
institutions (including investment firms, insurance undertakings
and mutual funds), public authorities, central banks, central counterparty settlement
agents or clearing house.

Under the FCL the pledgee
is allowed 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 highlighted that appropriation in the cases where the FCL applies is only
allowed where this has been explicitly agreed upon by the parties in the relevant
share pledge agreement, and if the parties have agreed on the valuation method of
the pledged assets.

H. Release of

Registrar of Companies, on evidence being given to his satisfaction with
respect to any registered charge:

(a) that the debt for which the charge was given has been paid or
satisfied in whole or in part; or

(b) that part of the property or undertaking charged has been released
from the charge or has ceased to form part of the company's property or

enter on the register a memorandum of satisfaction in whole or in part, or of
the fact that part of the property or undertaking has been released from the
charge or has ceased to form part of the company's property or undertaking, as
the case may be. Such evidence may be provided by the creditor or the company
whose property was charged.

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