Security over shares in Cyprus

Companies incorporated in Cyprus are widely used in connection with structured 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).

It is quite often that we see security been taken in Cyprus by way of a pledge and charge over shares. The complexity, perfection and the extent of involvement of the company registered in Cyprus (“Cyprus Company”) will depend on the corporate structure of the group and which shares are being pledged as security.

The following may be involved:

(a) pledge and charge of shares in a Cyprus Company by a foreign company as pledgor; or (b) pledge and charge of shares in a Cyprus Company by another Cyprus Company as pledgor; or (c) pledge and charge of shares in a foreign company by a Cyprus Company as pledgor.

In cases (a) and (b) the agreement to be put into place should ordinarily be governed by Cyprus law for enforcement purposes. The perfection of the security will involve satisfaction of the requirements of section 138(2) of the Contract Law, Cap 149, including, inter alia, the following:

(i) delivery of share certificates to pledgee; (ii) delivery of notice of the pledge by the pledgee to the Cyprus Company; (iii) making of an entry of a memorandum of pledge in the register of members of the Cyprus Company; (iv) delivery by the secretary of the Cyprus Company of a certificate evidencing that the entry of the memorandum of pledge has been made.

It is common for the parties to engage Cyprus counsel to undertake the drafting of such agreements. Parties should also seek legal advice from counsel in the jurisdiction of the foreign company which acts as pledgor in the structure.

In situation© the agreement will ordinarily be governed by the law of the jurisdiction of the company in which the shares are being pledged. In that case the role of Cyprus counsel is usually limited to review of the agreement for identification of any Cyprus law issues.

Where the pledgor/chargor is a Cyprus Company it is common for a charge to be registered at the Cyprus Registrar of Companies (“Registrar”) in favour of the pledgee. The procedure for undertaking this involves the filing of Form 24E and a certified true copy of the agreement. The Registrar will then issue a certificate of registration of charge in favour of the pledgee. It is possible to have the certificate issued in the English language.

Notably it was not clear from the original wording of section 90 of the Company Law, Cap 113, that security taken over shares required registration as a charge for its perfection. Despite this prevailing practice in Cyprus has been to register charges in situations such as (b) and©.

Law N.99 (I)/2009 has brought about a recent amendment to these provisions. The amendment legislation has expressly excluded the following from the requirement to register a charge in Cyprus for perfection purposes (free translation):

(i) a pledge of shares of Cypriot companies and all the rights attached to the same; (ii) a financial collateral arrangement falling within the ambit of the Financial Collateral Arrangements Law, N. 43(I)/2004 as amended and enforced from time to time.

The amendment, so far as it refers to a pledge of shares, is ambiguous in its interpretation. The Registrar of Companies has not altered its practice and continues to accept applications for registration of charges on Cypriot Companies in relation to shares.