Pledges and Charges under Cyprus Companies and Contract Law

The Republic of Cyprus, a member of the European Union since 2004, has established itself as an international business hub thanks to its strategic geographical location and favourable corporate tax regime. The Cyprus Companies Law (CAP 113) and the Cyprus Contract Law (CAP 149) play a pivotal role in regulating commercial activities in the country, including the creation and enforcement of pledges and charges. This article provides a comprehensive analysis of pledges and charges under Cyprus Companies and Contract Law, focusing on key legislation, regulations, and case law.

Pledges and Charges: An Overview

A. Pledges

A pledge is a form of security interest created by transferring possession of a movable property to a creditor (pledgee) to secure the performance of an obligation, such as the payment of a debt. The pledgor, who owns the property, retains ownership but temporarily loses possession. The pledge can be created over tangible assets, such as vehicles, equipment, or stock, as well as intangible assets, such as shares or intellectual property rights.

B. Charges

A charge is a form of security interest created over immovable property, such as land or buildings, or over specific movable property, without the transfer of possession. There are two types of charges:

Fixed charges: These charges are created over specific assets, and the debtor is restricted from disposing of or dealing with those assets without the creditor’s consent.
Floating charges: These charges are created over a class of assets, which may change from time to time, allowing the debtor to deal with the assets in the ordinary course of business until an event of default occurs, causing the charge to crystallise into a fixed charge.

Legislation and Regulations

A. The Companies Law, Cap. 113

The Companies Law, Cap. 113, is the primary legislation governing the creation, registration, and enforcement of charges over assets of companies incorporated in Cyprus. Key provisions relating to charges include:

Section 90: This section provides for the registration of charges with the Registrar of Companies, within 42 days of the charge’s creation, to ensure enforceability against third parties.
Section 91: This section lists specific charges that must be registered, such as charges on land, book debts, calls made but not paid, and floating charges.
Section 93: This section stipulates the consequences of non-registration, rendering the charge void against the liquidator and other creditors.
Section 97: This section grants the court the power to order the rectification of the register of charges.

B. The Contract Law, Cap. 149

A pledge under the Contract Law, Cap. 149, is defined as a bailment or transfer of possession of personal property from the pledgor (the person giving the pledge) to the pledgee (the person receiving the pledge) as security for a debt or obligation. The pledgor retains ownership of the property, but the pledgee has the right to take possession and sell the property if the pledgor defaults on the debt or obligation. Key aspects relating to pledges include:

Creation of a pledge: A pledge is created by an agreement between the pledgor and the pledgee. This agreement can be written or oral, but it must involve the transfer of possession of the property from the pledgor to the pledgee.
Possession: The pledgee must have actual or constructive possession of the pledged property. Actual possession means that the pledgee physically holds the property, while constructive possession means that the pledgee has control over the property (for example, through a third party who holds the property on behalf of the pledgee).
Types of property that can be pledged: Pledges can be made over movable property, such as goods, chattels, or securities. Real property (land or buildings) cannot be pledged.
Rights of the pledgee: The pledgee has the right to retain possession of the pledged property until the debt or obligation is paid or otherwise satisfied. If the pledgor defaults on the debt or obligation, the pledgee has the right to sell the pledged property and apply the proceeds to satisfy the debt or obligation. Any surplus must be returned to the pledgor.
Rights and duties of the pledgor: The pledgor has the right to redeem the pledged property by paying the debt or fulfilling the obligation. The pledgor also has a duty to compensate the pledgee for any damage to the pledged property resulting from the pledgor’s negligence or breach of duty.
Termination of a pledge: A pledge terminates when the debt or obligation is satisfied, the pledged property is sold, or the parties agree to release the pledge.

C. The Immovable Property (Transfer and Mortgage) Law, 9/65

This law regulates the creation and registration of charges over immovable property. Key provisions include:

Section 21: This section requires that charges on immovable property be registered with the District Lands Office to be enforceable against third parties.
Section 30: This section governs the priority of charges, with priority determined by the registration date.

Case Law

A. Alpha Bank Cyprus Ltd v. Demetrios Papakonstantinou (2010) 1A.A.D 1376

This case highlights the importance of registering charges under the Companies Law, Cap. 113. The court held that an unregistered charge was void against the liquidator and other creditors, emphasising the need for timely registration to ensure enforceability.

B. Hadjihannas v. Kyprianou (2010) 1A.A.D 324

This case demonstrates the court’s approach to determining the validity of a pledge. The court considered whether the transfer of possession was sufficient to create a valid pledge, ultimately holding that the creditor must have actual or constructive possession to establish a valid security interest.

C. Bank of Cyprus Public Company Ltd v. Rotsides (2011) 1A.A.D 480

In this case, the court examined the issue of floating charges and their crystallisation. The court held that a floating charge crystallises into a fixed charge upon the occurrence of specific events, such as the appointment of a receiver or the commencement of winding-up proceedings. Additionally, the court noted that the charge must be registered to be enforceable against third parties.

Pledges over Shares and Intellectual Property

A. Pledges over Shares

Pledges over shares of a Cyprus company provide an effective means for securing obligations, such as loans or performance of contracts. The creation of a pledge over shares involves the following steps:

Execution of a share pledge agreement between the pledgor and the pledgee, outlining the terms and conditions of the pledge.
Delivery of share certificates, along with signed and undated instruments of transfer, to the pledgee or an appointed agent, establishing constructive possession.
Notifying the company of the pledge by providing a copy of the share pledge agreement to the company’s registered office, ensuring the company’s awareness of the security interest.
Registering the pledge with the Cyprus Securities and Exchange Commission (CySEC) if the shares are publicly traded.

B. Pledges over Intellectual Property

Securing obligations through pledges over intellectual property rights, such as trademarks, patents, or copyrights, has become increasingly common due to the growing importance of intangible assets in modern businesses. The process for creating a pledge over intellectual property in Cyprus includes:

Execution of an intellectual property pledge agreement between the pledgor and the pledgee, detailing the terms and conditions of the pledge.
Registration of the pledge with the appropriate registry, depending on the type of intellectual property:

a. Department of the Registrar of Companies and Official Receiver for trademarks and patents.
b. Ministry of Education, Culture, Sports, and Youth for copyrights.

Notifying any licensees of the intellectual property rights of the pledge, protecting the pledgee’s interest in the event of the pledgor’s insolvency or enforcement action.

Enforcement of Pledges and Charges

A. Enforcement of Pledges

Upon the occurrence of an event of default, a pledgee can enforce the pledge according to the terms of the pledge agreement and the provisions of the Contract Law, Cap. 149. Typical enforcement options include:

Sale of the pledged property: The Contract Law, Cap. 149, allows the pledgee to sell the pledged property after providing notice to the pledgor. The sale proceeds are then applied towards the satisfaction of the secured obligation.
Appropriation of the pledged property: The pledgee can become the owner of the pledged property by appropriating it, provided that the pledge agreement explicitly allows for such a remedy and that the appropriation is made in good faith and at a fair value.

B. Enforcement of Charges

The enforcement of charges depends on the type of charge and the terms of the underlying security document. Common methods of enforcement include:

Appointment of a receiver: The chargee can appoint a receiver to take control of the charged property, manage it, and apply the income generated towards the satisfaction of the secured obligation.
Foreclosure: The chargee can apply to the court for an order allowing them to take possession of the charged property and sell it to satisfy the secured obligation.
Power of sale: The chargee can exercise a contractual power of sale, if provided in the security document, to sell the charged property and apply the sale proceeds towards the satisfaction of the secured obligation.

Cross-border Considerations

As an international business hub, Cyprus frequently witnesses cross-border transactions involving pledges and charges. In such cases, parties must be mindful of potential conflicts of law and the recognition and enforcement of security interests under foreign law. The Rome I Regulation (593/2008) and the Rome II Regulation (864/2007) govern the applicable law for contractual and non-contractual obligations, respectively, in cross-border transactions involving EU member states.

Understanding the legal framework governing pledges and charges in cross-border transactions is essential to ensure enforceability and protection of the parties’ rights.

Pledges and charges under Cyprus Companies and Contract Law are essential tools for securing obligations and facilitating business transactions. Understanding the relevant legislation, regulations, and case law is critical for creating and enforcing valid security interests, protecting the rights of both creditors and debtors. Timely registration of charges and the proper creation of pledges, including the transfer of possession, are vital to ensure their enforceability against third parties. By adhering to these legal requirements and principles, businesses and individuals can minimise risk and safeguard their interests in the dynamic and competitive landscape of Cyprus’s international business hub.

Comprehensive Legal Services in Pledges and Charges

Chambers & Co is a leading law firm in Cyprus, specialising in providing expert legal services related to pledges and charges. Our experienced team of lawyers possesses in-depth knowledge of Cyprus Companies and Contract Law, as well as cross-border transactions involving security interests. Our services in this area include:

A. Advisory Services

Legal consultation: We provide legal advice on the optimal structuring of security interests to meet clients’ specific needs, ensuring compliance with the relevant legislation and regulations.
Risk assessment: Our team conducts a thorough risk assessment of proposed security arrangements, identifying potential pitfalls and offering solutions to minimise risk and protect clients’ interests.
Cross-border transactions: We offer expert advice on the recognition and enforcement of security interests in cross-border transactions, addressing conflicts of law and ensuring compliance with international regulations.

B. Drafting and Negotiation

Pledge and charge agreements: Our attorneys draft bespoke pledge and charge agreements tailored to clients’ requirements, ensuring the proper creation and enforceability of security interests.
Contract review and negotiation: We review and negotiate security documents on behalf of our clients, safeguarding their interests and ensuring that the terms and conditions of the pledges and charges are fair and legally sound.

C. Registration and Compliance

Registration services: We assist clients in registering pledges and charges with the appropriate authorities, ensuring that security interests are enforceable against third parties.
Compliance monitoring: Our team monitors clients’ ongoing compliance with the relevant legislation and regulations, helping them maintain the validity of their security interests and avoid potential legal issues.

D. Enforcement and Dispute Resolution

Enforcement assistance: We provide legal representation and support in enforcing pledges and charges, guiding clients through the available enforcement options and ensuring the most effective approach to recover secured obligations.
Dispute resolution: Our experienced litigators represent clients in disputes related to pledges and charges, utilising negotiation, mediation, or litigation to resolve conflicts and protect clients’ interests.

At Chambers & Co, we are committed to providing our clients with exceptional legal services in the realm of pledges and charges. Our proactive approach and dedication to client success have positioned us as a trusted partner for businesses and individuals navigating the complexities of security interests in Cyprus and beyond.