Cyprus: Cyprus Chapter Of 'International Secured Transactions'

Last Updated: 11 July 2013
Article by Elias Neocleous and Kateřina Brandýsová

§ 11:1 Introduction—In general

Cyprus is a former British colony that gained independence in 1960. In 1974, Cyprus was invaded by Turkey and approximately one-third of the country remains under illegal Turkish occupation. All references to Cyprus or the Cyprus government in this chapter refer to the legitimate state and the government of that state.

When Cyprus became independent, the Constitution provided that the laws previously applicable should remain in force in the Republic, until repealed or amended by its laws. Consequently, much of the modern law of Cyprus relating to secured transactions and many other areas closely mirrors English law of the mid-20th century. In 2004, Cyprus became a member of the European Union (EU).

Thus, the primary sources of law in Cyprus are now the EU legislation and the laws passed by the Cyprus legislature, the House of Representatives, which are becoming fully harmonized with the acquis communautaire of the EU. Secondary sources include delegated legislation passed by the Council of Ministers and the Common Law system of case law, introduced in Cyprus by the British in 1935, under the doctrine of stare decisis. Cyprus also is a signatory to a large number of international conventions and treaties.

Cyprus is a member of the Commonwealth, the Council of Europe, the International Monetary Fund (IMF), the United Nations (UN), the World Bank, and the World Trade Organization (WTO) and is a founder member of the Organization for Security and Cooperation in Europe. In preparation for EU membership Cyprus made significant structural and economic reforms that transformed its economic landscape and created a modern, open and dynamic business environment. Key legislation related to secured transactions includes:

  1. The Transfer and Mortgage of Immovable Property Law1(the "Immovable Property Law"), governing the registration of mortgages over immovable property;
  2. The Companies Law, Companies Law (Cap. 113), governing the procedure for the registration of charges created over the assets or undertaking of a company;
  3. The Contract Law (Cap. 149), governing the procedure and requirements for the creation of liens and encumbrances generally and the pledge of share certificates, bills of exchange, promissory notes, and bonds; and
  4. The Financial Collateral Arrangements Law,2transposing Directive 2002/47/EC on financial collateral arrangements.

Cyprus also is a well-established shipping and ship-management center. Consequently, it has extensive shipping and admiralty legislation. Of special importance is the Merchant Shipping (Registration of Ships, Sales, and Mortgages) Law.3

There is also a legal framework in place4enabling credit institutions to issue covered bonds in line with Directive 2009/65/EC on Undertakings for Collective Investments in Transferable Securities.

§ 11:2 Introduction—Relevant agencies

The following are relevant to secured transactions in Cyprus:

  1. The Registrar of Companies (the "Registrar") — The public official charged with maintaining a register of all companies operating in Cyprus and the government department under his control;
  2. The Department of Land and Surveys (the "Land Registry") — The public body charged with maintaining a record of all registered immovable property rights;
  3. The Registrar of Trade Marks and Patents (the "Intellectual Property Registry") — The public body charged with maintaining a record of all registered intellectual property rights; and
  4. The Registrar of Cyprus Ships (the "Ship Registry") — The public body charged with maintaining a register of all vessels registered in Cyprus.

§ 11:3 Introduction—Financing practices

Financing practices in Cyprus are many and varied. They include:

  1. Term loan financing for non-operational outlays such as capital projects, real estate purchases, and purchase of other business assets or shares;
  2. Inventory and operational equipment acquisition financing via mechanisms, such as finance leases and hire purchase agreements;
  3. Inventory and receivables revolving loan finance to provide working capital, typically via bank overdraft or invoice discounting facilities;
  4. Recourse and non-recourse factoring of debts to provide working capital;
  5. Credit secured via transfer of title to an asset, e.g., sale and leaseback agreements;1and
  6. Securitization of debts.2

§ 11:4 Objectives of secured transactions regime

The overall aim of the secured transactions regime in Cyprus and its supporting objectives are closely in line with those specified in the United Nations International Trade Law Commission (UNICTRAL) Legislative Guidelines (the "Guidelines").

Successive Cyprus governments have agreed that a vibrant successful economy provides the best opportunity for improving the lives of its citizens and the security of the country. They also have recognized that an important factor in attaining economic success is the availability of finance to fund investment and growth and, that the ability to offer competitively priced secured lending in a flexible manner is an essential tool in attracting such finance.1

In principle, any asset can be charged or otherwise encumbered in Cyprus. This includes future and fungible assets. The security most commonly granted over immovable property is the mortgage. The types of security used over movables are normally the common law lien, the pledge, the fixed charge, and the floating charge. Receivables also may be assigned by way of security. It also is possible for more than one party to be given security on the same asset.2

Cyprus has transposed Directive 2000/12/EC relating to the taking up and pursuit of the business of credit institutions, into domestic law. In recent years, a profound transformation has occurred in the financial sector. A full range of banking and lending services is now available to businesses and this has been reflected in a growth in the availability of consumer credit.3

Security may be used to cover a wide range of transactions although there are some specific exclusions. Section 53 of the Companies Law prohibits companies from giving, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, and any financial assistance for the purpose of or in connection with the purchase of their own shares or shares in their holding company. Importantly, Law Number 99(I) of 2009 amended this section to introduce "whitewash" provisions under which financial assistance by a private company for acquisition of its own shares or of the shares of its holding company is no longer unlawful in cases where:

  1. The private company is not a subsidiary of any public company; and
  2. The relevant transaction is approved in a general meeting of the company by a resolution passed by holders of more than 90 per cent of all the issued shares of the company.

The general prohibition of the provision of financial assistance by a public company for acquisition of its own shares still exists. Furthermore, the whitewash provisions do not affect the obligation to comply with any other legal obligations and the constitutional documents of the company.

The Companies Law also stipulates a number of circumstances in which security given by a company would be invalid in the event of the subsequent insolvency of the company giving it. In general, however, there are clear and simple procedures to be followed in order to effect a valid security arrangement.4There also is a large degree of flexibility allowed in the drawing up of a security agreement and the choice of law governing it.5However, the parties must have regard to the Contract Law and, where an individual is concerned, consumer credit and protection legislation.

The secured transaction regime also is transparent.6Companies must maintain their own internal registers of charges and pledges and must also record them in the public registers. A company creating a charge over any of its property or altering an existing charge is required to send particulars of the charge accompanied by the document creating or evidencing the charge to the Registrar of Companies within 21 days after creation or alteration of the charge.7

If a company acquires property subject to a charge, it must send the same particulars together with a certified copy of the charge within 21 days of acquiring the property.8Section 90 requires the charges to be properly stamped to be accepted for registration. Any other person interested in the charge also can submit the particulars to the Registrar of Companies for registration and recover the cost from the company.9

Mortgages over vessels registered in Cyprus also must be registered with the Registrar of Cyprus Ships or at a Cyprus consulate overseas. To have legal effect, mortgages, charges, and other rights over immovable property in Cyprus also must be registered with the Department of Lands and Surveys under the Immovable Property (Transfer and Mortgage) Law.10However, registration is not compulsory.

The intention in securitization of lending is to facilitate business activity. Continuation of business is unlikely to be interrupted unless it becomes necessary for a party to enforce its security.11

In the event of the insolvency of a company there are clear and predictable priority rules set out in the Companies Law. The Bankruptcy Law (Cap. 5) details the situation in respect of personal insolvency.12

It is generally possible for the relevant security agreement to be enforced judicially and a judgment for the sale of the secured assets to be obtained. It also is generally possible to enforce a security governed by another jurisdiction. Importantly, however, most security agreements may be enforced extra-judicially, which usually provides the advantage of a speedier resolution.13

For example, in the case of a floating charge over all the assets of a company, a receiver and manager may be appointed over the whole or any part of the assets and may take possession of the company's business and property, carry on its business, and sell any of its assets.

Cyprus law does not draw a distinction between foreign and domestic secured creditors.14If correct procedures have been followed, a claim will be regarded as valid. The concept of non-discrimination is enshrined in the Constitution of Cyprus and is a crucial factor in the ability of the country to attract relatively high levels of foreign investment. Additionally, mechanisms exist for the recognition and enforcement of a foreign judgment or arbitration award via:

  1. EU Regulations 44/2001 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters and 805/2004 creating a European Enforcement Order for uncontested claims;
  2. Common Law;
  3. Statute; and
  4. Bilateral treaties and multilateral conventions.

Regulations 44/2001 and 805/2004 apply to all judgments given in civil and commercial matters by the courts of EU member states except Denmark. However, neither Regulation extends to revenue, customs or administrative matters. The idea behind the Regulations was to achieve the free circulation of judgments within the member states by means of a legal instrument that is binding and directly applicable in all member states. The Regulations aim to unify the rules of conflict of jurisdiction in civil and commercial matters and to simplify the recognition and enforcement procedures for judgments in member states.

Common law rules normally apply to the recognition of judgments in civil and commercial matters that originate in jurisdictions outside the EU.

As a contracting state to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Cyprus is bound to enforce arbitration awards made in foreign states which are parties to the Convention.

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Footnotes

[Section 11:1]

1 Law Number 9 of 1965.

2 Law Number 43(I) of 2004.

3 Law Number 45 of 1963, as amended by Laws Number 32 of 1965, Number 82 of 1968, Number 62 of 1973, Number 102 of 1973, Number 42 of 1979, Number 25 of 1980, Number 14 of 1982, Number 57 of 1986, Number 64 of 1987, Number 28(I) of 1995, Number 37(I) of 1996, Number 138(I) of 2003, Number 169(I) of 2004, and Number 108(I) of 2005.

4 The Covered Securities Law, Number 130(I) of 2010.

[Section 11:3]

1 This may be undertaken for a variety of reasons including freeing up capital to invest in new projects or to provide working capital for a business.

2 For example, in 2010 the Bank of Cyprus securitized part of its mortgage book to finance a number of specific capital projects.

[Section 11:4]

1 UNCITRAL Legislative Guide on Secured Transactions, Key Objectives, (a).

2 UNCITRAL Legislative Guide on Secured Transactions, Key Objectives, (b).

3 UNCITRAL Legislative Guide on Secured Transactions, Key Objectives, (d).

4 UNCITRAL Legislative Guide on Secured Transactions, Key Objectives, (c).

5 UNCITRAL Legislative Guide on Secured Transactions, Key Objectives, (i).

6 UNCITRAL Legislative Guide on Secured Transactions, Key Objectives, (f).

7 Companies Law, section 91.

8 Companies Law, section 92.

9 Companies Law, section 91. 10Law Number 9 of 1965.

11 UNCITRAL Legislative Guide on Secured Transactions, Key Objectives, 2e).

12 UNCITRAL Legislative Guide on Secured Transactions, Key Objectives, (g).

13 UNCITRAL Legislative Guide on Secured Transactions, Key Objectives, (h).

14 UNCITRAL Legislative Guide on Secured Transactions, Key Objectives, (k).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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