1 Introduction
1.1 A pledge is the delivery of goods as security for payment of a debt or performance of a promise in accordance with section 130 of the Cyprus Contract Law, Cap 149 (the "Law"). Therefore, a pledge is by definition a possessory security interest and thus involves the delivery of possession, actual or constructive. The pledge is the most common form of security in relation to shares in a Cyprus private company which involves the physical delivery of the share certificates in relation to the pledged shares. The pledgee retains possession of the pledged property until the obligations secured by the share pledge are fulfilled according to section 131 of the Law.
1.2 The pledge over shares in a Cyprus company is governed by the Law and needs to comply with the requirements of the Law in order to be valid and enforceable.
2 Conditions for the pledge over shares in a Cyprus company to be valid and enforceable
2.1 Other than the delivery of the share certificates representing the relevant pledged shares as security for payment of a debt or performance of obligations, a pledge over the shares is not valid and enforceable in accordance with section 138 (1) of the Law, unless the share pledge agreement:
2.1.1 is expressed in writing;
2.1.2 is signed at the end by the pledgor; and
2.1.3 is made in the presence of at least two witnesses who themselves are competent to contract and subscribed by them with their names as witnesses.
2.2 In addition to the requirements of the preceding subparagraph, a pledge of share certificates is not valid and enforceable unless the requirements of section 138(2) of the Law, set out below, have been satisfied:
2.2.1 notice of such pledge, together with a certified copy of the share pledge agreement is given by the pledgee to the Cyprus company;
2.2.2 the Cyprus company shall have made a memorandum of such pledge in its register of members against the shares pledged in respect of which the notice shall have been given; and
2.2.3 the Company shall have delivered to the pledgee a certificate that a memorandum of such pledge has been made in the register as aforesaid.
3 Capacity
3.1 Aside from the requirement of the Law with respect to the validity of the pledge, the parties should ensure that the provisions of the relevant constitutional documents are followed for the creation of the share pledge and also for the entry and execution of the share pledge agreement by the parties.
4 Registration
4.1 Pledges created over shares in the share capital of a Cyprus company are not registrable in Cyprus with the Cypriot Registrar of Companies.
5 Pledge Enforcement
5.1 It is common practice for the pledgor to provide ancillary documents to the pledgee pursuant to the share pledge agreement which can be used and put into effect if the debtor defaults on the debt and/or the obligations secured by the share pledge are not fulfilled pursuant to the provisions of the share pledge agreement.
5.2 Usually, the pledge deliverables which are provided to the pledgee (other than the original share certificates representing the pledged shares) are the following:
5.2.1 undated blank instruments of transfer duly executed by the pledgor;
5.2.2 irrevocable proxy and power of attorney from the pledgor;
5.2.3 undated, signed letters of director and secretary resignations;
5.2.4 letters of authority and undertaking by the directors and secretary not to accept or authorise any act which are contrary to the covenants contained in the share pledge agreement;
5.2.5 a resolution of the directors of the Cyprus company in which the shares are being pledged acknowledging the share pledge agreement and approving the transfer of the pledged shares to the pledgee;
5.2.6 if applicable, waiver of pre-emption rights signed by the other shareholders of the Cyprus company in respect to the transfer of the pledged shares to the pledgee;
5.2.7 an undated confirmation letter by the secretary of the Cyprus company, addressed to the Cypriot Registrar of Companies, confirming that the returns filed with the Cypriot registrar of companies are in compliance with its records and registers; and
5.2.8 an undated resolution of the shareholders of the Cyprus company approving any required amendments to the articles of association of the Cyprus company to remove any possible restrictions on enforcement.
5.3 The advantage of the above mechanism is that, upon the occurrence of an event of default in accordance with the provisions of the share pledge agreement, the share pledge can be enforced out of court without the need to obtain a court order and the pledgee can take ownership of the pledged shares.
Originally published 12 April 2022
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.
