What is a Pledge
A pledge is a form of real security giving the creditor (“pledgee”) proprietary rights over named property belonging to the debtor (“pledgor”). The pledgee has the right to retain those proprietary rights over the pledged property until an obligation (for instance payment of a debt) is discharged and the property is then restored back to the pledgor or alternatively, if the obligation is not fulfilled, the property vests in the pledgee to be sold and/or handled according to the agreement made between the parties.
The possession of the pledged property may be actual or it may, more commonly, be constructive. Actual possession of the goods will bring concerns regarding risk and duty of care. Consideration will need to be made for storage and appropriate insurance for the goods. Constructive possession is a much more commonly executed practice.
Pledges of Shares
A pledge of shares in a company is a widely used tool for offering commercial security in Cyprus. Such pledges are governed by the Companies Law (Chapter 113) and the Contracts Law (Chapter 149). A pledge of shares will be created by execution of a share pledge agreement which will govern the terms of the pledge and, upon signature, will specify that the following documentation be provided concurrently to the pledgee:
- Certified copies of resolutions approving the pledge and transfer of shares;
- The original share certificates for the shares in question;
- Executed and undated instruments of transfer;
- Irrevocable proxy and power of attorney regarding the shares;
- Signed and undated letters of resignation and letters of authority from Directors and Secretary.
The issue of such documents to the pledgee by pledgor will permit the pledgee to transfer the shares into his name, should the obligations specified in the share pledge agreement fail to be discharged. The pledgee will also seek to include provision in the share pledge agreement to ensure that upon the request of the pledgee, in accordance with the provisions of the share pledge agreement, a memorandum of the pledge should be registered against the Register of Members. Pledged shares should be fully paid up and have no other charges registered against them. The articles of association must allow the pledge and all the necessary board resolutions properly made.
A share pledge must be registered with the Registrar of Companies in Cyprus within the timeframe specified by law. This will safeguard the existence of the pledge in the case of liquidation.
Termination of a Pledge
Pledges will terminate in the following situations:
- The underlying obligation is fulfilled and therefore security is released according to the agreement made between the parties;
- The pledgee attains the right to enforce his pledge under the agreement and does so in accordance with provisions of the agreement;
- A specified date for termination in the agreement is reached;
- The pledgee waives his rights, serving a written termination notice upon pledgor;
- It may also (rarely) further terminate where pledgee breaches a term of the agreement – for instance if pledged goods are used and adversely affected by the pledgee.
Upon termination all proprietary documents held will be returned to the pledgor and all registered charges and memorandums cancelled.
Michael Chambers and Co. LLC’s team of commercial lawyers is able to advise on all issues relating to pledge. We can advise on all aspects of share pledges, negotiation of pledge agreements and compliance with formalities. If you wish to speak to one of our commercial lawyers, please contact us.