Further, this memo will principally look at the following types of security interest:

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2 Introduction The purpose of this memo is to describe the legal issues under Cyprus Law in connection with the taking and enforcement of security. In recent times, the focus of attention with respect to security and secured transactions has been on the enforcement of security interests taken by banks and credit institutions as part of simple or complex financing transactions. However, a proper understanding of the legal issues on enforcement requires a thorough understanding of the issues associated with taking security. The Cyprus law relating to the taking and enforcing of security is both statute and common law based. There is a dearth of Cyprus case law on the legal issues relating to the matters covered by this memo, so English case law which is either binding (pre-1960) or of persuasive authority (post- 1960) will be referenced throughout. Further, this memo will principally look at the following types of security interest: i. mortgage; ii. charge (fixed and floating); iii. pledge; and iv. assignment, as these are the principle types of security encountered in practice when advising on financing structures. This memo will also briefly consider certain quasi-security interests and transactions that are like security in that they achieve the same economic or security like consequences. Security Interests under Cyprus Law Although this memo identifies the types of security interest to be considered, it is necessary, albeit briefly, to examine the essential characteristics of a security interest. There is no statutory definition of security interest and most judicial pronouncements can be considered as applying to the particular type of security at issue, although, there have been attempts to give a more all-encompassing definition. 1 However, none of these have proven to be conclusive or exhaustive. Security can best be described as having the following characteristics: i. it arises from a transaction intended as security; ii. it is a right in rem; 1 Re Paramount Airways Ltd. [1990] BCC 130 where it was suggested that security is created where a person ( the creditors ). obtains rights exercisable against some property in which the debtor has an interest in order to enforce the discharge of the debtor s obligation to the creditors. Memo on Taking and Enforcing Security in Cyprus 1

3 iii. iv. it is created by grant or declaration not by reservation; it is fixed or specific, it implies a restriction on the debtor s dominion over the asset charged. These characteristics will serve to distinguish security from quasi-security or transactions having a similar economic effect as security. The forms of quasi-security or transactions similar to security are: i. Transfer of title In such type transactions, the absolute title to the asset is transferred to the creditor as security for the performance of the obligations of the debtor. Under this form the creditor becomes the absolute owner of the asset without any obligation to account to the debtor or on the debtors insolvency in respect of those assets. There may however be an obligation to re-transfer the assets or like assets consequent upon the performance by the debtor of his obligations 2. ii. iii. Trust Under a trust arrangement, property/assets can be held in trust for the benefit of the creditor pending the performance by the debtor of its obligations. This has the effect of taking the property/assets out of the estate of the debtor in the event of its insolvency and the creditor can claim its beneficial title to the property/assets. Retention of the title (Romalpa) clauses A retention of title clause which can take many forms in a sale contract pursuant to which a seller/creditor retains title to an asset until payment in full by the buyer/debtor. The possession of the asset (as with a transfer of absolute title), is not held or retained by the creditor. These clauses 3 do not amount to security as title never passes to the debtor until payment and security does not arise by retention. The debtor has no proprietary interest in the asset so as to enable him to grant or create a security interest in favour of the creditor. iv. Flawed Asset 4 Simply stated, a flawed asset is an arrangement between a bank and a customer pursuant to which a deposit held with a bank will not be repaid until a certain condition occurs. Unless and until the condition occurs, the depositor has no claim on the deposit and the bank has no liability to pay. Accordingly, the asset is flawed. Although the economic result is the same as set-off, the legal nature is distinguishable from set-off since if the event has not happened, there is no liability (of the bank) against which the depositor can set-off his obligation. Flawed asset structures have been held to be valid and enforceable. 5 2 For e.g. under the ISDA Credit Support Annex (English Law) which does not create a security interest in the assets/property delivered thereunder. 3 For e.g. current account form covering all indebtedness of the debtor to the creditor; proceeds or tracing form which allows sale in the ordinary course and transforms the creditors claim to a claim in the proceeds of sale. 4 The next two types of quasi-security are considered separately although they have the same economic effect. 5 Re Bank of Credit and Commerce International (No. 8) [1998] AC 214 Memo on Taking and Enforcing Security in Cyprus 2

4 v. Set-off At the risk of over simplification, set-off is where amounts are set-off against each other to arrive at a single amount payable arising out of a series of mutual dealings between two parties. Set off can arise by law, by contract or in equity. Set-off does not grant or create a security interest as neither party has a right in any asset, however, it operates so as to achieve a similar result. Set-off needs also to be considered in pre and post-insolvency circumstances. In pre-insolvency circumstances, it is a matter of giving effect to the right of set-off as it arose whether by law, equity or contract. In post-insolvency circumstances, the position is slightly different as set-off is mandatory. Section 35 of the Bankruptcy Law, cap 5 6 provides that: where there have been mutual credits, mutual debts or other mutual dealings between a debtor. and any other person proving or claiming to prove a debt under a receiving order, an account shall be taken of what is due from the one party to the other in respect of such mutual dealings and the sum due from the one party shall be set off against any sum due from the other party. This provision cannot be contracted out of. vi. vii. Netting/Close Out Netting This has the same economic consequences as set-off, however, it essentially involves, upon a default event, the closing out of open positions on executory contracts and then setting-off gains and losses on the contracts to arrive at a single amount payable. Negative Pledge A negative pledge is a contractual undertaking not to grant any encumbrances over the debtors assets in favour of a third party or to give any security that would rank pari passu with the security granted to the creditor. No rights are granted in respect of the assets so the negative pledge does not amount to a security interest. Types of Security Recognised Under Cyprus Law This memo will not consider all security interests that are recognised in Cyprus law but will consider those most commonly used in practice which are: i. mortgages; ii. charges; iii. pledges; and iv. assignments. 6 This also applies to Companies see s.299 of the Companies Law, cap.113 Memo on Taking and Enforcing Security in Cyprus 3

5 i. Mortgages Mortgages are distinct from charges in that a mortgage grants to the mortgagee a proprietary right in the asset/property the subject of the charge subject to the equity of redemption of the mortgagor. A mortgage can be (and usually is) taken over immovable property but can also be taken over movable property or chattels (for e.g. aircraft or ships). A mortgage gives the mortgagee the power of enforcement by way of sale, repossession, foreclosure or the appointment of a receiver or receiver and manager (these rights on enforcement will be considered later). 7 Mortgages fall into two classifications either (i) legal mortgages or (ii) equitable mortgages. Simply stated a legal mortgage gives a legal right in the asset/property whereas an equitable mortgage grants merely equitable rights only. The distinction has greatest significance when considered in the context of priorities which will be considered later in this memo. A charge on the other hand involves no conveyance of any proprietary right but the grant of a contingent right in the asset/property charged, i.e. the right to look to the asset/property in the event of default to satisfy the outstanding obligation. The chargor, as in the case of the mortgage, has an equity of redemption. In other words the chargee has the right to look to the asset/property only for the purpose of discharging the obligation and for no other purpose. ii. Charges Charges can be of a fixed or floating nature and take effect in equity only. 8 A charge does not result in the grant of any proprietary right or interest in the asset/property charged but gives the chargee the right to look to the asset/property and its proceeds for the purpose of recovering the obligations secured. In the case of a charge, the asset/property is appropriated for the discharge of the obligation but does not result in the grant of an absolute or special property in the asset/property charged, 9 although it has been suggested that a chargee under a fixed charge does have a proprietary right as the asset/property, the subject of the charge has been permanently appropriated to the payment of the sum charged, in such a way as to give the chargee a proprietary interest in the asset/property. 10 A fixed charge is given over an identified or identifiable asset/property and is limited to that. The principle remedies of a holder of a fixed charge will be the power of sale or the 7 It should be noted that Cyprus does not have any equivalent of the English Law of Property Act 1925 so therefore the mortgage instrument will have to expressly provide for all these powers. 8 Which is why one can have a charge over future property whereas a mortgage cannot be granted over future property. 9 See National Provincial and Union Bank of England v Charnley [1924] K.B See Re BCCI (No.8) [1998] A.C. 214 and in Re Spectrum Plus Ltd. [2005] UKHL 41. Memo on Taking and Enforcing Security in Cyprus 4

6 Fixed Charges appointment of a receiver. The instrument creating the fixed charge will usually contain such powers in favour of the chargee. As mentioned a charge involves the appropriation of an asset/property as security for the discharge of an obligation. In the case of a fixed charge this involves the transfer of dominion over that asset/property to the extent that the debtor will not be allowed to deal with that asset/property in the ordinary course of business. Floating Charges A floating charge is created by contract pursuant to which the debtor grants to the creditor a present but unattached security over a pool or class of assets, present or future of a nature that will or may change from time to time. A floating charge hovers over such assets until such time as it crystallises and attaches to the assets. The instrument creating the floating charge will usually specify the circumstances when the floating charge will crystallise and frequently sets out those circumstances where the floating charge will crystallise automatically. The characteristics of a floating charge are those identified in Re Yorkshire Woolcombers Association Ltd, 11 viz. (a) charge is a on a class of assets present and future; (b) the class is one which in the ordinary course of the business of the debtor is changing from time to time; and (c) the debtor, until some future step is taken by or on behalf of those interested in the charge, is permitted to carry on business in the ordinary course as far as concerns those class of assets. The essence then of a floating charge is that it is a present but unattached security over a pool or fund of assets that can continue to be utilised in the ordinary course of business. One of the key elements in the distinction between a fixed and a floating is the level of control that the debtor has over the use of the asset/property that has been charged. 12 Obviously, the greater the level of control or dominion that the creditor exercises, then the more likely that the charge will be a fixed charge. In order to determine if the charge is fixed or floating, the restrictions contained in the charge instrument will have to be considered, however, it will also be necessary to see how any dealing or control restrictions are implemented in practice. Crystallisation Once the crystallisation events as provided in the charge instrument occur, then the floating charge crystallises and becomes fixed, i.e. it attaches to the asset/property then in the fund or 11 [1903]2Ch.284, per Nomer L.J at National Westminster Bank plc. V Spectrum Plus Limited and others [2005] UKHL41 Memo on Taking and Enforcing Security in Cyprus 5

7 pool or as may subsequently be acquired. 13 It should be noted that crystallisation is not retrospective, the floating charge only becomes fixed from the date of crystallisation and not from the date of the instrument of charge. The principal effect of crystallisation is that the charge ceases to be floating, it becomes specific or fixed and the debtors ability to deal with the assets in the ordinary course ceases. 14 In the event that the instrument of charge does not provide for crystallisation events, it is accepted that a floating charge crystallises on: (a) appointment of a receiver; (b) commencement of liquidation; and (c) cessation of trading as an going concern. As a matter of practice however, such events are normally expressly provided for in the pledge together with other events such as: (a) insolvency; (b) presentment of a winding up petition or passing of a resolution to appoint a liquidator; (c) crystallisation of any prior or subsequent floating charge; (d) granting of any security to another creditor; (e) levying of distress or execution against any of the assets of the debtor; (f) default in paying any financial indebtedness; (g) incurring further borrowings beyond a certain figure. This is by no means exhaustive and in the circumstances of each financing structure there may be more events to be included. One further point to note regarding crystallisation is that the instrument of charge may provide for one or both of (i) crystallisation by notice or (ii) automatic crystallisation. All of the events listed above can be used to trigger either form of crystallisation. Further, crystallisation by notice can allow the creditor to crystallise the floating charge at will by serving a notice on the debtor. Pledges A pledge is a possessory security and grants to the pledgee the right to possession of the pledged property but not any right of ownership. The creditor/pledgee will retain possession of the pledged property until the underlying obligation has been performed. It is said that a 13 This depends on the wording of the instrument of charge and whether there is an after-acquired property clause. 14 The debtor does not cease to carry on business, it just cannot dispose of the asset/property charged without consent of the creditor. Memo on Taking and Enforcing Security in Cyprus 6

8 pledgee has a special property in the pledged property, however, this does not mean that the pledgee has any ownership or proprietary right in the pledged property. In order for a pledge to be created possession, actual or constructive, must be delivered to the pledgee. Thus, pledges can only be given over assets/property that are capable of being reduced to possession, such as Chattels or documentary intangibles, (i.e. documents embodying title to goods, money or securities such that the right to these assets is vested in the holder of the document of title and can be transferred by delivery with any necessary endorsement). Whilst there is some doubt under English law as to whether or not share certificates can be the subject matter of a pledge, the position under the Cyprus Contract Law, cap 149 is clear. The Contract Law clearly permits the grant of a pledge over share certificates and share warrants both bearer and registered. 15 The Contract Law further prescribes both formalities and perfection requirements. Section 138(1) provides that for a pledge of share certificates to be valid and enforceable it must be: (a) made in writing; (b) signed by the Pledgor; and (c) made in the presence of two witnesses. In addition, section 138(2) sets down perfection steps that must be followed in order for the pledge to be valid and enforceable. These steps are: (a) giving notice to the company whose shares are pledged together with a certified copy of the pledge; (b) memorandum of pledge being entered in the register of members; and (c) certificate of entry of the memorandum in the register of members is issued to the pledgee. Assignment Assignments as a matter of Cyprus law are a creature of equity 16 and can be either absolute assignments involving a transfer of title or ownership of the asset/property or assignment by way of security. This memo will only give consideration to assignments by way of security. Assignments are not the most common form of security interest encountered in practice, those being the mortgage, charge (fixed and/or floating) and the pledge. Further, assignment 15 The language used in section 138 of Contract Law cap.149 is to share certificates or share warrants transferable otherwise than by delivery. 16 Unlike English Law, Cyprus law does not have legal assignments and equitable assignments. Again, this is due to Cyprus not having an equivalent of the English law of Property Act, Memo on Taking and Enforcing Security in Cyprus 7

9 by way of security is not appropriate for all types of asset/property and fact is most commonly used for: I. benefits and rights under contracts; II. insurance proceeds; and III. debts of receivables. Again, as a matter of finance practice it would be more common to grant an all-inclusive debenture granting fixed and floating charges over all assets and undertaking of a debtor which would also include such types of asset/property. Assignments by way of security tend to be found primarily in asset finance such as ship or aircraft finance involving the assignment of insurances and earnings. An assignment by way of security involves a transfer of rights and benefits to the creditor with subsequent retransfer of those rights and benefits once the underlying obligation has been repaid. The assignment by way of security does not involve the transfer of ownership or possession of the assigned property but grants a proprietary right to the creditor in the rights and benefits assigned. Under Cyprus law, as the only form of assignment recognised is an equitable assignment, the assignment can be granted over present and future rights and benefits. Subject to what is discussed below regarding perfection, an assignment by way of security will be registered in accordance with section 90 of the Companies Law, cap.113 in order to be fully perfected and then enforceable against any liquidator and any other creditor. There is however an additional perfection requirement of giving notice in order to ensure property. This is the so-called rule in Dearle v. Hall 17 which, simply stated, provides that where you have two or more competing equitable interests in an asset, the first to notify prevails. 18 In practice, an assignment by way of security will include a form of notice and acknowledgement thereof to be provided. Registration and Perfection This part of the MEMO considers what registration or other perfection steps need to be taken to ensure that a security interest is valid and enforceable. In the context of corporate finance the primary perfection step is registration, be that registration with the Registrar of Companies under section 90 of the Companies Law, cap.113 and/or registration with some specialist Registry, such as District Lands Office in respect of mortgages on immovable 17 [1828] 3 Russ The notice is not required for the equitable arrangement itself to be valid, however, it is necessary in order to establish priority see Gorringe v Irwell India Rubber and Gutta Percha Works [1886] 34 chd 128. Memo on Taking and Enforcing Security in Cyprus 8

10 property 19 or the Department of Merchant Shipping in respect of mortgages over Cyprus ships. 20 Registration Under Section 90 Section 90 of the Companies provides that a charge, of the nature described in section 90(2), in order not to be void against any liquidator or creditor, particulars of the charge must be registered with the Registrar of Companies with 21 days of the date of the charge, if signed within Cyprus or, if signed outside Cyprus, within 21 days of the date the charge came into Cyprus in the ordinary course of post if dispatched diligently. 21 The list of charges that are registrable under section 90 include: (a) charge for the purpose of securing any issue of debentures; (b) charge on uncalled share capital; (c) charge on book debts; (d) floating charge; (e) charge on a ship or any share in a ship; (f) charge on a movable property created or evidenced by an instrument, where the company retains possession of such property 22 Failure to register the security interest will not invalidate the security which remains valid inter partes however, it will not be enforceable as against another creditor or a liquidator. Financial Collateral Arrangements The perfection requirements to be followed in order to have enforceable security have been greatly changed by the provisions of the EU Directive on Financial Collateral Arrangements. 23 The financial collateral directive (the FCD ) makes provision for the giving of financial assets by way of both security interest and title transfer structures with no formality as to perfection requirements. The creation validity, perfection, enforceability of a financial collateral arrangement or the provision of financial collateral is not dependent on any formal act Under Immovable Property (Transfer and Mortgages Law, Law 9/1965 (as amended) 20 The Merchant Shipping (Registration of Ships, Sales and Mortgages) Law, Law 45/63 (as amended) 21 As a rule of thumb this is 42 days. It should be noted that the prescribed time limit can be extended by court order, which as a matter of practice is readily granted. 22 Notwithstanding the provisions of section 90 the practice developed is registering every security even if not covered by section Directive 2002/47/EC as amended by Directive 2009/44/EC. 24 Article 3.1 of the FCD and section 5 of the Financial Collateral Arrangements Law, Law 43(7)/2004 (as amended) (the FCAL ) Memo on Taking and Enforcing Security in Cyprus 9

11 The FCD only applies to financial collateral arrangements which are defined as a title transfer financial collateral arrangement or a security financial collateral arrangement. For the purposes of this memo we are concerned only with security financial collateral arrangements, which are defined as an arrangement under which a collateral provider provides financial collateral by way of security in favour of or to a collateral taker and where the full or qualified ownership of or full entitlement to, the financial collateral remains with the collateral provider when the security is established. The Financial Collateral covered by the FCD and the FCAL is cash, financial instruments or credit claims. Looking at each in turn: (a) cash cash is defined as money credited to an account in any currency or similar claims for the repayment of money such as money market deposits. 25 Thus, cash clearly includes bank deposits, money market deposits and any other claims for repayment of money. Whilst cash might appear clear and without doubt, unfortunately, this is far from being the case and the extent of the definition of cash is very blurred. It is certainly the case that cash does not include a book debt but it is not clear if it includes sums received between the parties in connection with the operation of a financial collateral arrangement or a close-out netting provision. 26 (b) financial instruments The FCD and the FCAL define financial instruments as (a) shares or share equivalents in companies, (b) bonds and other forms of debt instruments giving rise to or acknowledging indebtedness if these are tradable on the capital market, and (c) any other securities which are normally dealt in and which give the right to acquire any such shares, bonds or other securities by subscription, purchase or exchange or which give rise to a cash settlement (excluding instruments of payment), including units in collective investment undertakings, money market instruments and claims relating to or rights in respect of any of the foregoing. 27 This is a very wide and all-encompassing definition. As to shares, it is clear that it covers the shares of private and public companies, there is no need for them to be listed on a capital market See Article 2.1(d) of FCD and section 2(1) of FCAL where exact same definition is adopted. Banknotes are expressly excluded. 26 This has been clarified in the UK by a provision in the Financial Collateral Arrangements (No.2) Regulations Articles 2.1(e) of the FCD and section 2(1) of FCAL. Again, the definitions are identical. 28 See Cukrova Finance International v Alfa Telecom Turkey [2009] 3 ALL ER 849. Memo on Taking and Enforcing Security in Cyprus 10

12 Also, any income (cash or otherwise) arising out of or derived from securities is covered. Bonds and other forms of debt instrument must be traded on the capital market. (c) credit claims 29 Credit claims are defined as pecuniary claims arising out of an agreement whereby a credit institution 30 grants credit in the form of a loan. This is again a very wide definition but should be useful in facilitating banks to raise capital by way of securitisations or other alternative forms of fund raising. Operation of FCD/FCAL In order to benefit from the provisions of the FCD/the FCAL, a number of qualifying criteria must be met: i. The collateral taker and the collateral provider must each belong to one of the categories listed in Article 1.2 of the FCD (and section 4(1) of the FCAL), which are (a) public authority, (b) a central bank, (c) a regulated financial institution, (d) central counterparty, settlement agent, or clearing house (including similar institutions acting in the futures, options and derivatives market) and a trustee or representative being other than a natural person acting on behalf of bondholders or holders of securitised debt or (e) a person other than a natural person (including unincorporated firms and partnerships) provided that the other party is one of the institutions mentioned in (a) to (d). In practice, the typical transaction will be a financing transaction between a financial or credit institution and a limited company which will accordingly be able to benefit from the FCD/FCAL. ii. The FCD/FCAL applies if the financial collateral arrangements can be evidenced in writing or in a legally equivalent manner 31. In practice this will not present any problems. iii. Neither the FCD nor the FCAL provides any definition of security 32, however the FCD and the FCAL does speak of the collateral provider providing financial collateral by way of security in favour of or to a collateral taker and where the full 29 Credit claims are added by way of an amendment to the FCD pursuant to Directive 2009/44/EC which amendments more transposed into Cyprus Law by Financial Collateral Arrangements (Amendment) Law, Law 100(I)/ As defined in Article 4.1 of Directive 2006/48/EC. 31 This includes by any electronic means or other durable medium. Memo on Taking and Enforcing Security in Cyprus 11

13 ownership of the collateral remains with the collateral provider when the security right is established Article 2.2 of the FCD clarifies that the provision of collateral means the financial collateral being delivered, transferred, held, registered or otherwise designated so as to be in the possession or under the control of the collateral taker or a person acting on its behalf. This distinguishes a security arrangement from a title transfer arrangement, in a security arrangement there is no transfer of title to the asset delivered as collateral. It would appear that the provide requirement is satisfied where the collateral taker can show that it has the necessary control over the collateral provided to prevent the asset from being used or dissipated in the ordinary course of business and the legal right to the asset is removed from the collateral provider 33. In the interest of control and possession, the FCD and the FCAL provide that any right of substitution, right to withdraw excess financial collateral in favour of the collateral provider or in the case of credit claims, right to collect the proceeds thereof until further notice, shall not prejudice the financial collateral having been provided to the collateral taker. Disapplication of Formalities The effect of the application of the FCD and FCAL 34 is to remove any perfection or other formality requirements so as to ensure that the security interest is valid binding and enforceable. However caution needs to be exercised for two reasons: 1. Due to the uncertainty as to whether a floating charge is covered by the FCD/FCAL, registration should be countenanced; 2. The FCD/FCAL only applies to financial collateral as defined in the FCD/FCAL. So if the security extends beyond financial collateral, then registration should be carried out. As regards credit claims the FCD (as amended) provides that there is disapplied any perfection or notification requirements 35, however the current view amongst practitioners is to err on the side of caution and effect notification of the assignment of credit claims in order to establish priority notwithstanding the provisions of the FCD. 32 Unlike the UK Regulations transposing the FDC which defines security as including a pledge, mortgage, fixed charge, floating charge and lien, being the types of consensual security known under English law. 33 See Re F2G Realisations [2010] EWHCL Section 90 of the Companies Law, cap.113 has been amended accordingly to remove the registration requirement for security interests otherwise registrable under s The rule in Dearle v. Hall (1828) S Russ 1. Memo on Taking and Enforcing Security in Cyprus 12

14 Disapplication of Insolvency Rules The effect of the FCD and FCAL is to disapply a number of trite principles of insolvency law, in particular: a) the provision of financial collateral will not be held to be invalid or void or set aside solely on the basis it came into existence or was provided on the day of commencement of winding up (but prior to the order of commencement) or in a prescribed period was to the commencement of such proceedings; b) where financial collateral has been provided on the day of but after commencement of winding up, it shall be enforceable of the collateral provider can prove it was not aware or should not have been aware of such proceedings. However, the FCD and FCAL make it clear that there provisions do not displace the Cyprus rules as to fraudulent preferences 36. Other Benefits of FCD/FCAL There are two other matters arising from the FCD and FCAL that deserve mention, albeit briefly. a. Close-Out Netting Close-out netting arrangements, which are an intrinsic part of most if not all derivative transactions are expressly recognised and are protected notwithstanding commencement of insolvency proceedings. This, in effect, reconfirms the preexisting Cyprus law position which provided for insolvency set-off in accordance with section 35 of the Bankruptcy Law, cap.5 (as amended). Unless the parties agree otherwise the effectiveness of close-out netting is not dependent on prior notice, court approval, public auction or any time periods. b. PRIMA Rule and Conflict Principles In many securities transactions and in particular derivative transactions, issues of conflict arise as to determining the rights of parties in the securities. The primary conflict rule that applies is lex rei sctae, however determining the location of dematerialised securities is not an easy task. The PRIMA principle (place of relevant intermediary) has been accepted as the applicable principle to determine proprietary interests in securities 37. The principle simply stated is that 36 See below 37 This has been adopted in the Convention of the Law Applicable to Certain Rights in respect of Securities held with an Intermediary (Hague, December 15, 2002). Memo on Taking and Enforcing Security in Cyprus 13

15 the applicable law is the law of the jurisdiction where the particular securities account is located. This principle is adopted by the FCD and FCAL. The law of the jurisdiction where the securities account is located will determine: a) Legal nature and proprietary effects of book entry securities; b) Perfection requirements and whatever steps are necessary to render a financial collateral arrangement with respect to book entry securities being effective against third parties; c) Whether a person s title or interest is overridden by or subordinated to a competing title or interest or a good faith acquisition has occurred; d) Steps required for realisation on enforcement. Enforcement As a starting point there are no statutory provisions in Cyprus law detailing the rights and remedies of a beneficiary of security upon the occurrence of an enforcement event. Cyprus law does not know of any equivalent of the provisions of the UK Law of Property Act In the main, the document creating the security will set out the rights of the collateral taker in the event of the occurrence of an enforcement event. In most forms of security interests, the security documentation will provide on the occurrence of an enforcement event, of the right to appoint a receiver. This will not be considered in much detail in this memo as the right to appoint a receiver and the role and powers of a receiver are clearly understood. The receiver will go in and take possession of the assets covered by the security, realise some value therefor, pay off the creditor appointing him and then exit. In many cases, particularly where the security can be regarded as self-realisable (for e.g. Pledges) the appointment of a receiver can be considered as otiose. The primary remedies on enforcement of security which are largely self-help remedies are: a) Power of sale; or b) Appropriation. The power of sale is clear and self-explanatory viz. the collateral taker disposes of the assets covered by the security and applies the proceeds thereof in satisfaction of the debt. The right of appropriation, which was permitted under Cyprus law prior to the FCD, allows for the assets covered by the security to be applied in discharge and satisfaction of the debt. In the exercise of both of these remedies, the collateral taker must act in good faith and reasonably which dictates that it must obtain (or allocate) the best price possible on the day it decides to enforce. In the event that sale or appropriation realises a price or value greater than the amount of the debt the collateral taker must account for the difference. Memo on Taking and Enforcing Security in Cyprus 14

16 The FCD and FCAL recognise these rights of enforcement. Setting Aside of Security Fraudulent Preference The primary ground upon which security can be set aside under Cyprus law is that the granting of the security amounts to a fraudulent preference within the meaning of section 301 of the companies Law, cap.113 (as amended). In order to constitute a fraudulent preference the transaction must have been entered into: a) With the dominant intention of preferring are creditor over another; b) Within six months prior to commencement of the winding up; and c) At a time when the company was insolvent. It is widely accepted that a transaction that is entered into on an arm s length basis on commercial terms will not likely be struck down as a fraudulent preference. October, 2013 Keane Vgenopoulou & Associates Memo on Taking and Enforcing Security in Cyprus 15

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