Security by a way of a pledge

Author: Multilysis Services Limited
Date: 2014-07-29
Securities nowdays are often required by the creditors for various transactions. One form of a security is a pledge over shares in a company, which by its nature is a possessory security interest and thus involves the delivery of possession, actual or constructive.
 
The taking of such security over the shares in a company is commonly in the form of a share pledge agreement executed between the registered owner of the pledged shares (the “Pledgor”) and the individual or legal entity in whose favour the pledge is executed (the “Pledgee”).
 
Necessary documentation:
As it has been mentioned above, the taking of such security over the shares in a company is usually in the form of a share pledge agreement, which provides that certain documentation is delivered and/or provided to the Pledgee by the Pledgor concurrently with the execution of the share pledge agreement. The following documentation must be granted by the Pledgor to the Pledgee:
  • The original share certificates representing the pledged shares.
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  • Undated blank instruments of transfer of shares, duly executed by the Pledgor.
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  • An irrevocable proxy and power of attorney in respect of the pledged shares from the Pledgor.
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  • Undated and signed letters of resignation from each of the directors and secretary of the company.
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  • A certified copy of a resolution of the board of directors of the company approving the pledge of the shares under the share pledge agreement and the transfer of such shares.
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  • A letter of authority and undertaking from each of the directors and the secretary of the company.
 
In Cyprus, a pledge of shares in a company is governed by the Contract Law (Cap. 149) and Companies Law (Cap. 113). When a Cyprus company is pledging shares, the prerequisites of Article 138(1) of Contract Law, Cap. 149 must be met. According to Article 138(1), the pledge must be:
  • made in writing
  • signed by the Pledgor, and
  • signed in the presence of two witnesses each having contractual capacity
Furthermore, in order for the pledge of shares to be enforceable the requirements of Article 138(2) of Contract Law, Cap. 149 must be satisfied. A notice of the pledge together with the certified copy of the deed of pledge needs to be given by the Pledgee to the company whose shares are being pledged. The company will cause a memorandum of pledge to be made in its register of members against the pledged shares and subsequently the company will need to deliver to the Pledgee a certificate that such memorandum was made in the form of the certificate and procure that the provisions of Article 132(2) are fully complied with regard to the share pledge agreement.
Also, pursuant to Article 90 and 91 of the Companies Law, Cap. 113, pledges and charges must be registered with the Registrar of Companies in Cyprus within 21 calendar days of the creation of the security interest, otherwise, they will be void against a liquidator, administrator or creditor of the company.  It should be noted, that such a registry is required by the aforementioned Articles of the Law if the Pledgor is a Cypriot company.
 
Enforcement under pledge is effected through implementation of the documents, which were mentioned above, delivered under the pledge and particularly the instruments of transfer of shares and the share certificates. It is important to note that the enforcement of the pledge can be effected without reference to any other person or without the need for a Court Order.
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