Secured Lending Comparative Guide -

1 Legal framework

1.1 Beyond general commercial and contract laws, what other specific laws and regulations govern secured finance in your jurisdiction?

The following legislation should be considered when dealing with secured financing, depending on the subject matter at hand:

the Financial Collateral Arrangements Law (43(I)/2004);
the Securitisation Law (88(I)/2018);
the Sale and Acquisition of Credit Facilities and Related Matters Law (169(I)/2015);
the Law on the Resolution of Credit Institutions and Investment Companies (22(I)/2016);
the Transfer and Mortgage of Immovables Law (9/1965);
the Financial Leasing Law (72(Ι)/2016);
the Merchant Shipping (Registration of Ships, Sales and Mortgages) Law (45/1963);
the Hire Purchase Law (32/1966);
the Combating Late Payments in Commercial Transactions Law (123(Ι)/2012);
the Trustees Law (Cap 193);
the International Trusts Law (69(I)/1992);
the Movement of Capital Law (115(I)/2003);
the Business of Credit Institutions Law (66(I)/1997); and
the Stamp Duty Law (19/1963);

1.2 Do any bilateral and/or multilateral treaties or trade agreements have particular relevance for secured finance in your jurisdiction?

No.

1.3 Beyond normal governmental institutions, are there regulatory or tax bodies that play a particular role in secured finance your jurisdiction? What powers do they have?

The following bodies are of particular importance for secured finance transactions, depending on the subject matter and the structure adopted by the parties:

Registrar of companies: The public official responsible for maintaining a register of all companies operating in Cyprus and the charges registered against their assets.
Department of Land and Surveys: The public body responsible for maintaining a record of all registered immovable property rights. A legal mortgage must be registered with the Department of Land and Surveys for perfection purposes.
Registrar of trademarks and patents (under the registrar of companies): The public official responsible for maintaining a record of security and any relevant amendments of all registered rights over intellectual property, or over a patent or copyright licence, created by a company registered in Cyprus
Registrar of Cyprus ships: The public official charged with maintaining a register of all vessels registered in Cyprus. The registrar plays a particular role in secured financing because when a mortgagee obtains an order converting a negative pledge in the deed of covenants restricting the mortgagor from disposing of a vessel without the mortgagee's prior consent, this order can then be served on the registrar of Cyprus ships and entered in the register as an encumbrance. The registrar usually demands written consent from every prior mortgagee before accepting a subsequent mortgage for registration.
Cyprus Tax Authority: Interest income is subject to tax. This authority handles all relevant tax matters arising from secured finance transactions.
Insolvency Department: The public body charged with the handling of voluntary liquidations, the appointment of receivers or administrators and the mechanism for corporate debt restructuring (examinership). Insolvency affects the enforcement of securities if a party becomes insolvent during a secured financing transaction.
Central Bank of Cyprus: The Central Bank of Cyprus calculates the interest rate ceiling every three months for the offence of usury. Apart from this, a UK credit institution seeking to purchase loans falling into certain categories must obtain a licence from the Central Bank of Cyprus to operate as a branch of a third country institution; once it does so, it will be considered as a licensed credit institution.
Stamp duty commissioner: The Stamp duty commissioner is responsible for the stamping of loan documentation.
Cyprus Stock Exchange (CSE): For dematerialised securities, such as shares in listed companies traded on the CSE, a charge can be taken over the special account of the investor's share account, which is then registered in the Central Securities Depository and the Central Registry of the CSE.
Cyprus Securities and Exchange Commission: This is an independent public supervisory authority responsible for the supervision of the investment services market, transactions in transferable securities carried out in Cyprus and the collective investment and asset management sector.

1.4 What is the government's general approach to secured finance in your jurisdiction? Are there government guarantee/support schemes available to lenders, and if so what are the qualifications to that support?

The overall aims 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 Legislative Guidelines.

The following government guarantee/support schemes are available to lenders:

Cyprus Government Guarantee Scheme: This offers low-interest loans to businesses of all sizes via Cyprus registered banks. The purpose of the scheme is to provide government guarantees totalling up to €1 billion to credit institutions operating in Cyprus with a view to granting new low-cost loans to businesses and self-employed persons. This is part of the European Commission's effort to provide support to member state economies in the wake of the COVID-19 pandemic. State guarantees will cover 70% of the potential losses, with banks covering the remainder, irrespective of whether the loan is secured.
Financing scheme for Cypriot SMEs in collaboration with the European Investment Bank (EIB): Through this scheme, banks provide loans with favourable terms to eligible Cypriot small and medium-sized enterprises and mid-caps. An even more favourable interest rate is provided to companies that meet the criteria for the EIB's Jobs for Youth Programme.

As regards the financial benefit, a reduced interest rate (usually by at least 1%) is offered to eligible companies, compared to the interest rate that would have been charged for the same loan without participation in the EIB scheme. Companies can benefit from an additional reduction in the interest rate (by 0.5%) if they are eligible under the Jobs for Youth Programme and fulfil certain criteria.

2 Secured finance market

2.1 How mature is the secured finance market in your jurisdiction? Are the majority of the transactions purely bilateral and domestic, or is there an international syndicated market for secured financing under your domestic law?

The secured finance market in Cyprus is mature. Financing practices in Cyprus are many and varied. They include, among others:

term loan financing for non-operational outlays;
inventory and operational equipment acquisition financing via mechanisms;
inventory and receivables revolving loan finance to provide working capital – typically via bank overdraft or invoice discounting facilities;
recourse and non-recourse factoring of debts to provide working capital;
credit secured via transfer of title to an asset; and
securitisation of debts.

While international syndicated market practices are not commonly used, there is a widespread trend of using agency and trustee schemes in many secured financing transactions. It is often the case that a security agent or trustee will be appointed as part of a financing transaction with responsibility for holding the assets of the borrower on trust until completion of the financing process. The responsibilities and obligations of a security agent or trustee are usually governed by a separate agency/trustee agreement.

2.2 Are there any bodies in your jurisdiction/region that promote the use of standard documentation and best practices in secured finance transactions? If so, are these widely used and followed?

There is no such body, but each local bank usually has its own standard documents that are in line with the applicable laws and regulations.

2.3 What significant secured finance transactions have taken place in your jurisdiction in recent times?

A Luxembourg-based bank recently provided aircraft financing to a Cyprus borrower in the amount of €55 million. Moreover, a leading Russian bank was involved in a €1 billion transaction concerning a Cyprus company's Russian limited liability company subsidiary. Further, a large group of companies involved in aluminium production, energy generation and distribution completed a 100% acquisition of two Cyprus companies in order to operate photovoltaic power stations through solar power plants in Cyprus. In addition, a leading Chinese-owned real estate group was engaged in the acquisition of a large investment group operating in the Russian commercial real estate market, owning properties valued at more than $4 billion.

3 Secured finance providers

3.1 Who are the key providers of secured finance in your jurisdiction? Is there a thriving alternative credit market (beyond bank lenders)?

Traditionally, bank lenders are on the front line of secured finance in Cyprus when it comes to local projects. The banking system is comprised of relatively large domestic credit institutions such as Bank of Cyprus and Hellenic Bank. Bank of Cyprus and Hellenic Bank currently hold around 70% of the loan market. There are also subsidiaries of Greek banks (eg, Alpha, Eurobank and National Bank of Greece), as well as other foreign and smaller banks (eg, Astrobank, Ancoria, Cyprus Development Bank).

In recent years, many banks established in Europe, the Middle East and Russia have shown increasing interest in the Cyprus market.

Cyprus companies that are used as a hub for investments in Europe and other jurisdiction secure financing from all major international banks, usually for projects that are based outside the jurisdiction. Such banks include JP Morgan, Citibank and Barclays.

3.2 What requirements and restrictions apply to secured finance providers in your jurisdiction? Do these vary depending on (a) the type of entity; (b) whether the lender is domestic or foreign?

According to the Financial Security Provision Agreements Law (43(I)/2004), a provider must fall within one of the following categories:

To a public authority in the Republic or elsewhere, excluding undertakings with a State guarantee, unless they fall within paragraphs (b) to (e), such as inter alia public body that has undertaken the management of the public debt or intervenes in it, a public body authorized to maintain customer accounts etc.
to the Central Bank of Cyprus, as defined in the Central Bank of Cyprus Laws of 2002 to 2007, to a central bank of another state, to the European Central Bank, to the Bank for International Settlements, to a multilateral development bank as defined in the Guidelines to the banks for the Calculation of Capital Requirements and Large Financial Exposures from 2006 to 2010, to the International Monetary Fund and the European Investment Bank.
to a financial institution subject to supervision, including a credit institution; an investment services business, as defined in the Investment Services and Activities and Regulated Markets Laws of 2007 and 2009; a financial institution, as defined in the Banking Laws of 1997 to 2011; insurance business, as defined in the Insurance Business and Other Related Laws of 2002 to 2011; an undertaking for collective investment in transferable securities, as defined in the Open-Ended Undertakings for Collective Investment in Transferable Securities (UCITS) Laws of 2004 and 2008; Management Company, as defined in the 2004 and 2008 Securities Laws on Open-Ended Undertakings for Collective Investments (UCITS).
in relation to payment and securities settlement systems, to a central counterparty, settler and clearing house as defined in the Irrevocable Payment Systems and Securities Settlement Systems Law of 2003.
to other similar institutions that are subject to supervision and that carry out activities in the markets of futures contracts, options and derivative instruments to an extent not covered by the Irrevocable in Payment Systems and in the Securities Settlement Systems Act 2003, and a legal person, acting as trustee or in an agent capacity on behalf of one or more persons, including any bondholders or holders of other forms of secured loans or any class specified in paragraphs (a) to (d).
to a legal person, including non-stock companies and cooperatives provided that the counterparty falls into one of the categories specified in paragraphs (a) to (e).

4 Secured finance structures

4.1 What secured finance structures are most commonly used in your jurisdiction?

A diverse range of secured finance structures are used in Cyprus. The arrangements most commonly used include the following:

a pledge over shares;
fixed and floating charges over the assets of a company;
mortgages;
sale and leaseback;
factoring;
hire purchase;
retention of title;
negative pledge; and
set-off.

4.2 What are the advantages and disadvantages of these different types of structures?

A mortgage gives the mortgagee:

a contractual priority right to the property; and
the right to apply to the Department of Lands and Surveys for the sale of the property in the event of a default in repayment of the loan.

A mortgage cannot be granted over future assets or over fungible assets.

A charge gives no proprietary right, but gives the chargee the right over the asset and its proceeds for recovery purposes. Specifically, a fixed charge gives the chargee control over any disposals of the property. A floating charge gives the chargor the right to deal with the assets from a business point of view. Moreover, an equitable charge can be granted over future property.

A lien gives the holder the right to retain, but not to sell, the debtor's property until repayment. A carrier's lien corresponds to a right of retainment until the transport costs are paid. Further, a banker's general lien allows a bank to offset credit and debit accounts that the customer holds in order to discharge a debt owed to the bank. Moreover, a lien can be granted over future property.

A share pledge creates a special proprietary right over the shares. The pledgee can enforce the pledge and exercise its proprietary rights over the shares, regardless of who owns the shares. However, this does not mean that the pledgee has any ownership right. A pledge cannot be granted over future assets.

In a sale and leaseback structure, the lessee has the additional right to demand specific performance.

In the case of hire purchase, the absolute title to the leased property remains with the lessor until the lessee exercises its optional right to purchase the property.

4.3 What other factors should parties bear in mind when deciding on a secured finance structure?

Traditionally, uncertainty has surrounded the reference rate of interest. Thus, parties should bear in mind that according to Law 72(I)/2011, a maximum is rate is calculated and specified by the Central Bank of Cyprus. It is a criminal offence to charge interest above this rate.

There are no particular assets over which security cannot be granted. However, a potential security holder should be aware of the following:

Certain receivables and contractual rights may not be charged due to prior contractual restrictions.
Restrictions on the grant of security may be imposed by a company's memorandum and articles of association.
A company granting security must not breach statutory provisions relating to corporate benefit, directors' duties, financial assistance and fraudulent preferences.

5 Security

5.1 What types of security interests are available in your jurisdiction? Which are most commonly used and which are recommended (if different)?

Assets of any type may be used to secure loan obligations. These include:

real estate (land, buildings, natural resources on land);
intellectual property (patents, trademarks, designs and copyrights);
tangible movable property (goods and stock, equipment, works of art, aircraft and ships);
financial instruments (shares, bonds and other forms of debt instruments);
claims and receivables (contractual rights and receivables under contracts, claim rights and proceeds under insurance policies – usually life insurance, promissory notes, book debts and rent receivables); and
bank accounts and cash deposits.

The most commonly used and recommended security interests in Cyprus are:

a legal mortgage over real estate; and
a pledge over the shares of a company.

A legal mortgage over real estate is usually recommended because it grants the mortgagee:

a contractual right of first refusal over the real estate; and
the ability to request the sale of the property from the Lands Office in the event of debt repayment default.

A mortgage is legally binding only once it has been registered and no transactions can be made with respect to the mortgaged real estate without the mortgagee's permission. According to Section 29 of the Transfer and Mortgage of Immovables Law (9/1965), as amended, immovable property may be subject to a second or subsequent mortgage only with the express written approval of all prior mortgagees.

A share pledge is a possessory form of security as it involves the physical delivery to the pledgee of the share certificates representing the pledged shares, to achieve actual or constructive delivery of possession. As such, it creates a legal charge over the share certificates but also an equitable charge over the shares. The pledgee retains possession of the pledged property until the obligations secured by the share pledge have been fulfilled. The agreement of share pledge usually contains a charge over the pledged shares. In contrast to a right in personam, a share pledge under Cyprus law creates a special proprietary right over the shares. No matter who owns the shares, the pledgee can enforce the pledge and use its proprietary rights over the shares. This does not, however, imply that the pledgee has any ownership stake in the pledged asset. A specific right is formed when shares of a Cyprus company are pledged, and it only becomes active when the obligation of the pledgor is not paid in full. Only a specific right (a right to sell the shares) and not full ownership is granted to the pledgee.

5.2 What are the formal, documentary and procedural requirements for perfecting these different types of security interests (ensuring that they are enforceable against debtors and third parties)?

Perfection of legal mortgage over real estate: An instrument in writing signed by the mortgagor and mortgagee creates a valid mortgage on immovable property. The mortgagee and mortgagor must both appear in person at the district lands office where the immovable property is located and show the signed instrument to a qualified officer to proclaim the mortgage.

The mortgage will be void against the mortgagor, the mortgagee, the liquidator and any other creditors of the firm or third party if it is not registered.

Perfection of pledge over shares: A pledge of shares in a Cyprus company held by a corporate shareholder/pledgor (whether or not a Cyprus company) is not registrable (with some exemptions under Section 90(2)(θ) of the Companies Law). If the pledge is taken over a foreign company's shares and the pledgor is a Cyprus registered company, the pledge must be registered as a charge with the registrar. A charge that is not duly registered is invalid as against a future liquidator of the legal entity chargor to be perfected and valid against a liquidator of the pledgor.

For a pledge over shares of a Cyprus company to be valid and enforceable, the following formalities set out in the Contract Law (Cap 149) must be met:

The pledge must be made in writing, signed by the pledgor and the pledgee, and witnessed by at least two witnesses;
Notice of the pledge must be given by the pledgee to the company whose shares are being pledged;
A memorandum of the pledge must be entered in the register of members of the company whose shares are being pledged; and
The company must issue and deliver to the pledgee a certificate executed by the appropriate official of the company confirming the fact of the registration of the pledge in favour of the pledgee.

Perfection of security over intellectual property: According to the Companies Law, any security issued by a company registered in Cyprus, as well as any alterations made in the future, over intellectual property, including a patent or copyright licence, may be registered with the registrar of companies.

Perfection of security over claims, receivables and cash deposits: Security over claims, receivables and cash deposits is perfected through security agreements in writing, and is valid and enforceable if it complies with common law and the statutory rules of contract law.

An equitable charge, assignment, lien or charge can be granted over future property; but a pledge cannot be granted over future property. The pledgor must be the owner, the possessor or a person with an interest in the movable property.

It is possible to create a pledge over any kind of movable property, provided that the provisions of the Contract Law are properly applied.

The perfection requirements in relation to securities or any subsequent amendments created over claims and receivables of a legal entity are set out in the Companies Law. A security over receivables is registrable when it is granted over:

book debts of a company;
an undertaking or property of the company, by a way of a floating charge; or
any other movable property, if created or evidenced by a document where the company retains possession of such property.

Registration does not affect the validity of the security agreement between the contracting parties, but perfects the security and renders it enforceable against any liquidator or creditor of the company.

For equitable securities such as assignments and charges, there is an additional common law perfection requirement.

Perfection of fixed or floating charges over tangible movable property: If the chargor is a Cyprus legal entity, it must register the charge with the registrar of companies. A charge that is not duly registered is invalid as against a future liquidator of the legal entity chargor.

Perfection of liens over tangible movable property: Usually, liens are taken over goods that are being transported. The lien gives the holder the right only to retain the debtor's property until payment and does not include a right of sale. The carrier's lien (the right to retain possession of the goods) is then extinguished on it receiving payment for the transport costs. Liens can arise under common law or equitable principles with no formalities being observed, although a contract may explicitly provide for a lien.

Perfection of ship mortgages: A registered ship or a share therein may be made a security for a loan or other valuable consideration, and the instrument creating the security. On the production of such instrument, the General Director of the Shipping Deputy Ministry will record it in the Register of Ships.

There will be attached to any such instrument of mortgage a deed of covenants agreed between the parties and dealing with any matter relating to the mortgage, including the following:

the mode of payment of interest and the repayment of principal;
insurances and renewals thereof and the application of policy money;
limitations on employment of the ship;
a definition of 'default' upon which statutory or other powers may be exercised;
the powers exercisable by the mortgagee, including the power to take possession of the ship, assume its management and sell the ship by private deal; and
any other matter ancillary or incidental thereto.

Mortgages will be recorded by the General Director of the Shipping Deputy Ministry in the order in which they are presented to him for this purpose. The General Director of the Shipping Deputy Ministry will issue a memorandum confirming that each mortgage has been recorded by him, stating the time and date on which this occurred.

Stamp duty: Stamp duty is imposed on agreements and ancillary documents pertaining to property or proprietary rights located in Cyprus or matters to be performed in Cyprus, regardless of where the document is signed (with some exceptions). Although the payment of stamp duty is not a requirement for perfection, it is necessary, among other things, in order for the document to be enforced in Cyprus courts.

5.3 What are the main types of collateral used as security in your jurisdiction and what specific points should be borne in mind regarding each?

The most common types of collateral used as security are as follows:

In the event of the debtor's default, a pledge over share certificates can be enforced in accordance with Cyprus law. The pledgee can sell the pledged assets without having to go to court in such a situation (please see question 5.2).
Assets that are less ascertainable may be secured by a floating charge giving the chargor the right to deal with the assets in the ordinary course of business. A floating charge is a security interest that 'floats' until an event of default occurs or the company goes into insolvent liquidation, at which time the floating charge 'crystallises' and attaches to the relevant assets. In practice, floating charges are usually created over the whole business and undertaking of a company, present and future. In the event of default, a floating charge will accumulate over the secured assets. After that, the secured lender – or its receiver – may liquidate the securities to pay off the debt. Unless certain solvency conditions apply, floating charges established within a year of the start of the liquidation will be null and void. After liquidation costs and preferential payments, floating charges will rank for payment unless they are crystallised prior to the start of the liquidation or under their terms. However, if the company's existing assets are insufficient to satisfy unsecured creditors, floating charges that are not crystallised will be prioritised over other unsecured creditors.
Fixed charge secured creditors may enforce their security in exchange for payment of their debt if the security provider is placed into winding up. In such cases, the net proceeds from the sale of secured assets are primarily used for the settlement of amounts secured by that charge (provided that, where the charge must be registered in accordance with the Companies Law to be valid as against the liquidator, the registration has been duly effected; otherwise, the claims will rank pari passu with those of unsecured creditors). If there is a surplus, it becomes part of the general pool of assets and is distributed in accordance with the priority list. If there is a shortfall, the secured creditor is an unsecured creditor only with respect to this shortfall and ranks after the costs of the winding up, preferential debts and any floating charge holders, pari passu with all other unsecured creditors. The ranking between fixed charge holders is determined by the timing of the registration of the charge with the registrar of companies. Provisions in inter-creditor or subordination agreements may also have an impact on priority. The obligations under a registrable but unperfected charge are not recognised by the liquidator as secured obligations, but instead constitute unsecured obligations and rank together with unsecured creditors.

5.4 Can security be taken over property, plant and equipment in your jurisdiction? If so, how?

Yes, by mortgaging the property in favour of the creditor, collateral security over real property can typically be established. Αn instrument in writing must be signed by the mortgagor and the mortgagee through Form N271 under Annex II of the Transfer and Mortgage of Immovables Law (9/1965) and filed with the district lands office in the district where the immovable property is situated in accordance with the Immovable Property (Transfer & Mortgage) Law of 1965, as amended. Only with the mortgagee's consent can a property transfer or other type of disposal be registered after the mortgage has been filed with the district lands office.

Under a fixed or floating charge debenture, a charge over plant, machinery and equipment will typically be created as a fixed charge.

5.5 Can security be taken over cash (including bank accounts generally) and receivables in your jurisdiction? If so, how?

Establishment of receivables security: A separate security document or a fixed and floating charge debenture is typically used to establish receivables security.

During the term of the security, the parties can decide whether the security over the receivables will be a fixed charge, an assignment or a floating charge, depending on the commercial arrangement for controlling the receivables. The chargee will have control over specific receivables under a fixed charge or assignment as security, which will include serving notice on the debtor. A pool of receivables will typically be covered by a floating charge, allowing the creditor to manage the receivables as usual.

Establishment of bank account security: A separate agreement or a fixed and floating charge debenture can also be used to establish security over a Cyprus bank account.

The extent to which the chargor or the chargee has control over the bank account determines whether the charge is a fixed charge or a floating charge. A fixed charge will necessitate the chargee's effective control over the account's inflows and outflows, which means that the bank must agree to the relevant terms for managing the charged account. Under the Financial Collateral Arrangements Law 2004, as amended, a charge over the bank account may also be considered a financial collateral arrangement depending on its terms.

5.6 Can security be taken over company shares in your jurisdiction? If so, how?

The Companies Law (Cap 113), the Contract Law (Cap 149) and principles of equity regulate the giving of security over shares in a Cyprus company, which typically takes the form of a pledge of share certificates or charge of shares.

The most common form of this kind of security entails pledging and physically handing over share certificates to the pledgee, and establishing an equitable charge over the company's shares. Under this arrangement, the pledgor remains the legal owner of the shares and keeps the benefits from the shares until an enforcement event occurs. The security instrument has a way to transfer control of the shares to the pledgee outside of court in the event of default.

The requirements for a valid and perfected pledge over a company's share certificates are outlined in the Contract Law. The pledge must be in writing, signed by the pledgor and witnessed by two competent witnesses, who must also sign. Additionally, in order for a pledge of shares in a Cyprus company to be valid and enforceable:

the pledgee must notify the company of the pledge;
the company must record the pledge in its shareholder register; and
the pledgee must receive a certificate of the pledge.

Although registration of the pledge as a charge with the registrar of companies is no longer required under Section 90 of the Companies Law, a company that has paid in full or in part the debt for which the charge was registered or, has released all or part of the property charged, must inform the registrar of companies accordingly by submitting the relevant form in order for the register of charges to be updated.

5.7 Can security be taken over inventory/moveables in your jurisdiction? If so, how?

The most common form of inventory/movables security is a charge debenture, which can be either fixed or floating. Typically, inventory is covered by a floating charge because a business must acquire and dispose of inventory in the normal course of business – making it impractical and undesirable for the creditor to control.

5.8 What charges, fees and taxes (including notary and similar fees) arise from the perfection of a security interest? Do these vary depending on the type of assets used as collateral?

Stamp duty is payable under Section 90 of the Companies Law and the Stamp Duty Law of 1963, as amended, as follows:

For transactions with a consideration of up to €5,000, no stamp duty is payable.
For transactions with a consideration of between €5,000 and €170,000, stamp duty of €1.50 for every €1,000 or part thereof is payable.
For transactions with a consideration of over €170,000, stamp duty of €2 for every €1,000 or part thereof is payable.
The maximum stamp duty payable on a contract is capped at €20,000.
Where no amount of consideration is specified in the contract, the stamp duty is €34.
For a transaction which is evidenced by several documents, stamp duty is payable on the main contract and ancillary documents are charged at a flat rate of €2.

Under Section 90 of the Companies Law, a charge must be registered for €680 with the registrar of companies.

According to the Immovable Property (Transfer & Mortgage) Law of 1965, as amended, a legal mortgage must be registered with the Land Registry Department. The mortgage fee amounts to 1% of the market value of the property.

The Merchant Shipping (Registration, Sales, and Mortgages) Law of 1963 stipulates that a mortgage over a ship or shares of ship must be registered with the Department of Merchant Shipping. The fee for registration will depend on the gross tonnage of the vessel.

5.9 What are the respective obligations and liabilities of the parties under the security documents?

The creation of a valid pledge over shares in a Cyprus company is subject to specific statutory requirements outlined in question 5.6.

It is very important to ensure that the pledgor has full power, authority and legal capacity to enter into the transactions contemplated by the security documents.

In addition to these statutory requirements, it is common practice in Cyprus that the pledgor provides the following documents to the pledgee on the date of entering into the security agreement:

an original share certificate issued in the name of the pledgor and representing all of the pledged shares;
a transfer instruction executed by the pledgor and undated providing for the transfer of the pledged shares to the pledgee;
duly executed undated letters of resignation from each director and the secretary of the company, to the extent that such have been appointed by the pledgor;
confirmation of the secretary of the company that the forms to be filed with the registrar are in line with the internal records of the company,
a certified and apostilled copy of the register of members of the company;
the original of a certified and apostilled irrevocable power of attorney in respect of the pledged shares;
the original of a memorandum signed by the secretary of the company confirming the endorsement of a note of the security agreement on the register of pledges of the company;
a letter of authority and undertaking from each director and the secretary of the company;
a certified and apostilled copy of a resolution of the company's board of directors approving the pledge of the shares pursuant to the security agreement; and
an undated resolution of the company's board of directors approving the transfer of the pledged shares to the pledgee.

5.10 What other considerations should be borne in mind by all counterparties when perfecting a security interest in your jurisdiction?

There are no other considerations.

6 Guarantees

6.1 What types of guarantees are available in your jurisdiction? Which are most commonly used and which are recommended (if different)?

See question 5.1.

6.2 What are the formal, documentary and procedural requirements to perfect a guarantee?

To provide the guarantee, the business must possess corporate authority. The corporate guarantor must demonstrate that the guarantee will benefit the company and serve its commercial and business interests if there is no clear corporate power. A written contract is typically used to create guarantees, which are subject to the general principles of the contract.

6.3 What charges, fees and taxes (including notary and similar fees) arise from the perfection of a guarantee?

Even though the loan secured may have no connection to Cyprus, the stamp duty commissioner has been known to levy stamp duty on performance guarantees issued by Cyprus-based businesses. The amount of the secured obligations is used to determine how much stamp duty is due.

Please also see question 5.8.

6.4 What are the respective obligations and liabilities of the parties under the guarantee?

Please see question 6.2.

The provision of guarantees must be contained in the scopes of the guarantor company. Most memoranda are usually written so that this can happen. Unless otherwise specified in a company's memorandum of association, there are no other restrictions.

6.5 What other considerations should be borne in mind by all counterparties when taking the benefit of a guarantee in your jurisdiction?

There are no other considerations.

7 Financial assistance

7.1 What requirements and restrictions apply with regard to the provision of financial assistance in your jurisdiction? What specific implications do these have for secured finance transactions?

Shares of the company: Unless otherwise permitted by Section 53(1) of the Companies Law, any financial assistance that could lead to the purchase of such shares is prohibited, particularly if lending money is part of the normal business of the company. Any officer who violates this provision will be subject to a fine, as will the company. When the company is wound up, misfeasance may also be the subject of legal proceedings brought on behalf of the company against the directors for breach of trust.

Nevertheless, a mechanism is added to Section 53(3) to relax this restriction. As long as it is not a subsidiary of a public company registered in Cyprus and the arrangement is approved by a resolution passed at a general meeting at which the holders of 90% of all issued shares of the company vote in favour, a private company may now provide direct or indirect financial assistance for the acquisition of its own shares or shares of its holding company.

It is still illegal for public companies to offer financial assistance for the purchase of their own shares. However, subject to strict adherence to Sections 57A–F of the Companies Law, a public company may redeem or otherwise purchase its own shares out of realised and undistributable profits.

Shares in a subsidiary company: As above.

Shares in a sister subsidiary: There is no restriction unless the acquisition of the company's shares is done indirectly, in which case the provisions above apply.

8 Syndicated lending

8.1 Is the concept of an agent or trustee recognised in your jurisdiction? If not, how is security taken for multiple lenders?

The concept of an agent or trustee in a syndicated loan is recognised under Cyprus law. This person will hold the underlying security in trust for the benefit of all or some of the lenders in the loan, as well as for those lenders which may occasionally join the syndicate through a loan transfer.

8.2 What requirements and restrictions apply with regard to syndicated lending in your jurisdiction?

The loan agreement will typically outline the rights and responsibilities of the agent or trustee, and each security agreement will specify which loan agreement provisions are equally applicable.

8.3 What other considerations should be borne in mind by all counterparties when engaging in syndicated lending in your jurisdiction?

The relevant security agreement is typically filed with the registrar of companies as establishing a charge over the borrower company's assets in favour of the security agent or trustee alone.

9 Taxes, charges and fees

9.1 What taxes and similar charges are levied in the secured finance context in your jurisdiction? Do these vary depending on whether the lender is a domestic or foreign entity?

Typically, interest income is subject to a defence tax of 30%. Non-Cypriot residents are exempt from this rule because they are taxed in their country of residence and are not subject to withholding tax.

However, the loan documentation may be subject to Cyprus stamp duty (see question 5.8).

9.2 Are any exemptions or incentives available?

The tax exemption applies to foreign lenders, as explained in question 9.1.

Other than that, there are no other exemptions.

9.3 What other significant costs will be incurred by the counterparties in entering into a secured finance transaction? Do these vary depending on whether the lender is a domestic or foreign entity?

Other than those already mentioned in question 9, there are no other significant costs.

9.4 What strategies might the counterparties consider to mitigate their tax and other liabilities in the secured finance context?

In terms of costs and taxes associated with the grant of securities and the enforcement of loan obligations, Cyprus is generally regarded as a cost-effective jurisdiction.

It is common practice in Cyprus for the pledgor to provide a full set of deliverables to the pledgee when signing the security agreement for automatic enforcement of out-of-court pledges (see question 5.9), and therefore the cost of enforcement is significantly reduced.

Apart from the strategy mentioned above, no other strategies are generally available to reduce fees.

10 Judicial enforcement

10.1 In the event of default, what options are available to enforce a security interest or guarantee? Is self-help available in your jurisdiction in connection with the enforcement of security (if so, in what circumstances) or must enforcement action be pursued through the courts?

Any mechanism for the enforcement of a security interest is generally provided by the security documents. Briefly, this document will specify what rights are available. Some security documents (eg, a pledge over shares) provide for out-of-court enforcement through pre-delivered deliverables.

For instance, if the security document gives the security holder the power to sell the asset covered by the security, the asset must be sold at market value. Where the security is considered as a financial collateral arrangement, appropriation is possible where certain criteria are met. Further, where the sale relates to shares, the pledgee has a duty to sell the shares in good faith.

As far as a floating charge is concerned, if a receiver or manager is appointed on behalf of a floating charge holder certain requirements will apply under the Companies Law (Cap 113).

The area of guarantees is of particular interest. Specifically, no exchange control restrictions on enforcement apply.

10.2 How long does the enforcement process generally take and what steps does this typically involve? Do these vary depending on any applicable requirements or restrictions (eg, requirement for public auction or regulatory consents)? Do these vary depending on whether the lender is a domestic or foreign entity?

Generally, the enforcement mechanisms in Cyprus have room for improvement. The enforcement process varies depending on the method followed and on any formal requirements. Further, Cyprus law does not provide for a public sale or auction.

10.3 What other considerations should be borne in mind when enforcing a security interest or guarantee in your jurisdiction?

A contract should be drafted that includes all alternative scenarios in the case of enforcement. Also, bear in mind that public authorities' procedures typically take too long.

Specifically, in certain cases the security interest created under contractual arrangements must be filed with the registrar of companies. A security that is not duly registered will be invalid against a liquidator if the company concerned is placed in winding up. Further, additional requirements apply to certain pledges, including a pledge over share certificates.

As far as equitable securities are concerned, a common law requirement provides that the first security holder must give notice to the relevant contracting third party to gain priority over the remaining equitable interests in the property.

Moreover, a mortgage over immovable property must be registered with the Land Registry.

Special rules apply with respect to charges over certain assets such as aircraft and ships, which involve separate registration requirements.

Apart from this, there are procedural requirements such as payment of stamp duty. An unstamped guarantee may not be accepted as evidence in Cyprus court enforcement proceedings unless stamp duty fees have been paid. Similarly, agreements and ancillary documents concerning property or proprietary rights situated in Cyprus or matters to be performed in Cyprus, irrespective of where the document is signed, are subject to stamp duty.

10.4 Are direct agreements with contractual counterparties well understood in your jurisdiction?

Yes. However, many transactions have resulted in disputes before the Cyprus courts. As a result of this scenario, the contractual interpretation of the relevant contract will depend on the judicial approach followed by the Cyprus courts.

10.5 What other avenues are available to a lender to safeguard its position in connection with security or guarantees?

There are no other ways to secure the lender's position.

11 Bankruptcy

11.1 How (if at all) do bankruptcy proceedings impact on the enforcement of security by a creditor?

Sections 203 to 333 of the Companies Law govern corporate insolvency. The kind of security that has been provided, such as a fixed or floating charge, will determine the lender's capacity to enforce its rights as a secured party over the collateral security.

11.2 In what circumstances can antecedent transactions be unwound for preference? What other similar measures apply in this regard?

In view of the registration requirements of charges and mortgages under Section 90 of the Companies Law, floating charges will be prioritised over other unsecured creditors.

Section 301 of the Companies Law states that any conveyance, charge, mortgage, delivery of goods, payment, execution or other act relating to property made or done by or against a company in the six months before the commencement of its winding up which, had it been made or done by or against an individual within six months before the presentation of a bankruptcy petition on which he is adjudged bankrupt, would be deemed in his bankruptcy a fraudulent preference of its creditors and be invalid.

Section 303 of the Companies Law provides that where a company is being wound up, a floating charge on the undertaking or property of the company created in the 12 months prior to commencement of the winding up will be invalid, unless it is proved that the company was solvent immediately after the creation of the charge. An exception applies to any cash paid to the company at the time of or subsequently to the creation of the charge.

Section 218 of the Companies Law provides that the winding up of the company will be deemed to have commenced at the time of the passing of the special resolution and unless the court, on proof of fraud or mistake, sees fit to direct otherwise.

In any case, the following are prioritised over debts secured by a floating charge in a winding up:

the costs of the winding up;
governmental taxes; and
amounts owed to employees, such as wages, compensation and holiday pay.

11.3 Are any types of entities excluded from the bankruptcy regime in your jurisdiction? If so, what alternative regimes apply?

There are no exempt entities in the case of either personal or corporate insolvency.

Insurance companies and banks and credit institutions are respectively subject to special bankruptcy arrangements under the Insurance Services and other Related Issues Laws of 2002 as amended, and the Resolutions on Credit Institutions and Investment Companies Law (22(I)/2016).

12 Governing law and jurisdiction

12.1 What law typically governs secured finance agreements in your jurisdiction? Do any specific requirements apply in this regard?

Typically, Cyprus law governs secured finance transactions.

12.2 Is a choice of foreign law or jurisdiction valid and enforceable? In the case of a choice of foreign law of jurisdiction, will any provisions of local law have mandatory application? Are submission to jurisdiction provisions that operate in favour of one party only enforceable?

The Cyprus courts tend to give effect to a contractual foreign choice of governing law in any action brought before a Cyprus court pursuant to the EU Rome I Regulation (593/2008), regardless of the domicile of the parties (Regulation 1215/2012 (Recast)). However, the regulation provides that this is subject to such choice of foreign law being pleaded and proved. Moreover, certain mandatory provisions of Cypriot law cannot be derogated from by agreement (eg, penal, revenue and court procedural rules); and the parties cannot choose laws which are manifestly inconsistent with public policy.

Moreover, local law will apply to security taken over immovable property in Cyprus; and a pledge of shares in a Cyprus company must comply with the requirements of Cyprus law to be valid and enforceable.

12.3 Are waivers of immunity enforceable in your jurisdiction?

A party's waiver of sovereign immunity will be legally binding and enforceable under the laws of Cyprus.

12.4 Will foreign judgments or arbitral awards be enforced in your jurisdiction? If so, how?

A party's submission to a foreign jurisdiction will be legally binding and enforceable under the laws of Cyprus. As Cyprus is a contracting state to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958, the Cyprus courts will enforce an arbitral award without re-examining the merits, provided that certain requirements as set out in the convention have been met.

EU Regulations 44/2001 and 805/2004, common law, statute and bilateral treaties and multilateral conventions are of relevance in this regard. Specifically, EU Regulations 44/2001 and 805/2004 apply to all judgments given in civil and commercial matters (but not revenue, customs or administrative matters) by the courts of member states except Denmark. Common law rules normally apply to the recognition of judgments in civil and commercial matters that originate in jurisdictions outside the European Union. Of particular importance is Article 169 of the Constitution, which provides that conventions relating to commercial matters, economic cooperation and modus vivendi that Cyprus ratifies will, on the basis of reciprocity, have superior force over domestic law. The acceptance and enforcement in Cyprus of a foreign judgment depend solely on the existence of a mutual recognition and enforcement convention between Cyprus and the country in which the judgment was issued. A foreign decision emanating from a country with which Cyprus has not signed such a convention cannot be directly enforced in Cyprus. Where there is such a convention, enforcement of the foreign judgment depends on the interpretation of the relevant terms of the convention.

Regulation (EC) 1346/2000 on insolvency proceedings is also of relevance and directly applicable in Cyprus. Under the regulation, a judgment initiating insolvency proceedings issued by a competent court of an EU member state will be recognised in Cyprus and vice versa.

13 Trends and predictions

13.1 How would you describe the current secured finance landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

Due to the small size of the Cyprus economy, the domestic lending market is modest in comparison to the market for cross-border lending to Cyprus legal entities holding overseas assets.

In 2012 and 2013, Cyprus experienced an extreme economic recession. This led to a 'bail-in' in 2013, in which regulators imposed 'haircuts' on bondholders and depositors with more than €100,000 in their accounts and the country's second largest bank, Laiki Bank, was shut down permanently. The financial crisis had a dramatic impact on the financial stability of the island and its consequences continue to affect the country to this day.

Since then, through a values-based remediation programme, Cypriot banks have successfully overcome the effects of the financial crisis to re-establish the jurisdiction as a market leader in terms of both size and governance.

According to the Economics Research Centre of the Department of Economics at the University of Cyprus, the Cypriot economy is expected to remain robust in 2022 as real gross domestic product is forecast to increase by 4.1%. The latest waves of COVID-19 did not result in significant constraints on economy activity but may intensify supply disruptions and strengthen upward price pressures – particularly international commodity prices – thus limiting growth prospects. In addition, downside risks could arise because of high levels of public and private debt that may make the Cypriot economy vulnerable to tighter economic conditions and changes in the investment world. Despite the economic uncertainty due to the pandemic and its adverse effects on the Cypriot economy, investments and structural reforms – notably through the European Union's Recovery and Resilience Plan for Cyprus – are expected to affect output and employment positively.

14 Tips and traps

14.1 What are your top tips for the smooth conclusion of a secured finance transaction in your jurisdiction and what potential sticking points would you highlight?

As in any other field, secured finance transactions have potential sticking points. Indicatively, the grant of real estate mortgages often leads to discussions, given the high cost for the borrower. Further, when enforcing, lenders should be careful to avoid triggering bankruptcy and thus avoid any potential liability.

For this reason, it is highly recommended to conduct sufficient planning to identify upfront any issues which may have an impact on structuring and/or timing. The following steps will smooth the path to a resolution of any financing transaction:

a clear closing process with documentary closing conditions agreed at an early stage;
a realistic closing;
the satisfaction of requirements from external parties early in the process; and
the engagement of a competent law firm which is proficient and experienced in the relevant type(s) of financing.

As a rule, expert advice should be sought at the earliest stages of the potential structuring of a debt transaction.

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.

Cyprus: Secured Lending Comparative Guide