The pledge should be registered with the Registrar of Companies for the protection of the creditor

The creation and registration of a pledge over a certificate of a company’s shares in favour of a creditor-pledgee constitutes a form of security provided for the repayment of a debt or the fulfilment of a promise. This type of security is valid provided that its terms are evidenced in writing under a share pledge agreement signed by the pledgor–debtor in the presence of two witnesses who countersign the document. Upon the creation of the pledge, the pledgee is required to bring this to the attention of the company through a notice, supported by a certified copy of the pledge agreement. Then, the company registers the pledge in the its registry of members against the encumbered shares and provides the pledgee with a certificate. Registration of the pledge with the Registrar of Companies is not mandatory, but is highly recommended for the public and any interested party to be made aware that the shares in issue are pledged in favour of a creditor.

A company’s share certificates may be pledged in favour of more than one creditor, enjoying the same rank of priority and the relevant certificate issued by the Registrar of Companies indicates the nature of the charge and its beneficiaries. The pledge agreement is stamped and may refer or apply to all the shares of a company or only a part of them; however, the non-stamping of the agreement does not make it invalid.

The agreement determines instances which constitute events of default, in the occurrence of which the pledgee is entitled to gain ownership or liquidate the shares covered by the pledge in order to repay the outstanding debt. Before proceeding with the sale of the shares, the pledgee is obliged to notify the pledgor in writing of the default and call for payment of the debt or fulfilment of the promise undertaken within the deadline specified in the notice, stating that in the event of failure to comply, the pledgee will proceed with the sale. When the pledgee proceeds with the sale, they have a duty towards the pledgor under the laws of equity to act in good faith and secure the best possible price.

A valuation should be undertaken before the sale and the pledgee must notify the pledgor of this, to prove that the pledgee acted with due care and diligence, treated the pledgor fairly and took all the necessary steps to secure the price. By doing so, the pledgee is considered to have fulfilled their duty of care towards the pledgor and is released from any obligation or liability. If the sale of the shares is not possible without a court order, such an order must be obtained prior to sale. The law explicitly provides that if there is no provision to the contrary, the pledgee has the same rights and remedies against third parties as the pledgor would have in the absence of the agreement. Moreover, any payment made to the pledgee by a third party by virtue of the pledge is valid, as if it was made to the pledgor.

Despite the existence and registration of the pledge, for as long as no event of default occurs or continues to exist, the pledgor is entitled to exercise their voting rights and powers arising from ownership, including the right to receive dividends and increase the number of shares pledged, except the right to sell, transfer, assign, charge, pledge or burden them. The pledgor has no right to vote for a resolution that will affect the rights of the pledgee or is inconsistent with the terms of the agreement. The share pledge agreement usually defines the pledgee’s rights in the occurrence of an event of default, including voting rights, the right to collect dividends, the right to sell the shares, the right to be released from any liability regarding the sale of the shares and the right to choose the timing of their sale, as well as the right to use the sale proceeds for the payment of the costs of the sale, then the balance of the outstanding debt secured by the pledge and if any balance is left, that should be paid to the pledgor.

George Coucounis is a lawyer practicing in Larnaca and is the founder of George Coucounis LLC, Advocates & Legal Consultants, [email protected]