The encumbrance and sale of shares is made by a court order for the repayment of a debt

As a way of securing and repaying a debt, a court may issue an encumbrance order for the sale of a debtor’s shares in a private company. These court orders are issued upon an application by a judgment creditor and claim that the transfer or disposal of the shares be prohibited and that the registrar of companies and official receiver proceed to sell them by public auction. An order may also be issued that any dividend in relation to the debtor’s shares be held in a separate account and form part of the charged shares for the same purpose.

Article 3 of the Law on Encumbrances, Law 31(I)/1992, provides that when a person (debtor) is ordered to pay a certain amount of money to another person (creditor) under a judgment of the court, then, for the purpose of executing the judgment, the court may issue an encumbrance order imposing a charge and interest that the judgement debtor has on assets for which the law is applicable and they are stated in the order, so as to secure the payment of the amount due.

These assets include stocks of any legal person, such as shares or debentures and the consequences of the charge order are their sale, disposal or liquidation, which can only take place after the issue of a court order upon the application by summons of the creditor, the so-called sale order.

When issuing the sale order, the court may impose certain terms regarding the notification of the debtor and any other interested or affected person, who is considered necessary under the circumstances.  

Priority of encumbrance

The charge order, as a charge on the interest of a debtor on their assets (shares), has priority over all the other debts and obligations of the debtor, provided these assets have not been the object of a previous charge order. Simultaneously, a prohibition is imposed regarding the transfer, sale, payment or any other transaction of said assets, as well as a prohibition for the payment of dividend to the debtor.

The court, before issuing a sale order, has the duty to examine the views of all the interested parties, including the registrar of companies and official receiver, the company’s directors or of any other legal person, in order to ascertain the interest of the debtor and of all the other persons who may have an interest in the charged assets or who may be affected by their sale, disposal or liquidation.

Appointment of receiver

Furthermore, the court may appoint a receiver for the disposal of the assets with an aim to collect the secured amount and in the event of the sale of shares, it is carried out, with the approval of the court, in a public auction to the highest bidder.

In the case where an action for debt or damages is pending, the court, after an application of the claimant, may issue an interim charge order, if it is satisfied that the claimant has a valid claim and that through the transfer or alienation of the assets, the judgment may not be satisfied.

Court decision

The District Court of Paphos, in it decision issued on January 9, examined the above issues, since an application was submitted before it with a summons requesting the issuance of an order for the encumbrance of the shares owned by the debtor in a company and that the Registrar of Companies be ordered to dispose of and/or sell the debtor’s shares by public auction and in accordance with the provisions of article 8 of Law 31(I)/1992.

The debtor objected to the creditor’s application and claimed that it was in bad faith with the aim of financially draining him, that he would suffer unjustified and disproportionate damage from the issuance of the requested orders at this stage, due to the pendency of his appeal against the first-instance decision issued for the debt owed and that it affected the ownership of the company’s immovable property.

The court, after establishing the existence of the judgment debt, that the disputed shares belonged to the debtor and constituted his only asset and that the application did not consider the possibility of encumbering, selling or disposing of immovable property owned by the company, decided that the issuance of the encumberance order accompanied by a sale order was considered a proper way of enforcing the court’s decision.

Having examined all the circumstances of the case and in particular evidence placed before it concerning the personal and financial situation of the debtor, as well as the possibility of damage to another creditor of the debtor in the event of the issuance of the requested orders, it considered that their issuance was justified and issued them.

George Coucounis is a lawyer specialising in Immovable Property Law, based in Larnaca. E-mail: [email protected], tel: 24818288