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Cyprus - Non-registration of registrable charges

As a general rule, a charge created by a Cyprus company conferring security on the company’s property or undertaking constitutes a charge registrable under Section 90 of the Companies Law CAP 113. Following the enactment of Law N99(I)/2009 a pledge of shares of a Cyprus company is no longer required to be registered under CAP 113 for perfection purposes. However, since it is invariably the case that a pledge of shares takes the form of a pledge of share certificates pursuant to the Contract Law CAP 149, coupled with an equitable mortgage or charge over the shares themselves, it is nevertheless advisable to register the charge under CAP 113, given the ambiguity of the amendment to the law, in its reference to a pledge of shares. The Registrar of Companies continues to accept applications for the registration on charges of shares in a Cyprus company, and this is the safest and most conservative approach.

The Companies Law, which is very similar to the English Companies Act 1948, provides that a registrable charge, so far as it confers any security on the company’s property or undertaking, is void against the liquidator and any creditor of the company unless the prescribed particulars of the charge together with the instrument creating it are submitted to the Registrar of Companies for filing. There is a 21 day time limit, though late registration is permissible with the leave of the court. Failure to register a charge in time makes the company and its officers liable to a default fine.

Nevertheless, registration is a perfection requirement and not a priority point and thus irrespective of whether the charge is registered or not, the agreement (creating the charge) between the parties will be upheld as a valid agreement.

The effect of non-registration is to avoid the security as against the liquidator and any creditor of the company. Any creditor includes a subsequent registered incumbrancer even though he had express notice of the prior unregistered charge when he took his security.

Accordingly, in the case where a registrable charge becomes void under Section 90 i.e. because of non-registration, the money secured thereby shall immediately become payable. This means that the debt secured by the charge will acquire the status of one payable on demand and, assuming the charge does indeed constitute a registrable charge (under Section 90), the chargee may in these circumstances require the chargor to immediately repay its debt. It is not necessary for the chargee to wait for the chargor to go into liquidation before requiring repayment.

By way of clarification and in conclusion, non-registration of a registrable charge will be void as against any liquidator of the company (chargor) and any creditor of the chargor in so far as the charge purports to create security over the chargor’s property or undertaking. In other words, the debt as between the chargor and chargee (which the charge purports to secure) will remain due and owed but non-registration will in practical terms demote the debt to one of an unsecured status. On a liquidation of the chargor therefore the creditor (chargee) may only recover against the chargor as an unsecured creditor. This follows the English decision in In re Monolithic Building Company [1915] 1 Ch 643, 667 that property subject to a registrable but unregistered charge should be available to the general body of creditors (or a secured creditor ranking after the unregistered charge) as if no such charge existed.