Charges under Cyprus law, can be of a fixed and floating nature, (i.e fixed and floating charges).

Fixed and floating charges have several features in common:

1) Most charges need to be registered with Cyprus Registrar of Companies and are void against a liquidator, administrator or creditor with an interest in the secured asset if not so registered, thought the contract between the company and the lender is still valid.

2) the charge holder right prevails over other creditors on insolvency.

3) the charge holder can take possession and sell the assets which are the subject of the charge.

Some general principals outlined

A fixed charge will take a priority over a floating charge on the same asset. Creditors are free to enter into the agreement in between themselves to alter the order of priority of their charge.

Fixed Charge

The most attractive security for a lender is land, including buildings and major items of machinery. A Cyprus company can create a number of fixed charges over such assets. Also the subject matter of the charge can be a pledge of share/s certificates. Suppose the chargor is a Cyprus company and such chargor pledges share certificates of the foreign entity, then according to CAP 113 s. 90 a registrable charge is created and same shall be registered with the Registrar of Companies to be valid against the liquidator.

Suppose the company in question goes into receivership or liquidation, then the fixed charge holders are paid out of the proceeds of sale of the relevant asset before any other claimants. This in particular makes a fixed charge a strong security.

In case of fixed charge such involves the transfer of dominion over that asset/property to the extend that the debtor will not be allowed to deal freely with that asset/property in the ordinary course of business.

Floating Charge

If a company has no scope for granting a fixed charge, the English case of Court of Chancery in re Panama, New Zeland and Australian Royal Mail Company (1870) LR 5 Ch App 318 gives an answer and permits the creation of an equitable charge over the company’s undertaking and stock in trade. It is therefore possible to have a charge over the assts such as stock which is constantly changing. The three basic features of the floating charge were analyzed in Re Yorkshire Woolcombers Association Ltd; Houldsworth Woolcombers Association Ltd [1903]2 Ch 284 and are:

a) It is an equitable charge over the whole or a class of the company’s assets for example over the book debts;

b) The assets subject to the charge are constantly changing;

c) The company retains the freedom to deal with the assets in the ordinary course of business until the charge ‘crystallizes’.

A floating charge will crystallize on the company in the following cases, provided the instrument creating the charge, expressly specifies in the charge document: going into receivership, going into liquidation, ceasing trade.

Therefore, once the floating charge crystallizes it becomes fixed and attaches to the asset/property and comes in the pool of assets. The principal effect of crystallization is that the charge ceases to be floating and it becomes specific or fixed and the debtor’s ability to deal with the asset in the ordinary course ceases.

As a matter of practice, the events of default are normally expressly provided for in the charge instrument and those are, amongst others:

(i) Insolvency;

(ii) Presentation of the winding up petition or passing of a resolution to appoint a liquidator;

(iii) Crystallization of any prior or subsequent floating charge;

(iv) Granting of another security to another creditor;

(v) Levying of distress or execution against any of the assets of the debtor;

(vi) Default in paying any financial indebtedness; and

(vii) Incurring further borrowings beyond a certain figure.

For further information on this topic please contact

Mrs. Liza Bokova(  ) at SOTERIS PITTAS & CO LLC,

by telephone (+357 25 028460) or by fax (+357 25 028461)

The content of this article is intended to provide a general guide to the subject matter. Specialist advise should be sought about your specific circumstances.