CYPRUS Law and Practice Contributed by: Kyriacos Scordis, Anna Borovska and Constantinos Kazamias, Scordis, Papapetrou & Co LLC
with available assets, and directing the junior debt to the parent company. Priority of shareholders In the event of insolvency, these arrangements will remain effective subject to the mandatory pari passu principle that the priority of creditors on insolvency is determined by whether they are preferential, general or deferred creditors. Care must be given in the drafting of such arrange- ments so that they do not run the risk of being consid- ered ineffective if caught by the fraudulent preference provisions of the Companies Law. Where the same security is provided to different class- es of creditors, inter-creditor arrangements are also made between the lenders and the borrower company through an inter-creditor agreement that sets out the terms and conditions of their relationship. 5.8 Priming Liens The most common tools used by lenders to secure their interests arise by operation of Cyprus law that can prime a lender’s security interest, and typically include the following. • Mortgage – a lender can establish a mortgage over immovable property, which provides it with a prior- ity claim over the property in case of default. • Pledge – a lender can secure its interest by taking a pledge over movable property, allowing it to have a priority claim over those assets. • Floating charge – this allows a lender to secure its interest over a class of assets, which can change over time until an event of default occurs. • Fixed charge – a lender can take a fixed charge over specific assets, ensuring their priority claim over those assets throughout the loan’s duration. • Lien – is frequently taken over items that are being transported, and might be a common law legal lien or an equitable lien. The lien grants the holder simply the right to keep the debtor’s property until payment is made and does not include a right to sell. The carrier’s lien (the right to maintain custody of the goods) is subsequently discharged upon payment of the transportation fees.
• Guarantee – personal guarantees from third parties can be used to secure a lender’s interest and pro- vide an additional layer of protection. Companies also commonly provide guarantees as security for money owed by themselves or a third party. • Shareholding or management participation – is less common, but saw increased use post-2013, especially with non-performing clients as part of a restructuring, whereby a lender would take a share- holding or management interest or position (or both) in the underlying asset. This would normally by coupled with exit and sale provisions. 6. Enforcement 6.1 Enforcement of Collateral by Secured Lenders Generally, a secured lender will be in a position to enforce its collateral in the event that the borrower (and/or any other party providing securities for the loan facility arrangement) is in default of their obliga- tions, as will be more specifically set out in the loan facility or security documents. In the event of a charge and pledge over shares and share certificates, the pledge agreement secures – through pre-delivered title documents – enforcement under specified circumstances without the need for court recourse. In the event of a floating charge, on a default event, the charge will become fixed and crystallise over the secured assets in accordance with the terms of the agreement, enabling the secured lender (or its admin- istrator/receiver) to liquidate the securities in settle- ment of the amounts due to it. It is noted that in the event of the security provider undergoing a winding up procedure, in general, secured creditors by way of a fixed charge are entitled to enforce their security in settlement of their particular debt which the secu- rity provider has failed to pay, in accordance with the enforcement terms of the agreement or the document creating the charge. Floating charges, if not crystal- lised prior to the commencement of the liquidation or subject to the security documentation, rank for payment after liquidation costs and preferential pay- ments, and before other unsecured creditors.
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