06 Dec Pledge on a shares certificate
Pledge on a shares certificate
by George Coucounis
“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 and enforceable provided that its terms are evidenced in writing under a share pledge agreement which is signed by the pledgor – debtor in the presence of two witnesses countersigning 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 company’s registry of members against the encumbered shares and provides the pledgee with a certificate that the pledge was duly registered. The registration of the pledge with the Registrar of Companies is not mandatory, but it is highly recommended in order for the public and any interested party to be 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 the company or only a part of them; however, the non-stamping of the agreement does not make it invalid.
The pledge agreement determines the instances which constitute events of default, on the occurrence of which the pledgee is entitled to gain ownership of the pledged shares or liquidate the shares covered by the pledge in order to repay the outstanding debt secured by the pledge agreement. Before proceeding with the sale of the shares, the pledgee is obliged to notify the pledgor in writing for the occurrence of the event of default and call the latter to pay off the outstanding debt or fulfil 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 of the shares. When the pledgee proceeds with the sale of the shares, he has a duty towards the pledgor under the laws of equity to act in good faith and secure the best possible price.
A valuation of the shares should be undertaken before the pledgee proceeds with the sale and he must notify the pledgor for this purpose, since such a step is proof that the pledgee acted with due care and diligence, that he treated the pledgor fairly and that he took all the necessary steps to secure this price. By doing so, the pledgee is considered to have fulfilled his duty of care towards the pledgor and he is released from any obligation or liability towards him. If the sale of the pledged shares is not possible without a Court order, such an order must be obtained prior to their 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 which the pledgor would have had in the absence of the pledge agreement. Moreover, any payment made to the pledgee by any third party by virtue of the pledge is valid and effective as if it was made to the pledgor.
Despite the existence and registration of the share pledge, for as long as no event of default occurs or continues to exist, the pledgor is entitled to exercise his voting rights and the powers arising from ownership, including the right to receive dividends and the increase of the number of the shares pledged, except from the right to sell, transfer, assign, charge, pledge or burden the same. The pledgor has no right to vote for a resolution that will affect the rights of the pledgee or which is inconsistent with the terms of the pledge agreement. The share pledge agreement usually defines the rights of the pledgee on 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.