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Ship finance in Cyprus in 2022: Opportunities and challenges

June 30, 2022

In an ever-changing environment, the shipping industry faces enormous challenges stemming from the need to transform the industry into a green space, meet environmental requirements, and change regulations. As a result, most shipowners opt to alter their current fleet or build new vessels to comply with updated ecological regulations, including provisions to reduce greenhouse gas emissions and mitigate air pollution, biofouling, plastic pollution and underwater noise, among others.

The transformation of the sector inevitably requires appropriate funding, and ship financing has become critical for the shipbuilding sector and shipping companies worldwide. The financing aspect of shipping includes the corporate financial management of shipping companies to refinance existing debts and the financing of new shipbuilding.

As one of the leading maritime centres (classified by the Cyprus Registry as the 11th largest merchant fleet in the world and the 3rd largest fleet in the European Union), Cyprus is one of the centres for ship financing both through the maritime sector and through the provision securitisation solutions for financing.

Below we will briefly analyse the instruments by which the financing of a shipping company and/or a vessel can be secured under the laws of Cyprus and, in particular, chapter 113 of the Cyprus Companies Law (“Companies Law”) and Merchant Shipping (Ship Registration, Sales and mortgages) from 1963 to 2020 (Law 45/1963) (“Merchant Shipping Law”).

Pledge of shares of the Cyprus company owning a ship

The pledge of the company's shares is widely used as it provides commercial security in Cyprus. It is also used as collateral in the area of shipping finance in cases where the vessel is owned by a legal entity registered in Cyprus. The pledge of shares takes place by concluding an agreement on the pledge of shares, which specifies the terms of the pledge and provides that when agreeing, certain documents must be provided to the pledgee, i.e. specific security arrangements that will facilitate efficient out-of-court enforcement.

Documentation should enable the pledgee to recover the security in the event of default without having to engage in lengthy legal proceedings. Therefore, the documentation provided to the pledgee by the pledgor allows the pledgee to transfer the shares in his name in case of failure to fulfil the obligations stipulated by the share pledge agreement. The pledged shares must be fully paid up, and no other claims must be made against them.

Pledge is a form of actual security that provides the pledgee with property rights to shares owned by the pledgor. Ownership of the mortgaged property may be direct or, more commonly, indirect. Actual property ownership raises concerns about risk and obligations to serve the best interests. Therefore, indirect ownership is the more common practice.

Ship mortgages

Mortgage loans are the most common way to secure funding for courts. The relevant Cypriot legal framework (Merchant Shipping Law) allows the registration of a ship or a share in a ship as collateral for the creation and/or securitisation of a loan. More specifically, the ship's security will be used by the shipowner as a tool to obtain appropriate financing for the purchase and/or conversion and/or construction of the vessel. At the same time, the lender will acquire a share of the mortgaged ship. The two parties of the ship mortgage agreement will be the pledger, who is the shipowner, and the mortgagee, who is the creditor.

Mortgages must always be accompanied by a pledge agreement that includes the commercial/contractual terms of the agreement between the mortgagor and the mortgagee, which largely reflect the agreed terms between the lender and the borrower, as they are included in the main document (loan agreement). While the relevant law does not prescribe a specific form of the unilateral undertaking agreement, it is mandatory under the Merchant Shipping Law to reflect specific conditions and issues. They included but were not limited to the following:

• repayment of the principal debt,

• payment of interest,

• insurance and their renewal,

• application of insurance payments,

• restrictions on the use of the vessel,

• cases of default in which the legal or other agreed powers of the pledgee may be exercised, and

• powers of the mortgagee.

It should be noted that, under the provisions of 4.3(e) of the First Schedule to the Stamp Act of 1965, pledged documents are exempt from any obligation to pay stamp duty. This option, of course, is an additional incentive for parties interested in purchasing and registering a vessel under the Cypriot flag.

Mortgages and agreements on unilateral obligations are subject to registration in the relevant Register of the Ministry of Maritime Navigation of Cyprus. Such a register records information about the mortgage, the beneficiary, the date-time of the creation of the vessel or the pledged shares number. The time and date of the mortgage are essential and integral, as the priority of the mortgage is governed by the respective time and date of the mortgage. It is also noted that it is a widespread practice for a pledge to be issued and filled by a registrar of the Registry of the Cyprus Ministry of Maritime Navigation at the same time as the underlying document (loan agreement) is executed to close any gap in collateral that may arise between the issuance of a loan agreement and the registration of the pledge in the relevant registry. In addition to the registration procedure mentioned above and subject to the provisions of section 90 of the Companies Law, if the shipowner is a legal entity registered in Cyprus, the mortgage may also be registered with the Cyprus Companies Registry within 21 days from the date of creation of the relevant charge. Mortgages can be discharged from the Registrar of Companies by submitting an appropriate application (accompanied by a letter of the waiver signed by the lender/mortgagee) and from the relevant Registry of the Cyprus Ministry of Maritime after the signing of the memorandum of termination of the contract or obligation.

As follows from the above summary of the relevant procedures, Cyprus has established a well-structured ship financing framework to provide the necessary security systems for the demanding and ever-changing shipping industry market. As a leading maritime nation, Cyprus can and will play a decisive role in this transformation by offering attractive and convenient solutions to financiers and ship owners wishing to develop or modernise their fleet.

Don't hesitate to contact our experts for advice if you need more information regarding ship financing in Cyprus. We work quickly, professionally, and confidentially. We are waiting for your requests!

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