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Cyprus: Steps toward normalisation

Costas Stamatiou
Following the bail-in of depositors as a condition of international financial support to Cyprus in March 2013, restrictive measures were imposed on deposits within the Cyprus banking system as of March 15 2013. These restrictions are gradually being relaxed, and the government has announced that it hopes to remove them entirely in the first few months of 2014. It should be noted that the restrictive measures apply only to funds within the Cyprus banking system as of March 15 2013. Any funds introduced after that date are free of any restriction.

Further progress towards the normalisation of the banking system has been made with the release by Bank of Cyprus, the largest commercial bank, of €950 million ($1.3 billion) of blocked deposits. When the bank was recapitalised in July 2013, €2.9 billion of deposits were blocked. The target date for release of the first tranche of €950 million was the end of January 2014, with an option for the bank to roll over the deposits for a further period of six months. Having established evidence of improving stability in its deposit base and an increasing level of customer confidence, the bank's management determined that there was no need to exercise the option to roll over the deposits, and accordingly released them. The Ministry of Finance and the Central Bank of Cyprus have welcomed this move as a significant step in strengthening the confidence of the public and investors, and as an indication that the banking system is on course for stabilisation.

At the same time as it released the deposits, the Bank of Cyprus (BoC) announced the procedure for transfer of the non-listed and non-dematerialised shares issued to depositors in connection with the recapitalisation. These shares are not yet admitted for trading on any recognised stock exchange, but may be traded privately.

There is considerable interest in trading the blocked deposits and the shares. The following paragraphs summarise the principal considerations involved under Cyprus law.

The concepts of assignment and novation

An assignment is the transfer to a third party (the assignee) of a right that one person (the assignor) has against another, such as the assignment of a lease or a debt. The assignee of a chose in action cannot acquire a better right than the assignor had. In other words, the assignee takes the chose in action subject to all the equities affecting it in the hands of the assignor which are in existence before notice is received by the debtor.

From the assignee's point of view, it is essential to ensure that the proposed assignor is not contractually restricted from assigning his right or, if there is such a contractual restriction, that the consent of the other contracting party is obtained.

Novation is a form of assignment in which, by the consent of all the parties concerned, a new contract is substituted for an existing contract. The new contract may be between the original parties, for example where a written agreement is later incorporated in a deed; or between different parties, such as where a new person takes the place of the original debtor or creditor.

Transfer of shares

It is now possible to transfer shares in the BoC which resulted from the implementation of the bail-in, despite the fact that they are not yet listed on a stock exchange. As the BoC is a public company, the directors' right to decline to register a transfer of shares (which applies in the case of a private company) does not apply to the BoC, as long as the transfer complies with the Articles of Association of the BoC and the applicable laws of Cyprus.

An instrument of transfer of shares in the prescribed form must be executed by the transferor and the transferee. Under the Articles of Association of the BoC, persons that acquire unlisted shares are entitled to receive a certificate evidencing ownership of the shares.

A new phase

The assignment and novation of deposits held in the BoC may now take place, subject to the consent of the BoC, and the non-listed and non-dematerialised shares may be traded on a private basis. Persons who acquire such assets may need to cooperate with the BoC for the purpose of compliance with the bank's so-called know-your-client due diligence requirements. Persons acquiring substantial holdings of shares should also be aware of the notification requirements under the Banking Laws of 1997 to 2013. The shares may also fall within the scope of the Insider Dealing and Market Manipulation (Market Abuse) Law 116(I) of 2005. Given the complexity of the issues involved, it would be prudent to obtain legal advice on the form of any agreement and the procedures to follow.

Costas Stamatiou

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