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Cyprus: Banking law amendments

Banks in Cyprus have been given new tools to facilitate the reduction of non-performing facilities. These tools have been introduced through the enactment in April of Law 38(I) of 2017, which amends the Business of Credit Institutions Laws of 1997 to 2016, which regulate the activities of commercial banks.

The amendments allow banks to appoint a so-called receiver-director of companies whose shares have been acquired in a debt-for-asset swap. The role of the receiver-director is to wind up the company. Alternatively, if the bank intends to dispose of the shares in due course, it may appoint a director to manage the company and preserve its value pending disposal. In both these cases the appointment must not prejudice the rights of any other shareholders under the Companies Law, CAP 113.

As a general rule, banks acquiring shares in a debt-for-asset swap must dispose of them no later than three years after buying them. The Central Bank of Cyprus may grant an extension of the disposal deadline if it considers, on the basis of a detailed application by the bank concerned, that there are exceptional reasons for doing so.

The amendments also give banks analogous powers regarding immovable property they have temporarily acquired. They may now undertake any maintenance work to preserve the value of the property, and may complete any unfinished project or any other development to render it marketable, if they have tried and failed to sell the property in its uncompleted state at an acceptable price, and a feasibility study confirms that the proposal is viable.

In addition, banks may rent out immovable property that has come under their control to a third party, provided that this does not impair the prospect of a subsequent sale. This potentially has multiple benefits: it will allow the bank to obtain an income stream, reduce holding costs and avoid displacing existing tenants.

The last of the main amendments provides an exemption, subject to safeguards, from the general prohibition on banks giving direct or indirect financial assistance for the acquisition of their own, their parent companies' or their subsidiaries' securities. A bank may now provide finance for the acquisition of a special purpose company (SPV) it has formed for the purpose of acquiring immovable property or other assets in the context of debt settlement, as long as the borrower receiving the finance is different from and not connected to the debtor who had transferred assets to the SPV in the context of a debt-for-asset swap. By increasing the sources of finance available to potential third-party purchasers of SPVs holding distressed assets, the amendment should facilitate their disposal, and liquidation of the underlying assets.

Notwithstanding the urgency of the need to reduce non-performing debt in the banking system, there are limits to how fast asset disposals can be achieved without adversely affecting the underlying markets, and the latest amendments are a positive step in addressing this issue.

Neocleous-EliasElias NeocleousMarissa Christodoulidou

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