The 2013 banking crisis brought to light the serious issue of Cyprus banks carrying on their balance sheets substantial provisions for non-performing loans (NPLs) which adversely affected the banking sector's profitability and sustainability. In response to EU pressure, the government of Cyprus put considerable effort into tackling the problem of NPLs, implementing various measures including improved foreclosure legislation and measures to assist banks to restructure their loan portfolios.
As a result, Cyprus has seen a large increase in enforcement proceedings, undertaken by credit institutions holding security on various assets, which has resulted in courts increasingly being required to deal with the material issue of whether the security holder has an obligation or duty to the debtor to sell the secured assets at the best possible price.
The right of a creditor to sell a secured asset in the circumstances of a default by the debtor, in general, is affirmed by the provisions of the Contract Law of Cyprus; in particular, in the event of default, the creditor has, in addition to the right to bring proceedings against the defaulting debtor for the outstanding debt, the right to either retain the goods pledged as collateral security or, sell the goods, upon reasonable notice to the debtor.
Many English and Cyprus cases have confirmed a creditor's right to sell secured goods in the event of a default by the debtor and have examined the issue of whether, in exercising the right of sale, a creditor is obliged to obtain the highest price possible. An early case in point was the English case of Cuckmere v Mutual Finance (Cuckmere Brick Co v Mutual Finance case [1971] 2 All ER 633). The central notion in Cuckmere was that a mortgagee is not a trustee of the power of sale for the mortgagor. Once the power of sale has accrued, the mortgagee has the right to exercise it for its own purposes, at the time it chooses, with no obligation to delay a sale to get a higher price. Salmon LJ concluded that a mortgagee exercising its power of sale bears the obligation to take reasonable precautions to obtain the true market value of the mortgaged property at the date on which it decides to sell it. This point was confirmed in the later English case Tse Kwong v Sen (Tse Kwong Lam v Wong Chit Sen [1983] UKPC 28, [1983] 3 All ER 54).
In the recent Cyprus case of Trokkoudi v Bank of Cyprus (Trokkoudi v Bank of Cyprus Public Company et al, No 3091/14, 28/8/2018), the court referred to the English case of Medforth v Blake (Medforth v Blake and others [1999] EWCA Civ 1482) and stated that the duties of the seller in exercising the right to sell included, among other things, principally the duty to act in good faith in the exercise of that duty, and to manage the property with due diligence.
In the Cyprus case of Syrimi v Pancyprian Finance (Syrimi Maria v Pancyprian Finance Public Company, [2010] 1 AAΔ 1131 [Supreme Court of Cyprus]), the Supreme Court reaffirmed the principal that the respondent, as secured creditor, had under Section 134 of the Contract Law, a plain 'right' to sell the secured property (in that case, shares), but that this did not amount to an 'obligation' to sell the shares as the appellant claimed. Further, it also referred to the case of China and South Sea Bank v Tan (China and South Sea Bank v Tan [1989] 3 All ER 839) and held that the respondent as creditor did not become a trustee of the pledged shares and could not be held responsible towards the appellant as a debtor, for not exercising the permitted power over the security in any particular way. The court held that the only obligation of the respondent creditor, if it decided to exercise the right to sell, was to do so by exercising reasonable diligence to secure the market price at the time it chose to sell.
Finally, in the Cyprus case of Hellenic Bank v Polydoridi (Hellenic Bank v Polydoridi, [1993] 1 AAΔ 68 (Supreme Court of Cyprus) the court held that where a receiver was exercising powers over a company's property, the receiver was required to show diligence to protect the company's property, and highlighted the importance of the receiver doing so to the standard of a prudent businessman in the conduct of his financial affairs.
The conclusion to be drawn from the relevant decisions is that a creditor must be diligent, prudent, act reasonably and in good faith in dealing with secured property, and in the case of exercising its right to sell, it must take reasonable precautions to obtain the true market value or 'the best price possible' at the time the creditor chooses to sell. However, the creditor does not owe a duty to wait until market conditions improve in order to obtain a higher value, nor indeed is the creditor required to sell at a particular time to avoid a reduction in value. In other words, a creditor is not under any obligation to pursue maximisation of the price. The meaning of 'best price possible' is the best price that is obtainable at the exact time the creditor chooses to sell, in the particular circumstances.
What is clear from the relevant case law, is that the creditor's duty cannot be expanded to a point where the creditor owes to the debtor duties similar to those of a trustee to maximise the return on the secured property in the interest of the debtor. All that is required is that, when a creditor chooses to exercise the power of sale, it must act with due care and in a way that secures the then prevailing market price, according to a reasonable assessment of the circumstances of the particular case. Further, it is also clear that in order for a debtor to challenge the price obtained by a creditor for the secured property, the debtor must be in a position to prove that the creditor did not exercise due care and prudence to obtain the then market price and/or acted dishonestly in its dealing with the secured property.
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Michael Pelosi |
Ioannis Sidiropoulos |
