Egypt: The New Bankruptcy Law And Its Effects In Egypt

Last Updated: 8 February 2019
Article by Youssry Saleh & Partners

The Egyptian Government set a new business plan of investments in Egypt which should encourage the local and the foreign investors by issuing the New Bankruptcy Law No. 11 of the year 2018.

The Law has been issued on the 19th of February and came into force on the 22nd of March which revokes the bankruptcy rules set out in Chapter 5 under the Commercial Code No.17 of the year 1999 (the "Commercial Code").the newly introduced provisions have been adopted from the US Bankruptcy Law, Chapter 11.

The New Law aims to provide a safe environment for investors, continuation of the business rather than declaring bankruptcy and facilitates smooth entrance to and exit from the Egyptian Market, it also provides an opportunity for the startups to invest and not to worry about the risk-taking.

Egypt ranks number 115 in the Resolving Insolvency index in the 2018 Doing Business report, while it dropped 18 places in its overall ranking in the 2018 edition, standing at 128 out of 190 countries, down from 122 in the 2017 report.

The law modified ways to get over financial and administrative crises otherwise it creates a win-win situation for all the related parties as follows:

1. The Re-structuring System (Plan Re-structuring Organization):

It's a new business plan for reorganizing the company's financial and administrative system with the aim of paying off its debts; so instead of declaring bankruptcy or opting for liquidation it will help business owners and merchants in restructuring and re-organizing the company system.

Article 15:"Any trader whose capital is not less than one million Egyptian Pounds and has continuously engaged in the trade business in the two years preceding the filing of the petition and has not committed fraud, shall have the right to apply for re-structuring. A company under liquidation may not be re-structured."

Article16:a trader's business or property may be re-structured after his death at the request of his heirs within the year subsequent to the year of his death.

Article 18:"Restructuring aims to develop a plan for re-structuring the financial and administrative business of a trader, illustrating how could he get out of the financial and administrative disturbance, and how to pay his debts, and identifying the proposed source of finance. This could be done through a number of mechanisms, including revaluation of assets; restructuring of debts, including debts due to the State; capital increase; acceleration of cash inflows; reduction of cash outflows; and administrative restructuring."

Article 24 stipulated that "The trader shall continue to manage his property during the restructuring period, and shall remain liable for any obligations or contracts, prior or subsequent to the approval of the restructuring plan, so long as they do not conflict with this plan."

After approval of the re-structuring plan creditors will be prohibited from taking any action against the debtor until the end of the process which is stipulated in Article 29.

After approval of the re-structuring plan, no suits may be initiated between the trader and any of the signatory creditors, in connection with the re-structuring plan, nor may be proceeded with. Likewise, no individual lawsuits may be initiated or judicial actions be taken. The time bar related to the lawsuits, claims and loans shall be suspended pending the completion of the re-structuring plan.

Although this organizing plan serves the interest of the creditors and the debtors and guarantees their rights herein according to Article 25 which stipulates that:

The trader shall be barred from making any dispositions that are likely to adversely affect the interests of the creditors, including sale out of the trader's ordinary course of commercial business, donation, gift, borrowing or lending or any of the free-of-charge acts and guarantees, in addition to any pledge or lien or any analogous acts inconsistent with the re-structuring plan.

The re-structuring plan will be run by a re-structuring committee managed by (bankruptcy administration experts) wherein a number of offices and companies specialized in re-structuring and asset management registered together with experts from Ministries of Finance, Investment Trade, Industry, Manpower, And the Central Bank of Egypt, General Authority for Investment and Free Zones, Egyptian Financial Regulatory Authority, Egyptian Exchange, Egyptian Federation of Chamber of Commerce, Federation of Egyptian Industries, trustees in bankruptcy, appraisers and others, if necessary.

The aforementioned committee will have authority to re-evaluate the company's assets, re-structure its debts, increase its capital, increase its cash flow and decrease the expenditure.

2. Preventive composition:

Any trader who may be declared bankrupt and who did not commit any fraud or wrongful act that cannot be made by the ordinary trader may apply for preventive composition if his financial business is so disturbed, although, he should meet the conditions prescribed in the paragraph of the proceeding.

According to Article 35 "Petitions for preventive composition shall be submitted to the head of the bankruptcy department at the competent court, indicating the reason for business disturbance and proposals for composition and guarantees for implementation thereof."

This method prevents declaration of bankruptcy, protects the bankrupts' reputation and saves time for the creditors rather than facing complex procedures.

3. Mediation:

Resolving disputes by negotiating with the parties collectively or separately through a qualified independent judge (the Bankruptcy Judge) in order to reach an agreed point of view out-of-court or may propose an appropriate solutions for them.

The Judge must preserve the secrecy of all information related to the mediation procedures unless disclosure of such information is mandatory by Law.

The Jurisdictional Court and the specialized Judges

The competent court to hear the cases is the first instance circuit at the economic courts as defined by the domicile of the debtor (i.e. registered office of the company).

If the registered office is located outside of Egypt, jurisdiction shall rest with the court within whose jurisdiction the local management center is located and if the trader doesn't have a domicile the competent court shall be the court within whose jurisdiction the trader's usual residence is located.

The Penalties:

The Law distinguished between the non-fraudulent bankrupts who face difficulties while running his business and the fraudulent bankrupts who commit fraud and ruined their business intentionally as the new law abolishes imprisonment in cases of non-fraudulent bankrupts in which case the penalty will apply. Whereby the fraudulent bankrupt is penalized by fine in addition to the pre-existing penalty of imprisonment from three to five years.

Finally, the New Law brings faith in the investment climate in Egypt through re-organizing the company's administrative and financial system with paying of its debts and rather than declaring bankruptcy or opting for liquidation, the creditors may apply for re-structuring to save their business. In other words, the investors will no longer worry about the future financial and administration crises which will guarantee entering and the exiting the Egyptian market safely.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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