On 19 February 2018, a new law no. 11/2018 was issued regulating the restructuring, preventive reconciliation and bankruptcy in Egypt (the" Bankruptcy Law"). The law entered into force as of 22 March 2018.
The law introduces for the first time an out-of-court restructuring system which helps troubled companies reorganize their business. In the meant time, courts are given the authority to enforce a restructuring plan if a consensual solution is not reached. Also a new court supervised mediation system is introduced.
Bankruptcy procedures and preventive reconciliation was previously regulated under Chapter 5 of the Egyptian Commercial Law No. 17 of 1999. This chapter is now abrogated and replaced by the Bankruptcy Law.
The Bankruptcy Law is a new tool aiming at boosting the current Egyptian economic status. It complements the newly issued Investment Law in enhancing sustainable economic development and provide safety valve for financial failures. The law enhances a new culture of creditor cooperation in debt restructuring to avoid the closure of business as well as promotes distribution and use of assets of failing business more efficiently and equitably. The law is expected to make loan workouts more flexible and give a leap to Egypt's ranking in the World Bank's Resolving Insolvency Index in the "Doing Business" report.
The Economic Court which has jurisdiction over the head office of the bankrupt company will continue to be competent to hear all Bankruptcy Law related lawsuits. However, the First Instance Circuit, rather than the Second Instance Circuit under the old law, will have jurisdiction. This change will impact the appealability of bankruptcy-related decisions before the Court of Cassation.
A Foreign Company which has a branch office or an agency in Egypt can be declared bankrupt in Egypt even if not declared bankrupt in its country.
Out-of-Court Restructuring System
The Bankruptcy Law introduced a new restructuring system which a non-fraudulent merchant or company can voluntarily apply for in case of financial and administrative turmoil.
The purpose of the restructuring is to set a 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, merchants and viable companies could apply for restructuring to save their business.
Only merchants and companies having a minimum of EGP 1 million are entitled to apply for restructuring. In the meantime, companies going through liquidation or preventive conciliation cannot apply for it.
The restructuring process will be run by a committee formed out of the experts listed in the Bankruptcy Expert Schedule at the Economic Courts ("Bankruptcy Experts")
The restructuring committee will have the authority to reevaluate the company's assets, restructure its debts (including these owed to the government); increase its capital; increase its internal cash flow, decrease expenditure; and apply an administrative restructure.
The restructuring committee will prepare a report to the competent judge within 3 months with its opinion as to the reasons behind the company's financial and administrative turmoil, the efficiency of entering into a restructure and the suggested plan. In all cases, the execution of the plan should take no longer than 5 years.
In order to be binding, the restructuring plan need to be signed by the stakeholders and ratified by the competent judge. The judge has the authority to appoint an assistant from the listed Bankruptcy Expert to help the company in implementing the plan and negotiating with the creditor as well as to provide technical and consultancy support.
The applicant will continue to run its business during the implementation of the plan. It will continue responsible for its obligations and contracts entered into before and after the ratification of the plan as long as they do not infringe it. The applicant will however be prohibited from entering into any agreement or taking any action that harm the interests of the creditors or infringe the restructuring plan, such as selling its assets, giving loans or imposing a pledge or any encumbrance over its assets.
After ratification of the restructure plan, creditors will be subject to a standstill that prohibits each creditor from exercising default remedies or otherwise taking any court action against the debtor until the end of the process.
Court-Supervised Mediation System
In a further step to limit recourse to courts on a case by case basis, and to preserve the bankrupt's commercial reputation, a mediation system is introduced to help resolve disputes in an approachable way that could fulfill a compromise for all the parties.
For that purpose, a new administration called the 'bankruptcy administration' ("Bankruptcy Administration") is created and shall be present in every Economic Court.
The Bankruptcy Administration shall be competent with handling the mediation process, and shall have broad discretion in this respect. It can request the assistance of experts, hold joint meetings with all parties or with part of them separately. Information disclosed during the mediation process is confidential.
Hearings can be attended by representatives of the parties; however, their representation must be evidenced by an official power of attorney allowing them specifically to negotiate and settle the dispute on their behalf. If a consensus is reached between the parties, a settlement agreement will be signed with the details of the procedures taken and the terms of the settlement. Once ratified by the competent judge, the settlement agreement shall be binding and judicially enforceable.
The old law did not differentiate between negligent bankrupt who unintentionally face difficulties in the course of running their business and those who willfully commit fraud. Both of them used to be deemed guilty and can face jail terms.
The new Bankruptcy Law adopts a new philosophy by abolishing the detention of a non-fraudulent bankrupt, while allowing travel ban for a limited period of 6 months in case of necessity. The court will declare a debtor bankrupt if it fails to pay its financial obligation(s) and such failure is a result that it is in sever financial distress. Once bankruptcy declared, creditors may place the debtor in involuntary liquidation.
Bankruptcy is declared by virtue of a court judgment upon the request of a creditor, the debtor itself, or the public prosecution.
For a creditor to bring a bankruptcy claim, its right against the debtor must be undisputed and due. As an exception, a creditor with a right that is not yet due can bring a claim for bankruptcy if the debtor took actions that are detrimental to the group of creditors, and provided that it can prove that it stopped paying its financial debts.
The judgment declaring bankruptcy will decide the date at which the debtor stopped meeting its financial obligations (the 'cessation date'), which will be a maximum of two years before the declaration of bankruptcy. The period from the 'cessation date' until the debtor was judicially declared bankrupt is call the ‘suspect period’.
During the 'suspect period', the law provides that certain transactions shall be inoperative vis-à-vis the creditors. These transactions include, donations, paying debts before their due date, or in a different way other than the agreed methods, creation of a pledge or any other security or guarantee for a pre-existing debt.
The court-appointed receiver will act as a trustee to manage the assets of the bankrupt and act on its behalf in all lawsuits and actions necessary to manage its assets.
Upon issuance of the bankruptcy judgment, the following effects shall apply in relation to the debtor:
- Bankrupt will not be allowed to manage its business or dispose of any of its assets.
- Bankrupt will be prevented from paying any of its financial obligations or receiving any financial dues.
- All monetary debts of the bankrupt will be accelerated, whether secured, unsecured or preferential debts.
Upon issuance of the bankruptcy judgment, ordinary unsecured creditors or creditors with general lien rights shall be prohibited from independently initiating lawsuits or undertaking judicial proceedings against the bankruptcy. Also, ongoing lawsuit they initiated prior to the bankruptcy declaration will be stayed.
Interests payable relating to an unsecured debt will cease to accrue vis-à-vis the group of creditors upon issuance of the bankruptcy judgment. Secured creditors may claim interest after the bankruptcy judgment only from the proceeds of the realization of their secured assets. Both unsecured and secured creditors are required to record their debts and deliver to the receiver all debt-related documents. The receiver will then examine creditor's claims and security interests and notify the relevant creditor of its remarks or objects (if any), and the creditor should reply with clarifications within 10 days.
The receiver will also carry out an inventory of the bankrupt estate. Once the inventory of the assets of the estate and the verification of the debts are concluded, the receiver shall submit to the court a statement of the verified debts including lists of the names of the secured creditors, the amount of such debts, and the type of collateral as well as its opinion regarding acceptance or non-acceptance of each debt. These lists will be verified and finally confirmed by the bankruptcy judge.
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