Issue 102, 6 March 2018

EGYPT’S NEW BANKRUPTCY LAW, WHAT DO YOU NEED TO KNOW?

When considering investing in Egypt, you probably think of “High Risk Environment”. One of the crucial factors that made Egypt be considered as a high-risk country for investment is the legal framework of bankruptcy, which is tainted by bureaucracy, high procedures cost and an overly long process.
The World Bank’s report on doing business for the year 2017 demonstrated the difficulty of exiting the Egyptian market. Thus, it became very clear that there is a crucial need for an adequate and efficient regime to regulate this.

On 19 February 2018, the government issued a new Bankruptcy Law no. 11/2018 (the “New Law”). The New Law replaces and revokes the bankruptcy rules set out in chapter 5 under the Commercial Code No. 17 of 1999 (the ” Commercial Code “). The executive regulation of the New Law (the “ER”) is expected to be issued within three months from the date the New Law came into force.

The New Law introduces a new philosophy. For a long time, Egyptian bankruptcy regulations used to adopt an approach that deals with the bankrupt as a criminal. However, it looks like the New Law is trying to change this entrenched belief by introducing new mechanisms like reorganization and by mitigating strictness with the debtor like mitigating imprisonment penalty for non-fraudulent bankruptcy.

In this update we are going to give you a glimpse on what you really need to know about the New Law:

Reorganization, New Perspective…

One of the most significant changes in the New Law would be establishing and regulating reorganization regime, citing United States bankruptcy chapter 11 which create win-win situation for all the related parties in the bankruptcy process.
The New Law introduced comprehensive reorganization procedures, which will open an outlet for non-viable companies to entail the continuation of the business and to prevent bankruptcy complex procedures with the court intervention, which was not the case previously. Reorganization was not regulated before the New Law, so it was achieved through a mutual arrangement between the debtor and the creditor, without any involvement from the court.

So who can apply for a reorganization plan and when? 

Well, any trader with a minimum capital of one million EGP, who did not commit any fraudulent act and whose business remained active for two years prior to the submission of the application of reorganization, can apply for a reorganization plan.
The timeline for submitting the request for the reorganization plan is not clear. We hope that this will be clarified in the ER.

Who is responsible for preparing the reorganization plan? 

A reorganization committee subordinated to the Court will be responsible of preparing the proposed plan for reorganization. The decision of the reorganization committee regarding the proposed reorganization plan shall be reached within three months from the date of submitting the reorganization application, although, the court may extend that period.

What is the time limit for implementing the reorganization plan?

Five years in the time limit.

How Far Has The Egyptian Bankruptcy Regime Been Effected By Other Regimes …
U.S. bankruptcy system:
There is no doubt that US Chapter 11 has largely influenced the New Law. 
Chapter 11 incorporates a forgiving bankruptcy system which allow business reorganization in order to encourage risk-taking. Making the business owners worry less about future financial catastrophe and knowing that they can renew their business without being expelled from the market, is really what revitalizes the investment and gives it the ability to renew itself.
We hope that such influence by Chapter 11, which introduces this more lenient perspective, will encourage investment and inspire growth in the Egyptian economy. 

Mediation is an Option, But….

With some exceptions, the law refers to the possibility of requesting mediation at any stage. The mediation will be led by the bankruptcy judge however! The law does not elaborate more on the process and we are not sure what this will look like. This is something to be clarified in the ER.

Civil and Criminal Liability of Board Members and Managers Remain the Same,

The law basically reinstated the same rules existed before. For instance, board members and/or mangers can be held severally or jointly liable to pay all or part of the company’s debts, in case the company’s assets do not suffice to pay 20% of these debts.

Some of the Penalties Have Been Mitigated, Other Aggravated,

The old legislation treated bankruptcy as a potentially criminal act, even if not accomplished by fraud. However, the New Law abolishes imprisonment in cases of non-fraudulent bankruptcy. 
Now, the prevention from leaving Egypt will be for a period not exceeding six-month, which may be extended for additional periods if any damages occurred to the creditors’ rights.
Negligent bankrupt is now penalized by fine only instead of imprisonment. While fraudulent bankrupt is now penalized by fine in addition to the preexisting penalty of imprisonment from three to five years.

In General, Shorter or Explicit Timeline for Procedures,

The law introduces timelines for some procedures and shortens the timeline for some other procedures.