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Movable Guarantees Law Adopted

Movable Guarantees Law Adopted
Last week witnessed the adoption of one of the most important economic pieces of legislation in the last few years, namely the Guarantees over Movable Assets Law (“Movable Guarantees Law”).[1] The Law states that it shall be applicable three months following its publication, i.e. on 16 February 20116, and that its Executive Regulations will be issued during the following three months, namely prior to 15 May 2016. While it did not receive significant media attention due to its highly technical nature, the new Law represents an important shift in the legislative framework that governs credit and banking operations. Thus, the Law deserves a detailed description and analysis of its many significant advantages.
Background
For about 150 years, Egyptian Law has regulated several forms of credit guarantees, including the official real estate mortgage, the possessory lien on movable assets, and the commercial mortgage on productive assets. These all allowed a creditor - whether banks or other financial institutions - to recover their monies if the debtor defaulted. However, throughout the years, Egyptian Law failed to recognise one other form of guarantees that is used in international financial markets, namely guarantees over movable assets. This form of guarantee is taken on movable assets that remain in the possession of the debtor for the entire duration of the guarantee. The advantage of this type of guarantee is that it allows the debtor to make use of movable assets that may be needed for his/her economic activities in an effective and efficient manner. While the commercial mortgage system which has been in place for over sixty years allows debtors to mortgage machinery, equipment and other company assets, only banks were permitted to take this type of mortgage. Furthermore, the commercial mortgage system failed to provide sufficient flexibility for the debtor to use these assets in a normal and effective way, and gave creditors a hard time trying to enforce their guarantees. Thus, the adoption of the Movable Guarantees Law came to address and resolve many of the problems faced in the credit guarantee system. The Law had been debated for a number of years, and it manages to give those seeking credit an additional, more appropriate way of dealing with banks and other financing institutions. The Law also opens the door for small enterprises to enter the world of official financing and credit.
Scope of the Law  
What distinguishes the movable guarantees covered by this Law is that they include "all existing or future physical movable assets or existing intangible ones owned by the debtor or the grantor". According to the Law, physical movable assets include the following: outstanding or deferred debt, bank accounts, negotiable securities, commercial/negotiable instruments, shipping documents, equipment, inventory, trees, crops, birds and animals, minerals before extraction, and intellectual property rights. Future assets are physical movable assets that are expected to be under the possession of the debtor or the grantor in the future. This, however, does not include intangible assets. Thus, the new Law enables the borrower – for the first time – to get credit by presenting current or future movable assets as a guarantee, without compromising their possession. This means that the borrower can actually borrow by using a “portfolio” of assets that is subject to change during the duration of the guarantee. While this new system could be of significant impact on credit in general, it opens the door for many small enterprises that may not be able to provide the traditional guarantees required by banks and financial institutions to enter the world of credit guarantees. On the other hand, it is noted that the new Law has excluded from its scope the following: (1) Movables owned by the State or foreign embassies, (2) concessions granted by the State (such as exploration or mining rights), (3) movables owned by banks or intended for personal use unless the credit was granted for the purpose of financing their purchase, and (4) movables under common ownership unless they were presented as guarantees with the consent of all owners. Moreover, the Law does not apply to (1) rights derived from liens on financial securities, (2) rights to inheritance, (3) rights to pension, (4) life insurance policies, (5) rights to damages, (6) alimony, and (7) wages. In other words, none of these rights may be mortgaged under the new Law.
Registration of the Guarantee
To regulate this type of movable guarantees and achieve the legal protection needed over them, the Movable Guarantees Law stipulates that the Egyptian Financial Supervisory Authority (“EFSA”) has to create/hold an electronic log/register to register and publish the guarantees’ rights and any amendment or deletion thereto. The Law also gives EFSA the right to entrust the management of this register to an independent body provided it is under its supervision. The Movable Guarantees Law also stipulates that its Executive Regulations will determine the procedures required to register the guarantee and the fees associated with such registration which shall not exceed five hundred Egyptian pounds for a single registration. The registration should include the description of the movable asset, the parties of the contract, and the duration of the guarantee. The guarantee may also include the commercial terms set between the debtor and the creditor regarding the debtor's responsibility for maintaining the movable guarantees, their proper use, and notifying the creditor of any changes to the movable in his/her possession. In this regard, the Movable Guarantees Law stipulates that the debtor in possession of the movable guarantee will be held accountable and responsible for the asset, using the highest standard of responsibility under Egyptian Law. The creditor may assign its rights under the guarantee to third parties from the date of notification to the debtor.
Rule for Guarantees
The new Law regulates many details related to movable guarantees. While it is beyond the scope of this analysis to provide these details at length, the following elements must be highlighted:
  • The conditions of a guarantee can only be changed through an agreement between its parties or through a court order;
  • At the end of term of the guarantee, the creditor shall cancel the registration of the guarantee within ten days. Otherwise this may be done through an order of the urgent matters court;
  • If a debtor defaults, guarantees registered under the new movable assets guarantee system are not entered as part of the general guarantees for creditors;
  • Naturally, the most important effect of the new Law is to give the creditor priority over the execution of the movable asset to pay of his/her debt.
Execution/Enforcement of the Guarantee
Generally, the new Law requires a notice of five days (starting on the day on which the debtor is required to repay his debt) to be given to the debtor before a creditor is allowed to enforce the guarantee. At the end of these five days, a creditor may request a court order for the sale of the movable asset. The sale is made in accordance with the rules determined by the judge. Nonetheless, the Law permits the enforcement of the guarantee without abiding by the above procedures in two cases: First, if the guaranteed asset is a financial debt to a third party or if it is a bank account. This is of high importance because it allows for enforcement on a bank account without going through judicial procedures. Secondly, the Law permits debtor and creditor to agree on the creditor’s right for the direct sale of the guaranteed asset without attaining a court order. This is subject to the condition that the creditor notifies the debtor of the need to repay the debt, and gives the debtor a five-day notice before enforcing the guarantee. At any rate, the debtor may halt the sale procedures – even if only one day before the completion of the sale – if he/she presents a request to the urgent matters court and repays the debt in question.
Penalties 
The Law imposes a number of penalties - ranging between various fines to imprisonment - against the debtor in possession of the asset if he/she alters its condition in order to deliberately harm the creditor, fails to safe-keep it, damages it, disposes of it, or prevents its sale upon execution. It also punishes creditors who unlawfully register guarantees, as well as anyone who establishes an electronic registry for movable guarantees in violation of the Law.
Conclusion
This is one of the most significant pieces of economic legislation issued in the last few years, as it opens the way for a new type of commercial guarantees and accordingly expands the scope of financial inclusion especially among smaller enterprises. Undoubtedly there will be many details and procedures that will need further clarification following the application of the Law, especially with regard to the electronic register of guarantees and execution thereon. And there may be a need for some revision and adjustment in the future based on this experience. While there is no doubt that markets will take some time to get used to the application of this new system, this remains a much needed and a highly positive reform. [1] Presidential Decree-Law No. 115/2015 issuing the Movable Guarantees Law, Official Gazette, Issue No. 46 (bis) (a), 15 November 2015.
Last week witnessed the adoption of one of the most important economic pieces of legislation in the last few years, namely the Guarantees over Movable Assets Law (“Movable Guarantees Law”).[1] The Law states that it shall be applicable three months following its publication, i.e. on 16 February 20116, and that its Executive Regulations will be issued during the following three months, namely prior to 15 May 2016. While it did not receive significant media attention due to its highly technical nature, the new Law represents an important shift in the legislative framework that governs credit and banking operations. Thus, the Law deserves a detailed description and analysis of its many significant advantages.
Background
For about 150 years, Egyptian Law has regulated several forms of credit guarantees, including the official real estate mortgage, the possessory lien on movable assets, and the commercial mortgage on productive assets. These all allowed a creditor - whether banks or other financial institutions - to recover their monies if the debtor defaulted. However, throughout the years, Egyptian Law failed to recognise one other form of guarantees that is used in international financial markets, namely guarantees over movable assets. This form of guarantee is taken on movable assets that remain in the possession of the debtor for the entire duration of the guarantee. The advantage of this type of guarantee is that it allows the debtor to make use of movable assets that may be needed for his/her economic activities in an effective and efficient manner. While the commercial mortgage system which has been in place for over sixty years allows debtors to mortgage machinery, equipment and other company assets, only banks were permitted to take this type of mortgage. Furthermore, the commercial mortgage system failed to provide sufficient flexibility for the debtor to use these assets in a normal and effective way, and gave creditors a hard time trying to enforce their guarantees. Thus, the adoption of the Movable Guarantees Law came to address and resolve many of the problems faced in the credit guarantee system. The Law had been debated for a number of years, and it manages to give those seeking credit an additional, more appropriate way of dealing with banks and other financing institutions. The Law also opens the door for small enterprises to enter the world of official financing and credit.
Scope of the Law  
What distinguishes the movable guarantees covered by this Law is that they include "all existing or future physical movable assets or existing intangible ones owned by the debtor or the grantor". According to the Law, physical movable assets include the following: outstanding or deferred debt, bank accounts, negotiable securities, commercial/negotiable instruments, shipping documents, equipment, inventory, trees, crops, birds and animals, minerals before extraction, and intellectual property rights. Future assets are physical movable assets that are expected to be under the possession of the debtor or the grantor in the future. This, however, does not include intangible assets. Thus, the new Law enables the borrower – for the first time – to get credit by presenting current or future movable assets as a guarantee, without compromising their possession. This means that the borrower can actually borrow by using a “portfolio” of assets that is subject to change during the duration of the guarantee. While this new system could be of significant impact on credit in general, it opens the door for many small enterprises that may not be able to provide the traditional guarantees required by banks and financial institutions to enter the world of credit guarantees. On the other hand, it is noted that the new Law has excluded from its scope the following: (1) Movables owned by the State or foreign embassies, (2) concessions granted by the State (such as exploration or mining rights), (3) movables owned by banks or intended for personal use unless the credit was granted for the purpose of financing their purchase, and (4) movables under common ownership unless they were presented as guarantees with the consent of all owners. Moreover, the Law does not apply to (1) rights derived from liens on financial securities, (2) rights to inheritance, (3) rights to pension, (4) life insurance policies, (5) rights to damages, (6) alimony, and (7) wages. In other words, none of these rights may be mortgaged under the new Law.
Registration of the Guarantee
To regulate this type of movable guarantees and achieve the legal protection needed over them, the Movable Guarantees Law stipulates that the Egyptian Financial Supervisory Authority (“EFSA”) has to create/hold an electronic log/register to register and publish the guarantees’ rights and any amendment or deletion thereto. The Law also gives EFSA the right to entrust the management of this register to an independent body provided it is under its supervision. The Movable Guarantees Law also stipulates that its Executive Regulations will determine the procedures required to register the guarantee and the fees associated with such registration which shall not exceed five hundred Egyptian pounds for a single registration. The registration should include the description of the movable asset, the parties of the contract, and the duration of the guarantee. The guarantee may also include the commercial terms set between the debtor and the creditor regarding the debtor's responsibility for maintaining the movable guarantees, their proper use, and notifying the creditor of any changes to the movable in his/her possession. In this regard, the Movable Guarantees Law stipulates that the debtor in possession of the movable guarantee will be held accountable and responsible for the asset, using the highest standard of responsibility under Egyptian Law. The creditor may assign its rights under the guarantee to third parties from the date of notification to the debtor.
Rule for Guarantees
The new Law regulates many details related to movable guarantees. While it is beyond the scope of this analysis to provide these details at length, the following elements must be highlighted:
  • The conditions of a guarantee can only be changed through an agreement between its parties or through a court order;
  • At the end of term of the guarantee, the creditor shall cancel the registration of the guarantee within ten days. Otherwise this may be done through an order of the urgent matters court;
  • If a debtor defaults, guarantees registered under the new movable assets guarantee system are not entered as part of the general guarantees for creditors;
  • Naturally, the most important effect of the new Law is to give the creditor priority over the execution of the movable asset to pay of his/her debt.
Execution/Enforcement of the Guarantee
Generally, the new Law requires a notice of five days (starting on the day on which the debtor is required to repay his debt) to be given to the debtor before a creditor is allowed to enforce the guarantee. At the end of these five days, a creditor may request a court order for the sale of the movable asset. The sale is made in accordance with the rules determined by the judge. Nonetheless, the Law permits the enforcement of the guarantee without abiding by the above procedures in two cases: First, if the guaranteed asset is a financial debt to a third party or if it is a bank account. This is of high importance because it allows for enforcement on a bank account without going through judicial procedures. Secondly, the Law permits debtor and creditor to agree on the creditor’s right for the direct sale of the guaranteed asset without attaining a court order. This is subject to the condition that the creditor notifies the debtor of the need to repay the debt, and gives the debtor a five-day notice before enforcing the guarantee. At any rate, the debtor may halt the sale procedures – even if only one day before the completion of the sale – if he/she presents a request to the urgent matters court and repays the debt in question.
Penalties 
The Law imposes a number of penalties - ranging between various fines to imprisonment - against the debtor in possession of the asset if he/she alters its condition in order to deliberately harm the creditor, fails to safe-keep it, damages it, disposes of it, or prevents its sale upon execution. It also punishes creditors who unlawfully register guarantees, as well as anyone who establishes an electronic registry for movable guarantees in violation of the Law.
Conclusion
This is one of the most significant pieces of economic legislation issued in the last few years, as it opens the way for a new type of commercial guarantees and accordingly expands the scope of financial inclusion especially among smaller enterprises. Undoubtedly there will be many details and procedures that will need further clarification following the application of the Law, especially with regard to the electronic register of guarantees and execution thereon. And there may be a need for some revision and adjustment in the future based on this experience. While there is no doubt that markets will take some time to get used to the application of this new system, this remains a much needed and a highly positive reform. [1] Presidential Decree-Law No. 115/2015 issuing the Movable Guarantees Law, Official Gazette, Issue No. 46 (bis) (a), 15 November 2015.