Bankruptcy Trustee’s Power to Suble

On 4 November 2017, the Supreme Constitutional Court (“SCC”) issued a decision[1] finding unconstitutional Article 624.4 of the Trade Code empowering bankruptcy trustees, after taking the approval of the bankruptcy judge, to sublease leased premises even if the lease contract between the lessor and the bankrupt prohibits subleasing. In this decision, the SCC founds its decision on the basics of the right of ownership and the right to contract as guaranteed by the Egyptian Constitution. By issuing this decision, it has become easier for lessors who have faced similar situations to challenge sublease arrangements undertaken by the bankruptcy trustee without their consent, provided that the lease contract prohibits subleasing.

Background

The Egyptian Trade Code was issued by Law No 16 of 1999. Apart from regulating trade in general and specific forms of trade contracts, the Trade Code dedicates a whole chapter for bankruptcy. This chapter sets out the rules and procedures for declaring a person bankrupt – whether they are a natural person (individual), or legal person (entity or corporation), – the rules for managing and disposing of the bankrupt’s assets, and the settlement – to the maximum extent possible – of their debts. Once a person is declared bankrupt, they are prohibited from managing their own assets. The bankruptcy court appoints a bankruptcy trustee to manage the bankrupt’s assets as well as a bankruptcy judge to supervise the actions of the bankruptcy trustee. One or more bankruptcy supervisors may also be appointed from amongst the creditors who nominate themselves for this role of supervising the actions of the bankruptcy trustee. In managing the bankrupt’s assets, the bankruptcy trustee is required to maintain the assets and to represent the bankrupt in all claims and actions that are required for the management of the assets.

The Supreme Constitutional Court Decision

One of the rights granted to the bankruptcy trustee in the Trade Code is the right to sublease the leased premises even if the lease contract between the lessor and the bankrupt prohibits subleasing. The bankruptcy trustee may only sublease such leased premises if he obtains the prior approval of the bankruptcy judge and if such action is not detrimental to the interests of the lessor. This right and its qualifications are contained in Article 624.4 of the Trade Code and its constitutionality was contested before the SCC. On 4 November 2017, the SCC found Article 624.4 to be unconstitutional because it violates the freedom to contract as well as the right to own, which are protected and guaranteed by the Constitution. In this respect, the SCC cites Article 92 of the Constitution, which states that “The personal rights and freedoms of a citizen may not be obstructed or reduced. No law regulating the practice of rights and freedoms may restrict it in a manner that affects their fundamentals or core”. The SCC, further, clarifies that the purpose of regulating contracts is to ensure the existence of some balance between the parties; however, under no circumstances should such regulation become an obstruction to private ownership or strip an owner of their property rights. In this respect, the SCC cites Articles 27 and 54 of the Constitution, which guarantee the different types of rights to ownership, including private ownership, and personal rights respectively and require the achievement of balance between the interests of the different parties. With respect to lease contracts, the lessor’s fundamental rights include the right to choose who leases the premises and the right to determine the purpose of its use. The SCC finds that giving the bankruptcy trustee the right to sublease the leased premises even though the lease contract had specifically prohibited such action by the lessee violates the ownership rights that the owner has over their property, and grants unnecessary power to the bankruptcy trustee that is also unjustifiable in light of the leasing relationship. The SCC further clarifies that such finding is not affected by the requirement to ensure that the interests of the lessor are not prejudiced. This is because the Article in question did not set a penalty for its violation, neither did it determine the material interests that would justify the use of such right, nor did it set out guarantees that would allow the lessor to utilize their ownership rights. All of which creates an imbalance between the interests of the parties to the lease contract.

Effects of Unconstitutionality of the Article

Once a legal provision is found unconstitutional by the SCC, it may no longer be applied starting from the date that such decision is published in the Official Gazette. Further, its application prior to the issuance of the SCC decision becomes challengeable on the grounds of unconstitutionality unless its application has already been contested before the regular courts and a final decision has been issued or the right to challenge its application has lapsed. Accordingly, lessors of premises that have been subleased by bankruptcy trustees in contradiction to a lease contract, in application of Article 624.4 of the Trade Law, can now challenge the sublease arrangement based on the SCC’s recent decision.

The Draft Bankruptcy Law

We note that a new bankruptcy law has been drafted and is currently being reviewed by the State Council. We have reviewed a version of the draft bankruptcy law dated 28 December 2016 and Article 143.4 thereof contains the same wording that was found unconstitutional. It is needless to say that such wording should be removed from the draft bankruptcy law in order to avoid the re-legislation of a provision that has already been found unconstitutional.   [1] Supreme Constitutional Court Rule for Case No. 226 of Judicial Year 30 declaring the unconstitutionality of Article 624.4 of the Trade Law No. 17/1999, Official Gazette, Issue No. 45 (bis) (h), 15 November 2017.