The New Bankruptcy Law

On 19 February 2018, the law for restructuring, bankruptcy and bankruptcy-avoiding settlement was issued (generally referred to as the “Bankruptcy Law”). [1] The Law is considered one of the most important pieces of economic legislation to come out lately. It adds novel concepts and introduces a new approach to dealing with persons and entities who are facing financial or administrative trouble. For instance, the Law introduces for the first time in Egyptian bankruptcy legislation the concepts of mediation and restructuring, giving both debtors and creditors a higher degree of flexibility in dealing with debts. It also revokes some harsh consequences of bankruptcy that were part of previous legislation, cancelling the authority of the Bankruptcy Judge to place the debtor in custody. The Law states that its executive regulations and other related implementing decrees are to be issued within three months from the date of its coming to effect (determined as thirty days following the Law’s publication); i.e. prior to 21 June 2018.

Background

Prior to the issuance of the present Law, Code of Commerce No. 17 of 1999 (Articles 550 to 772) constituted the main governing provisions for bankruptcy. This is in addition to a few relevant articles under the Penal and Civil Codes. The new Bankruptcy Law No. 11 of 2018 has repealed bankruptcy related provisions in the Code of Commerce, as well as any rules that contradict the new provisions.

The New Bankruptcy Law

• Scope

The new Law applies to all companies which take a legal form provided under a companies’ related law (i.e. whether that is a corporation or a partnership, and whether it is regulated by Investment Law No. 72 of 2017, or Companies Law No. 159 of 1981). In addition, the Bankruptcy Law is applicable to any person who undertakes a commercial operation, whether as an amateur or a professional. Excluded from the scope of the Law are public sector companies and unregistered special purpose vehicles.

• Mediation

For the first time in the context of bankruptcy, the new Law introduces the concept of mediation. The latter is defined as an amicable means for the settlement of commercial disputes through a mediator (the Bankruptcy Judge), who seeks middle ground between the parties in dispute and suggests solutions. Mediation is a procedural development in the sense that it is more concerned with the method in which a settlement was reached, and not with the substance of that settlement. It is therefore possible that the parties resort to mediation at any point during restructuring, bankruptcy, or bankruptcy-avoiding settlement. The Law provides that a new department – the Bankruptcy Department – is to be established at the Economic Courts to undertake mediation procedures through presenting the matter before a bankruptcy judge within 30 days from the date of submission of a mediation request. Information that comes to the knowledge of the Bankruptcy Judge during mediation is confidential, except any information that must be disclosed by a law or in order to enforce the settlement. According to Article (9) of the Law, in the event that the parties to the dispute reach a satisfactory solution, a settlement agreement is concluded which contains all relevant details, and that is by law automatically enforceable. If a settlement is not reached, the Bankruptcy Judge refers the matter to the competent court in order to initiate normal litigation proceedings.

• Restructuring

Also for the first time, the new Bankruptcy Law recognizes restructuring, which is an important notion for companies in financial hardship. Restructuring is defined as “procedures that assist the merchant in exiting a stage of financial and administrative turbulence”. Article (18) of the Law elaborates the purpose of this concept as being laying out a plan to reorganize the merchant’s business in a manner that guarantees the overcoming of that stage of financial and administrative uncertainty, and the payment of debts. The Law assigns the task of forming a restructuring committee to the judge. The Restructuring Committee is composed of experts registered at the Economic Courts. It submits its report containing a restructuring plan to the judge within three months from the date of the request. In an attempt to delineate a clear timeline for this procedure, Article (20) provides that the time period for implementing the restructuring plan cannot exceed 5 years. It also gives the Bankruptcy Judge the right to appoint an assistant to oversee the implementation of the plan. Submitting a restructuring request suspends any other requests for bankruptcy or bankruptcy-avoiding settlement until a decision is reached in the restructuring. It is worth noting that during restructuring the merchant continues in administering his/her finances throughout the period of implementation of the plan. A merchant also remains liable for any obligations that result from that. However, they are not allowed to undertake any transactions that might [adversely] affect the rights of the creditors, or which go against the restructuring plan. While the Law allows the judge to appoint an assistant for restructuring, the competencies of the latter seem to be of a consulting nature, or that their role is mostly to provide information (things like: assisting the merchant to rectify his/her financial position, and offering advice and technical support). However, the Law does not define the restructuring assistant as someone with an authority that supersedes that of the debtor’s in running the business. In order to avoid any misuse of this path, the Law limits eligibility for requesting restructuring to merchants with capital that is not less than EGP 1 million who have undertaken a continued business within the two years preceding the request. A company may not be in liquidation and submit a restructuring request, nor may a decision of bankruptcy or bankruptcy-avoiding settlement had been issued in its respect. Furthermore, the Law considers the rights of parties likely to be affected by the restructuring, as it states in Article (26) that “any party with vested interest may come before the Bankruptcy Judge to review any requests in relation to the restructuring plan”. Moreover, while the ratification of a restructuring plan that is signed by certain creditors suspends the right of these creditors in initiating any litigation proceedings against the merchant, Article (29) also provides for the suspension of the running of the statutes of limitation for filing claims regarding these debts till the end of the restructuring plan. This essentially means that a creditor’s agreeing to restructuring does not bar them from subsequent litigation, albeit it freezes that right until the end of the restructuring procedures.

• Bankruptcy-Avoiding Settlement

Resorting to restructuring is a way to avoid a declaration of bankruptcy and retain a portion of the power to run the merchant’s own business. An alternative method provided by the Law is bankruptcy-avoiding settlement. Likewise, bankruptcy-avoiding settlement is a way to avoid a declaration of bankruptcy. However, it does not come with the same freedom that restructuring provides with respect to the debtor’s administration of their own business. Similar to the way it was under the repealed provisions of the Code of Commerce, the new Bankruptcy Law contains several Articles that regulate bankruptcy-avoiding settlement, being a procedure that any merchant may resort to as long as their business is in financial disorder in a manner that affects their ability to pay, and given that the merchant has been undertaking their commercial activity in a continuous manner for at least two years prior, without committing any fraud. Article (31) further states that companies may not file for bankruptcy-avoiding settlement except upon the approval of the majority of the company’s shareholders or its general assembly. While restructuring gives the debtor relative flexibility and control over their business, a bankruptcy-avoiding settlement contains stricter regulations that curtail the freedom of the debtor in dealing with the entity or assets in question. These regulations are more flexible, however, in comparison to a debtor who has been declared bankrupt. As such, one can look at a restructuring plan, a bankruptcy-avoiding settlement, and a declaration of bankruptcy as being part of a continuum that provides decreasing degrees of flexibility, autonomy and control for the debtor. The new Law authorizes the court to take interim measures to safeguard the debtor’s obligations until a decision is made in relation to the debt settlement request. If the court approves the request, it must appoint a settlement judge and a settlement trustee to oversee subsequent settlement procedures, including taking stock of relevant creditors, inviting them to a settlement meeting, sealing the debtor’s ledgers, and supervising the management of the debtor’s business. The settlement itself occurs through a meeting that involves the creditors and the debtor, in which they negotiate the terms of the settlement after hearing from the settlement trustee. The settlement is agreed upon if it is approved by at least the majority of the creditors whose claims have been approved, provided the value of their claims represent at least two thirds of the value of all claims. Article (62) of the Law clarifies that creditors with debts guaranteed by real rights must not take part in voting on the settlement, except if they waive their guarantees. Reaching and executing a settlement at the creditors’ meeting is not the end of the story. Following agreement, the settlement is sent to the relevant court, which decides to approve or reject the settlement. It is noteworthy that while the settlement process is relatively participatory in nature (debtors and creditors determine it to a large extent), the Law makes it clear – in Article (65) – that the court has the ultimate authority to approve or reject the settlement, even if it is accepted by all relevant creditors and the debtor.

• Declaration of Bankruptcy

The new Law did not effectively change the basic understanding of the concept of bankruptcy that was included in previous legislation. A company would still be considered bankrupt only if it ceases to repay its commercial debts following a period of financial turbulence, and only after a court decision declaring its bankruptcy has been issued. Bankruptcy declaration processes may be initiated by the debtor, a creditor, the public prosecutor’s office, or the relevant court. Naturally, the process leading up to and following a declaration of bankruptcy is the most complicated and stringent process, in comparison to restructuring or debt settlement, giving the debtor the least amount of flexibility and autonomy over their business. According to Article (82), the relevant court may order precautionary measures to safeguard the debtor’s assets or to manage them directly. Similar to the former bankruptcy provisions in the Code of Commerce, the new Law allows for these measures to be imposed until a court decision on the bankruptcy is reached (although the new Law breaks this period down to a renewable three months period without a cap on the number of extensions). Expectedly, the Law includes a number of provisions that guide the court in determining the date on which the debtor will be considered to have ceased to repay debts. The Law also includes a number of provisions detailing the process for selecting a bankruptcy trustee and a bankruptcy judge and details their powers and responsibilities. One additional responsibility on the bankruptcy trustee that the Law adds is the requirement to inform a number of public authorities, including the Central Bank of Egypt (which in turn informs banks operating in Egypt), the Financial Regulation Authority (previously EFSA), and the Egyptian Stock Exchange of the issuance of a bankruptcy declaration. This addition may help in creating a more transparent environment, in allowing the market to be better informed, and in facilitating cooperation between different public authorities. As for the consequences of a bankruptcy declaration, the new Law maintained the bulk of the former consequences that were provided in the Code of Commerce. However, in a significant departure from the previous provisions, the new Law completely revokes the right of the Bankruptcy Court to take a bankrupt person into custody and reduces the severity of other measures (while maintaining them in essence), such as the court’s authority to issue a travel ban, and its authority to temporarily revoke the right of the bankrupt person to vote and to exercise other political rights. The new Law also prohibits the bankrupt from representing others with respect to the disposal of and management of assets.

• Relevant Courts

The Law stipulates that all courts shall – on their own accord – transfer open cases related to bankruptcy to the relevant Economic Court, which shall be the court in which the debtor’s business or the headquarters of the company are registered. If a company is headquartered abroad, the relevant court shall be the Economic Court in the same precinct where the relevant local administration is located. In a notable development, the new Law expanded the jurisdiction of the Bankruptcy Court through Article (83), stipulating that it shall have jurisdiction to hear all cases arising out of the bankruptcy, including cases connected with the assets of the debtor. Previously, bankruptcy provisions allowed for some bankruptcy related cases to be heard by different courts, which delayed the process.

Conclusion

The ease of entry into the market (starting a business) and exiting it are seen as cornerstones of a healthy market. While many economic reforms in the past have focused on facilitating and providing incentives to enter the Egyptian market, as exemplified in the new Investment Law, exiting it has been a barrier to the ease of doing business. The new Bankruptcy Law, which has been sought for many years, is one of the most important recent developments in economic legislation. In addition to clarifying many procedural details, the new Law presents a different outlook and approach to the idea of ​​default and bankruptcy. For the first time, the Law gives troubled companies the opportunity to deal with their difficulties and continue their business, while preserving the rights of creditors. The Law introduces the concepts of mediation and restructuring, rather than starting the discussion on how to liquidate the business of the debtor and punish them. The new Law also abolishes the court’s ability to place the debtor under custody, which showed a hostile view of the debtor, while retaining other measures to safeguard the interests of concerned stakeholders. Overall, the new Bankruptcy Law aims to develop the legal structure dealing with bankruptcy, leaving some room for debtors and creditors to deal with default and insolvency in a less aggressive manner. The Law aims to address an insolvency system that has resulted in ranking Egypt at 115 out of 168 countries in the 2018 Doing Business Report. Despite the many positives introduced by the new Law, its real impact will depend on the decisions and regulations that will be issued for its application, and on the development of the administrative structure and personnel that will oversee its implementation.   [1] Law No. 11/2018 on Restructuring, Bankruptcy and Bankruptcy-Avoiding Settlement, Official Gazette, Issue No. 7 (bis) (d), 19 February 2018.