New start after bankruptcy

Ahmed Kotb , Thursday 25 Mar 2021

Amendments to Egypt’s bankruptcy laws have been approved in a bid to enhance the business environment

Egypt’s House of Representatives last week approved amendments submitted by the government to modify some provisions of the law regulating business restructuring, preventive composition, and bankruptcy.

According to Parliamentary Speaker Hanafi Gebali, the amendments to the law, which was issued in 2018, are set to be referred to the State Council for revision before being put up for a final vote.

“The amended law is expected to boost economic and investment activities in Egypt,” Gebali said. It will help struggling businesses to obtain financing amid the present lack of liquidity.

Companies usually file for bankruptcy in order to restructure and settle new repayment terms for debts so that they can remain in business. Relying on the banks alone to achieve such goals may not be feasible in all cases, according to the explanatory memorandum attached to the amended law.

The amended law allows other parties in addition to the banks, such as financing institutions and other entities authorised to provide financing or credit facilities, to help stalled businesses.

“The amendments are exactly what we were asking for,” said Sherif Al-Diwani, senior advisor to the board of the Alexandria Businessmen’s Association (ABA).

He said that when the law was first issued there was little concern for implementation or for the procedures to be carried out by the courts in implementing its executive regulations. Procedures associated with bankruptcy and company restructuring thus used to take a long time, he added.

Last year’s economic crisis on the back of the coronavirus pandemic had made companies and investors in Egypt, like in the rest of the world, want revisions to the law in order to protect them from bankruptcy, Al-Diwani said.

“We hope the amendments will be implemented as soon as possible because they guarantee protection from bankruptcy,” he said, adding that this protection would also help to allocate capital to market conditions, enabling companies to sustain and create new job opportunities while preserving the rights of all parties.

Al-Diwani said that any well-functioning economy needed well-drafted bankruptcy laws because they were essential in guaranteeing a safe exit for their investments to investors. The amendments allow for non-banking entities to be among company creditors, as long as their financing of stalled companies will benefit all parties, he added.

The amended law also aims to grant such entities the right to obtain full financial information about companies being lent to before embarking on any financing, in addition to allowing creditors to apply for oversight and preventive composition of the debtor, thus avoiding the possible bankruptcy of viable companies or investors.

Preventive composition procedures allow a company facing financial difficulties but not yet insolvent to use a court-led process to reach a settlement and restructure its obligations and assets.

Allowing creditors to vote on decisions related to post-bankruptcy procedures is also among the amendments to the law, including voting to continue operating a bankrupt business, delegating restructuring experts to develop a plan for restructuring the bankrupt debtor’s trade, and starting procedures for selling bankrupt assets or liquidating the assets of the bankrupt.

Parliament has approved amendments to Article 31 of the law, which stipulates that an application for preventive composition from bankruptcy cannot be accepted unless the debtor has been in business continuously during the two years preceding the submission of the application.

The debtor company may not request protective composition except after obtaining permission to do so from the majority of its partners or from shareholders, depending on the type of company.

Amendments to Article 35 of the law have also been submitted requiring protective composition applications from debtors to be submitted to the head of bankruptcy administration at a competent court, provided that they include information on the causes behind the business failure, reconciliation proposals including how to pay off debts, and proposals to divide creditors into categories according to the nature of the debt, its type, and the proposed financing, with an indication of amount, utility, funding destination, duration, and how such proposals will be implemented.

Protective composition allows a debtor to apply for a protective arrangement to avoid bankruptcy.

Article 41 of the draft law, also among the amendments, says that “the composition trustee shall be appointed from among persons or companies who have experience in the field of financial analysis and who are registered on the list of magistrates’ trustees of experts in bankruptcy management.”

Parliament has also agreed to amendments to Article 57 of the law, which stipulates that after completing an investigation of a company’s debts, a court will appoint a date for a creditors’ meeting.

“Creditors and debtors may delegate a special agent authorised to attend the meeting, and the magistrate or judge shall invite the creditors whose debts are permanently or temporarily accepted to attend the first meeting in order to vote on whether the conciliation trustees will keep or replace him,” it says.

The present bankruptcy law has been in effect since 2018 and introduced a mediation system in order to reduce lawsuits related to bankruptcy proceedings and support companies that have temporarily stalled or are facing cash-flow difficulties.

The law ensures that company owners do not get involved in lawsuits that affect their commercial reputation. It has helped the banks to settle bad-debt portfolios while also ensuring that they do not lose their investments, and it has helped in the disposal of irregular portfolios.

According to parliament’s Constitutional and Legislative Affairs Committee and Economic Affairs Committee, the amendments to the law will lead to the simplification of post-bankruptcy procedures and ensure flexibility and speed.

The committees said that the government was seeking to keep pace with changes recently seen in investment and internal trade worldwide and that it was keen to overcome obstacles to foreign investment in a way that would make it a partner in achieving development.

This was especially the case in the light of the coronavirus pandemic, the committees said, which had negatively affected the performance of many economic and financial institutions.

Achieving the highest rates of economic growth and attracting the largest number of foreign investments is part of Egypt’s 2030 Vision to achieve sustainable development.

*A version of this article appears in print in the 25 March, 2021 edition of Al-Ahram Weekly

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