The Restructuring Review: Egypt
Overview of restructuring and insolvency activity
It is our view that the Egyptian market maintains a very solid position compared with similar countries such as Argentina. For example, the exchange rate between US dollars and the local currencies in both Egypt and Argentina is almost at the same level as five years ago. However, there is now an 85 per cent gap between such local currencies in favour of Egyptian pounds.
This outcome is due to the hard work of the Egyptian government in the past few years in improving the business environment in the country, which has resulted in more foreign direct investment being attracted in multiple sectors in addition to the financial sector. For example, Egypt recently managed to attract the Standard Chartered Bank to operate in the country, where it was granted the first all-new banking licence since 2012.
The Egyptian market's credentials (such as investment cost, workforce, and local and market demand) are very attractive to all businesses at all levels from start-ups to large multinational entities.
Despite the international and local crises that the country has been facing for years (including revaluations, covid-19, the Ukraine–Russia war, inflation and the potential recession), Egypt has somehow been maintaining a good liquidity and financial status.
The Egyptian government, led by the Central Bank of Egypt, have adopted multiple financial initiatives supporting all industries, sectors and even individuals that were affected by any of the international and local crises. These initiatives include, for example, waiving default interest on overdue loans, granting flexible financial support and tax exemptions, all of which initiatives helped a lot of businesses to avoid becoming insolvent or bankrupt.
General introduction to the restructuring and insolvency legal framework
Insolvency and bankruptcy activities are generally governed by Bankruptcy Law No. 11 of 2018 (the Bankruptcy Law) and the Egyptian Civil Code.
Generally, the Bankruptcy Law sets out three options or schemes that a debtor undergoing financial difficulties can resort to: (1) restructuring, (2) preventive reconciliation and (3) bankruptcy.
The term 'restructuring' is defined by the Bankruptcy Law as 'the procedures allowing a trader or a company to overcome financial and administrative difficulty(ies)'. The Bankruptcy Law sets out and develops a restructuring framework or plan providing a debtor facing financial or administrative disturbance, or both, the possibility to reorganise its financial position through, inter alia, asset revaluation, debt restructuring, capital increase, increasing cash inflows, minimising cash outflows and managerial restructuring.
According to the Bankruptcy Law, any trader or company (1) with capital of not less than 1 million Egyptian pounds, (2) that has continuously engaged in the trade business in the two years preceding the filing and submission of the restructuring plan, and (3) that has not committed fraud shall have the right to apply for restructuring, noting that the application of restructuring may not be submitted by a company under liquidation, neither in cases whereby a judgment declaring bankruptcy has been issued against the debtor nor in cases whereby preventive reconciliation procedures have been initiated by the debtor.
The restructuring application shall include a proposed restructuring plan, which shall be submitted to a committee formed out of the experts listed in the Bankruptcy Expert Schedule at the economic courts (the Restructuring Committee). According to the Bankruptcy Law, the Restructuring Committee shall prepare a report to the competent bankruptcy judge within three months of the date of submitting the application with its opinion as to the reasons behind the company's financial or administrative turmoil, the efficiency of entering into a restructure and the suggested plan, which period may be extended by an additional three months at the bankruptcy judge's sole discretion. In all cases, the execution of the restructuring plan should not exceed five years.
The restructuring plan shall be signed by the company's shareholders and be ratified by the competent bankruptcy judge to be binding on all parties. The bankruptcy judge has the authority to appoint an assistant for the debtor from among the listed trustees or the Restructuring Committee to help the company to implement the plan and negotiate with the creditor, as well as to provide technical and consultancy support.
The debtor shall continue to run its business during the implementation of the restructuring plan and shall continue to be responsible for its obligations and contracts entered into before and after the ratification of the restructuring plan, as long as the restructuring plan is not violated by any of the concerned parties. However, the debtor is prohibited from entering into any agreement or taking any action that might harm the interests of the creditors or violate by any means the restructuring plan, such as, inter alia, by selling its assets, giving loans, or imposing a pledge or any encumbrance over its assets.
Generally, according to the Bankruptcy Law, the restructuring plan shall be terminated if any of the following events takes place:
- the completion of the execution of the restructuring plan;
- the impossibility of executing the restructuring plan; or
- the violation of the restructuring plan by any party thereof.
ii Preventive reconciliation
According to the Bankruptcy Law, 'preventive reconciliation' is defined as 'an application used by the unfortunate debtor to avoid the declaration of bankruptcy'. Preventive reconciliation allows the debtor to avoid bankruptcy by submitting a request for preventive reconciliation to the head of the bankruptcy department at the competent economic court to reach a settlement with its creditors. The preventive reconciliation application may be submitted by any debtor undergoing financial difficulty, provided that (1) such a debtor did not commit fraud or gross misconduct, (2) such a debtor has been carrying on a business continuously for at least two years and (3) the application shall be submitted within 15 days of being in default of due payments, noting that to be able to submit the preventive reconciliation request if the debtor is a company, it shall not be in liquidation and shall have obtained the approval of the majority of its shareholders.
The competent court shall have the sole discretion to accept or refuse the submission of the preventive reconciliation request. Following the court approval of the preventive reconciliation request, the debtor can continue to manage its business under the supervision of the appointed trustee, noting that any gratuitous transactions or donations entered into or made by the debtor shall not be enforceable against its creditors. Furthermore, any act, including, inter alia, reconciliation, mortgage and disposal of assets outside the regular course of business of the debtor, shall require the prior approval of the court.
All creditors, including secured creditors, are required to submit to the trustee a list with all of their debts and to publish the list in a daily newspaper. A meeting shall be convened by the court including the debtor and all the creditors whose claims have been included in the list to review the settlement plan. To be valid, the settlement plan shall be approved by the majority of the creditors present in the meeting provided that they represent two-thirds of the actual debt. A second meeting is called if no majority is reached. In the event that the debtor has issued corporate bonds or sukuk surpassing a third of the total of the claims included in the list submitted to the court, the general assembly of the bond or sukuk holders is required to approve the settlement plan.
In parallel, the trustee shall prepare a report that covers their detailed opinion regarding the feasibility of the settlement plan proposed by the debtor.
Once the settlement plan is approved by the court and the creditors in the convened meeting, the settlement plan is ratified by the court and shall become binding on all the debtor's creditors.
According to the Bankruptcy Law, preventive reconciliation shall be nullified after its ratification in the event of evidence of occurrence of fraud by the debtor, in particular in cases of voluntarily hiding assets or debts, inventing debts or premeditatedly exaggerating their amounts. The request for nullification of the composition shall be submitted within six months from the day fraud is detected; otherwise, the request shall not be accepted. In all cases, the request shall be unacceptable if submitted after the lapse of one year from the date of issuing the reconciliation ratification judgment. The creditors shall not be required to refund the amounts they collected from their debts before the court judgment nullifying the reconciliation was issued, and the debtor shall be released from the amounts paid. Nullifying the reconciliation shall result in clearing the guarantor's obligation to guarantee the execution of the composition terms.
According to the Bankruptcy Law, 'bankruptcy' is defined as 'the failure of the company to pay its debts due to financial difficulty'. An application for bankruptcy may be filed by (1) any creditor, (2) the public prosecution, or (3) the debtor itself or its heirs. However, a fully secured creditor may not file a bankruptcy application unless the value of its collateral is lower than the outstanding debt. According to the Bankruptcy Law, the court shall be entitled to postpone bankruptcy proceedings for a maximum of three months in case a postponement may assist in improving the company's financial standing or in the interest of the national economy. It is worth noting that a debtor may not be declared bankrupt for stopping or being unable to pay taxes, social insurance or criminal fines due on such a debtor. If the court declares the debtor bankrupt, it will determine the date from which the debtor stopped paying its debts (the repayment failure date) and appoint a trustee to manage the debtor's assets and financial affairs during the bankruptcy process. Between the repayment failure date and the date the debtor is declared bankrupt, no gifts, prepayments of debts, repayments on terms different from those in the debt agreement or grants of security given by the debtor will be enforceable against the creditors. Once declared bankrupt, the debtor loses capacity to manage its financial affairs or to dispose of any of its assets. However, a bankrupt debtor may, with approval of the court, start a new business using capital that is not subject to the bankruptcy proceedings, in which case any debts arising from the new business will have priority over other claims in relation to the assets of the new business. Following the bankruptcy decision, the unsecured creditors will not be able to initiate proceedings against the debtor, but the secured creditors can initiate or continue claims against the trustee. The bankruptcy decision will also accelerate all future financial obligations of the debtor, whether such obligations are secured or unsecured. The court may, at its initiative or upon a request from any interested party, mediate between the debtor and the creditors to reach a settlement. The settlement will be effective only if approved by all creditors (excluding the secured creditors who have not waived their security). A bankrupt debtor will be automatically discharged from bankruptcy three years after the date of the termination of the bankruptcy proceedings.
Recent legal developments
In order to improve Egypt's economic status and to attract more foreign direct investment as well as local investments, the Egyptian government issued the Restructuring, Preventive Reconciliation and Bankruptcy Law No. 11/2018 (the Bankruptcy Law), which came into effect on 19 March 2018. The Bankruptcy Law aims to regulate corporate bankruptcy and preventive reconciliation and to introduce an out-of-court restructuring system. Before the issuance of the Bankruptcy Law, bankruptcy procedures and preventive reconciliation were regulated by Trade Code No. 17 of 1999 under Chapter 5, which governed the bankruptcy process in Egypt for almost 20 years. By the issuance of the Bankruptcy Law, Chapter 5 of the Trade Code was annulled and replaced by the Bankruptcy Law.
It is worth noting that, since the issuance of the Bankruptcy Law, Egypt's ranking index in the World Bank's resolving insolvency report of 2020 rose from 115 to 104.2
The Bankruptcy Law applies to commercial companies and traders but does not apply to non-merchant individuals, who continue to be subject to the insolvency provisions under Civil Code No. 131 of 1948. The Bankruptcy Law also does not apply to state-owned companies, which remain subject to Public Companies Law No. 203 of 1991.
Significant transactions, key developments and most active industries
The tourism and industrial sectors have been most affected by the international crises and local challenges.
Earlier this year, the Egyptian government expressed its intentions to list several government-owned companies on the Egyptian Stock Exchange during the next year, and companies are reportedly currently being restructured in preparation for such a listing, according to the Prime Minister of the Arab Republic of Egypt. For example, the general assembly of EgyptAir Holding Company was expected to approve the project of merging EgyptAir's eight companies and reducing them to four companies including three affiliated companies and the fourth company as the holding company.
The first company that will be retained as part of the restructuring is EgyptAir Airlines, which will be the largest, as it will be joined by air freight companies, domestic and regional airlines, Express, Karnak and In-flight Services. The second company will be EgyptAir Company for Maintenance and Engineering and the third company will be EgyptAir Company for Ground Services. Complementary Industries Company will be divided and its factories and printing press will be distributed between EgyptAir Holding Company and EgyptAir Ground Services Company. Finally, the fourth company, which will be the holding company, will include EgyptAir for Medical Services and EgyptAir Duty Free Shops.
Egyptian Arbitration Law No. 27 of 1994 (the Arbitration Law) is based on the UNCITRAL Model Law on International Commercial Arbitration. Furthermore, since its establishment in 1979, the Cairo Regional Centre for International Commercial Arbitration (CRCICA) has adopted the UNCITRAL arbitration rules, with various amendments throughout the years up until 2011, with all amendments based on UNCITRAL arbitration rules.
According to CRCICA, in 2021, four cases involved corporate restructuring agreements. One of these cases involved a settlement agreement for the terms for the termination of an escrow agreement and the closure of an escrow account between an Emirati company and two companies – one in the British Virgin Islands and one in Egypt. Furthermore, two cases related to share purchase agreements – the first case between a Saudi company and a company based in the British Virgin Islands, an Egyptian Company and a Maltese company and the second case between a Ukrainian company and several Egyptian individuals. The remaining case involved a shareholders' agreement between Egyptian individuals organising the exit of a number of shareholders from an Egyptian company.
Egypt has ratified several treaties – namely, the New York Convention in 1959, the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention) in 1972, and a number of bilateral investment treaties.
The enforcement of foreign arbitral awards in Egypt is governed by the New York Convention. Under the New York Convention, the enforcement of the arbitral award occurs after depositing the award with the courts and obtaining a writ of execution. The award is then enforced in the same way as that for a court judgment. Furthermore, under the ICSID Convention, enforcement of arbitral awards may be obtained by the competent court or any other authority as decided by the state that is a party to the treaty. In Egypt, the Ministry of Justice is the designated authority to oversee enforcement of arbitral awards in Egypt in accordance with the ICSID Convention.
The Egyptian government is currently in the process of preparing an all-new arbitration law that will be proposed to the Egyptian House of Representatives.
1 Mohamed Hashish is a managing partner, Rana Abdelaty is an associate and Farida Rezk is a junior associate at Soliman, Hashish & Partners.
2 Please refer to this link: https://www.statista.com/statistics/1241243/doing-business-topics-ranking-in-egypt/.