New Bankruptcy Law Paves Way for Business

Monday, 23rd January 2017

Nine investor associations published a joint-SOS addressed to Egyptian President Abdel-Fattah El-Sisi in several local newspapers, last December 2016, expressing fears of bankruptcy and the let-go of labor due to the free flotation of the Egyptian pound that continues to escalate prices and tightens budgets. As part of its economic reform plan, Egypt pushed through with a free floatation of its pound, following recent years of consecutive devaluation of its currency against the US dollar as an appeal to the International Monetary Fund (IMF) for a loan back in November 2016. 

Given the current economic condition and hardship carried by investors and businesses, the cabinet approved Egypt’s first bankruptcy law on January 4, aiming at encouraging investments. This comes following yet another recently approved law, the Investment Law No.8 in December 2016.

investors joint-SOS to El-Sisi
Investors joint- SOS to President El-Sisi in December 2016

Abolishing imprisonment in cases of bankruptcy, the newly drafted law is expected to reduce litigation against businesses and to facilitate post-bankruptcy procedures to re-build companies. On the other hand, if it was proven that one had forged bankruptcy documents, hiding their assets or transferring it overseas, the newly drafted law promises those violators punishments that would deprive from liberty, the draft reads. 

Invest-Gate knows from Tarek Bahaa, the sales and marketing director at IGI Real Estate, that the real impact this law has, is on contractors rather than real estate developers since they import materials, which has become a burden nowadays. “Developers rarely apply for bank loans in a foreign currency,” he explains.

Speaking to a contractor from Rowad Modern Engineering, Ahmed Shafiq tells Invest-Gate that contractors’ finances have been affected since the VAT took effect in the fiscal year 2016/17. “All prices of construction materials have hiked by 13% even concrete that had no sales taxes imposed on it before,” he says.  

From an accountant’s perspective, Abdel-Qawi Fath-Allah, a former financial manager at El-Mahmoudia General Contracting & Real Estate Investments, states that based on his experience in the field, “I had never come across a real estate company that had declared bankruptcy,” he declares.

However, Fath-Allah argues, “There are cases of roguery like that of Ikramy El-Sabagh, owner of Honest, an Egyptian property developer, who is currently spending three years in prison, as of January 14, for deceiving buyers into paying installments without handing over their units in return.” Other similar cases include that of businessman and scholar Ahmed Bahgat. Back in 1990s, Bahgat had received a loan of EGP 451 mn from a bank and could not pay it back. In consequence, the National Bank of Egypt and Bank Misr confiscated his properties along with his companies’, and yet this was no case of bankruptcy.

The state’s Central Agency for Public Mobilisation and Statistics (CAPMAS) report reveals that bankruptcy declaration rulings rose to eight cases in 2015, in comparison to four cases in 2014. The report adds that debt value of bankruptcy declaration rulings reached EGP 16.3 mn in 2015 compared to EGP 3.3 mn in 2014, declaring a 401.2% increase.

Prior to the proposed drafted law, bankruptcy procedures would take up to two years and a half to liquidate holdings of distressed companies, “at a cost of up to 22% of the company’s assets and with a dollar earnings rate of 27% to the debtor,” Assistant to the Minister of Justice Khaled El-Nashar previously stated.

According to the drafted law, it is anticipated that the period of this procedure would shrink to nine months, while the business performance index would increase. The law promises to facilitate the process of entering and exiting the market. It will also renovate the systems of restructuring and re-intermediating, as well as, the post-bankruptcy procedures.

“The drafted law will encourage businessmen, who were hesitant about investing in Egypt due to the risk of facing prison time,” Muhamad El-Haggan, associate at Hegazy Law Firm, tells Invest-Gate.  

“It provides flexibility through restructuring and security to creditors of companies going bankrupt,” El-Haggan clarifies.  

“As real estate is severely impacted due to the government’s recent shift in economic policy, I believe this law, when enacted, will keep the real estate market intact and able to survive this major shift until the market re-stabilizes,” he anticipates, “hopefully in the medium-term future.”

“The newly drafted Bankruptcy Law is drafted specifically for foreign investors, who had a problem with the ambiguity of Egypt’s bankruptcy regulations and procedures,” MP Mohamed Badrawy, undersecretary of Economical Committee, claims.

The state has lost billions as compensation to foreign investors “resorting to international courts due to the lengthy procedures and conflicting steps, which is more of a reason to push the legislative arms to work to fix the problem,” Badrawy adds.

According to a report by Egyptian Center for Economic & Social Rights (ECESR) released back in October 2013, Egypt is one of the top four countries facing international litigation from foreign investors. Ever since 2011, Arab and non-Arab investors have sought international arbitration in protest to the rulings of Egyptian courts. Only last year, did the government manage to reach friendly settlements in three major international arbitration cases, including ArcelorMittal, Kuwait Gate Holding, and Italian ASA International.

Prior to January 4, there were no specific laws for bankruptcy; bankruptcy regulations and legislation were included as part of the over- 600- article Trade Law. “The lengthy Trade Law is a bundle of more than 600 articles, making it very general and unclear; and this was the main reason behind the unclarity of the bankruptcy regulations,” Badrawy explains, stressing the urgency of drafting a new independent law for bankruptcy that covers 264 articles. Badrawy reckons it would take no longer than 60 days for the law to become in effect.

This first Bankruptcy law is to be waved to the parliament’s economic committee anytime in the coming two weeks for a popular vote across the general assembly before it goes to the president for final approval.

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