Restructuring, Composition and Bankruptcy: Egypt's Law 11 of 2018

Executive summary

• Law 11 of 2018 sets out three routes for a distressed trader: restructuring, preventive composition, and bankruptcy. Law 11 of 2021 (effective 29 April 2021) amended a number of its provisions.
• Restructuring is open only to a trader with capital of at least EGP 1 million who has traded continuously for the two years before the request and committed no fraud (article 15); a company in liquidation cannot use it.
• Preventive composition may be requested before cessation of payment, where the trader's affairs are disturbed, or within 15 days of an actual cessation (article 30); since 2021 a creditor may also request it once its debtor has stopped paying (article 36 bis).
• The debtor keeps managing its assets in restructuring, and does so under the composition trustee's supervision in composition; in bankruptcy it is divested as soon as the judgment is issued (article 112).
• Bankruptcy accelerates monetary debts and stops ordinary creditors' individual suits (articles 128 and 129). Board members and managers may be ordered to pay the company's debts if its assets cannot cover 20% of them, unless they prove they exercised the diligence of a prudent person (article 198).
• Rehabilitation follows by operation of law three years after the bankruptcy ends, except in fraudulent bankruptcy, and must be ordered earlier if the bankrupt pays all its debts (articles 239 and 240).

The three routes: conditions and comparison

Every economic court's Bankruptcy Department receives requests under all three routes (article 1). Each has its own gateway:

The routes cannot be combined: filing a restructuring request suspends bankruptcy and composition requests and cases until it is decided, and it is not admissible after a bankruptcy judgment or a judgment opening composition proceedings (article 17).

What the 2021 amendment changed

Law 11 of 2021 (Official Gazette No. 16 bis (w) of 28 April 2021) replaced or added many provisions. The most relevant for a business dealing with a distressed counterparty: a creditor can now request preventive composition against its own debtor ("any creditor with an undisputed commercial debt may apply for preventive composition against its trader-debtor, who has stopped paying its commercial debts" — article 36 bis), unless a bankruptcy request or case or a composition case is already pending; before 2021 the request was reserved to the debtor and its heirs. The restructuring committee's reporting deadline was extended from three months to six months, extendable by the same period, and the plan's execution period can now be extended by two further years with all its parties' agreement (article 20). Where a court refuses to ratify a composition, or ends the proceedings, and cessation of payment is established, it must declare bankruptcy in the same judgment, on its own motion (article 65 bis).

The Bankruptcy Department and mediation

Each economic court has a Bankruptcy Department, chaired by a judge of at least Court of Appeal rank, with a sufficient number of the court's judges (article 3). Requests are filed with the head of the Department, who refers them to the bankruptcy judges for mediation between the applicant and the other parties, to be completed within thirty days of filing, extendable once by the same period (article 5). A settlement is recorded in an agreement with the force of an enforceable instrument (article 9). Failing settlement on a bankruptcy or composition request, the judge rejects it, and the applicant may file the case within a month of the rejection or lose the right to do so (article 10, as amended); a restructuring request is instead filed away if no plan can be agreed (article 27). To draw up the plan and value the trader's assets, the competent judge forms a Restructuring Committee from the experts on the Bankruptcy Department's roster (articles 13 and 14).

Personal liability for directors and managers

The court may bar a bankrupt from leaving the country for up to six months, renewable, where the bankrupt has done something liable to harm creditors' rights (article 109). Until rehabilitated, a bankrupt may not be a member of chambers of commerce or industry or of unions, manage or sit on the board of any company, or work in banking, commercial agency, or import and export (article 111). If a company is declared bankrupt, the court may strip these same rights from board members or managers whose grave errors led to its financial disturbance and cessation of payment. If the company's assets cannot cover at least 20% of its debts, the court may order board members or managers, all or some of them, to pay all or part of the company's debts unless they prove they exercised the diligence of a prudent person in managing its affairs (article 198). Board members and managers of a joint-stock company who cause its bankruptcy by fraud — for example by false statements about its capital or by distributing fictitious profits — face the penalty for fraudulent bankruptcy: three to five years' imprisonment and a fine of EGP 50,000 to 500,000 (articles 253 and 255).

Rehabilitation

Rights lost under article 111 are restored by operation of law three years after the bankruptcy ends, unless the bankruptcy was fraudulent (article 239). Rehabilitation must be granted before then if the bankrupt has paid every debt in full, with expenses and up to two years' interest (article 240), and may also be granted early where the bankrupt has obtained a composition from the creditors and performed it, or proves that the creditors have released all debts or unanimously consent to rehabilitation (article 241). After a conviction for fraudulent bankruptcy, rehabilitation is not available until six years after the sentence is served or pardoned, and in every case the debts must have been paid or settled with the creditors (article 243).

What this requires

• Identify the right route early: capital is a condition of restructuring, and two years' continuous trading a condition of both restructuring and composition.
• Prepare a complete application file the first time — balance sheet and profit and loss account for the two preceding years, a statement of assets, and lists of creditors and debtors — since missing documents are a ground for a restructuring request to be filed away (article 27) and for a composition request to be refused (article 38).
• Remember that a restructuring request suspends the composition and bankruptcy requests until it is decided, and that a company in liquidation can neither be restructured nor granted a preventive composition.
• Review existing security before any request: each route affects a secured creditor differently from an ordinary one.
• Meet the deadlines the judge sets for documents: missing them is a ground to file away a restructuring request, and a breach of the plan once approved is a ground to end it (articles 27 and 28).
• Keep the board's decisions documented as the distress unfolds — that record is the evidence of "the diligence of a prudent person" if liability is later raised.

The firm's Corporate Legal Department assesses a distressed business's position, identifies the right route, and prepares and follows up its application before the Bankruptcy Department.

Mahmoud Nassef — Chartered Accountant (Egyptian Register), Founder Partner

Member, Egyptian Society of Accountants & Auditors
Member, Egyptian Tax Society
Member, Egyptian Society for Public Finance and Taxation

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Disclaimer: This bulletin is prepared for general information on the legislation in force at the date of its publication. It does not constitute a professional opinion or tax or legal advice on any particular matter, and it should not be relied upon in place of advice based on an examination of the circumstances of each case. Nassef & Partners International accepts no responsibility for any action taken, or refrained from, in reliance on its contents. The positions stated remain subject to subsequent legislation and decisions.