OUTLINE OF THE EGYPTIAN BANKRUPTCY LAW CONDTIONS - EFFECTS Adopted from Bankruptcy – Part 1 Prof. Dr. Nagy Abdel MOAMEN Professor of commercial Law, Faculty of Law, Ain Shams University Translated by Dr. Yassin EL SHAZLY Lecturer of commercial Law, Faculty of Law, Ain Shams University 1
Meaning of bankruptcy The plain meaning of the term bankruptcy could be incapacity or weakness. However, from a legal perspective it has a different meaning. Bankruptcy is a system applied only to traders and which aims to establish a collective execution on the funs of the debtor who stopped paying his commercial debts. This system includes a series of procedures and rules designed to such procedures 2
Meaning of bankruptcy The legislator states that the bankruptcy decisions will consequently prevent the debtor from managing his funds and in the time will entrust the distribution of his funds to the creditors conduct to an agent called trustee. This system has two major objectives: Firstly, bankruptcy aims to protect the creditors from their bankrupted debtor whose property is not sufficient to meet the amount of their debts. 3
Meaning of bankruptcy Secondly, bankruptcy system aims to protect creditors themselves from each other. In fact, the bankruptcy situation could create a struggle among the creditors as every one of them will try to collect separately and rapidly his debts trying to get the greatest possible interests from the debtor, regardless the right and the interest of the other creditors. To avoid such a prejudice of such a conflict the bankruptcy system is used in order to create a fair distribution of the debtor funs according to a collective procedure in which all creditors are included. 4
Regarding the physical person -11. Taking the commercial acts as a profession2. Professionalism should be in the person name and for his own account3. Enjoying the legal capacity4. Being obligated of holding commercial books ( article 21) 8
2- Regarding the moral persons1. The company should take one of the forms mentioned in the law ( article 10-2)2. Special case : public sector company – public private companies)3. Exception related to the silent company4. The company in the phase of liquidation 10
Definition Art no 10 of the new commercial code defines the merchant as: exercises regularly commercial transactions in own name, and for his own account. 2- "Every company which takes one of the forms stipulated in the company law for whichever purpose it is establish From that we can understand that the law recognizes two kinds of merchants : A person who acts by his own name and for his a commercial act and takes this act as a profession. And, a company that takes the form of commercial company if this company is engaged in civil acts (e.g. law firms)
Professionalism=Regular basis That is to say a merchant is one who operates at least one of the acts presented by law to be commercial in nature such as buying for the purpose to sell or lease, etc. Should any one carries a commercial transaction for once, he cannot be considered a merchant. A man purchase an aircraft or establishes a company the act is commercial but he is not a merchant unless he makes this act regularly and takes it as a profession. It was decided that persons who are.- being prevented from practicing trade such as judges or lawyers are deemed merchants if they practice these acts on a regular basis in spite of this prohibition.
Professionalism=Regular basis Art. 17 of the new code which stipulates. "If any person exercises commerce whom is fo,- bidden from trading by laws, regulations and/ or a special system will be considered as a merchant, and the provisions of commercial law are applicable to him. A profession means that the person involved must carry on this business regularly as an occupation he follows for making livelihood. Should a mere employee has a taxi which he sometimes uses to improve his income he is not a trader because he does not depend upon such commercial act for living.
On the merchants own name, and for his own ac-count It is submitted that exercising of the commercial acts must be on the merchants own name, and for his own ac-count: Thus an employee or sales representative will not be qualified as merchant but his master is. On the contrary a commercial agent can be considered a merchant when he acts independently even for the principal account or by the principal naive. Such as brokers, commission agents and commercial agents. In the case of agents the issue will de-pend upon the control and supervision practiced by the prin- cipal and the kind of independence he has in performing the job.
On the merchants own name, and for his own ac-count The question is raised where a man practicing trade behind the name of somebody else. According to Art 18 of the code the character of a merchant shall be proved to any-one who exercises commerce professionally by a false name, or who is concealed behind another person, besides proving the said characteristic to the ostensible person. Professionalism is not presumed but must be proved. The burden of proving such thing lies upon the person who relays upon the charac-ter of the merchant. (e.g. man wants claim bankruptcy of his debtor). However, it could be proved by the fact that the al-leged person has an office and employees of special skill or by the fact that the person is registered in the commercial Registry. It is also for the court to deduce the characteristic of a merchant for someone
On the merchants own name, and for his own ac-count According to art no. 14 of the new code a man as-sumes the character of merchant by advertising it through journals, circulars radio, television, or any other means, will be presumed as a merchant. This assumption can be dis-proved by proving that he did not in fact exercise commerce. Anyway the state and other organs associations and departments of public law shall not have the character of a merchant although commercial law rules will apply to com-mercial operations done by them. (art 20 of the code).
Legal capacity (1) Anyone reaches the age of twenty one has the right of exercising commerce in Egypt. The rule will include any Egyptian woman and also any foreigner even if the law of his country deems him a minor in such age (21 years) (2)- Egyptians minor, completed 18 years old male or female can exercise. commerce, subject to the obtaining of special permission from the competent court. Such a person must be express clear and limited. A court permit may be conditional by restricting certain transactions or limited to certain fund. .A minor who is authorized to practice tirade has full capacity to carry out all legal operations which his trade re-quires. He has to fulfill the legal obligations of a `merchants and can. declared bankrupt. (3) For aliens the matter need more details: alt must be noted that aliens even adults are prevented from practicing some kinds of business (e.g. importing, agency).
1- what is meant by discontinue of payment First view : The merchant should stop paying the debts of his creditors regardless the reason behind the discontinue of payment Second view : The discontinue of payment of the creditors should be due to a real financial turbulence which the debtor is passing and a real crisis facing him 21
Elements of the -2 discontinue payment 1- the actual or material stop of payment : It means that the debtor should stop paying his debts. It should be noted that a merchant can not be declared bankrupted if he resorted to fraudulent means in order to hide his financial situation , like complement bill of exchange or contracting loans with high interest. The court take in consideration the actual date of discontinue of payment and not the real date ( date of the collapse of the debtor 23 financial statues).
Elements of the discontinue payment -2 2- The financial turbulence of the debtor status : The discontinue of payment of the creditors should be due to a real financial turbulence which the debtor is passing and a real crisis facing him Financial turbulence should lead to the lost of confidence between the debtor and his creditors as well as weakling the credit. Temporary financial turbulence won’t lead to declaration of bankruptcy. Financial turbulence is not related to asset/ debt equation. 24
2- The financial turbulence of the debtor status : It is not necessary that the discontinue of payment cover the whole debts. In other terms, It could be partial. A merchant could be declared bankrupted if he stops the payment of only one creditor as long as the non-payment reflects a serious financial turbulence. The detriment factor is the amount of the unpaid debts and how it reflects the collapse of the financial status of the debtor which could threaten the rights of his creditors. Financial turbulence covers only the commercial acts performed by the merchant. 25
The proof of the discontinue of -3 payment Burden of proof is upon the plaintiff The plaintiff should proof the discontinue of payment by all means of evidence. The proof should cover the existence of a debt and that such non-payment will lead to a legal discontinue of payment due reflecting a real financial turbulence. It should be noted that the discontinue of payment should continue until the date of the declaration of the bankruptcy judgment. 26
The proof of the discontinue of payment -3It should be noted that the plaintiff should proofthat his debtor enjoyed the status of merchantwhen he stopped paying his debts.A person who is dead or quite exercisingcommerce could be declared bankrupted under 2conditions :A- he should die or quite at a moment where hewas in situation of discontinue of payment hisdebts.B - the bankruptcy claim should be filed withinone year from the date of death or abolishment ofthe merchant name from the commercial registry. 27
conditions of the unpaid -4 debt1. The debt should be an amount of money2. The debt should be immediately due3. The debt should be cleared from claims4. The debt should be commercial 28
1- The debt should be an amount of money1. The unpaid debt should not be an obligation to do or an obligation not to do.2. This could be justified by the fact the bankruptcy is a system which tends to the liquidation of the debtor assets and fairly distributed among his creditors.3. This is also following the objective of protecting the credit and trust between merchants. 29
2- The debt should be immediately due1. The unpaid debt should be immediately due and not postponed.2. The debt should be conditioned.3. To know whether the debt is due or not, we should look to the date of filing the bankruptcy action.4. According to article 554/2, a creditor with a postponed debt could exceptionally request the bankruptcy of his debtor if : his debtor run away or didn’t have a known domicile in Egypt or committed an act with the intention to prejudice his creditors. 30
3- The debt should be cleared from claims1. A debtor can be declared bankrupted if his debts was doubtful and not certain.2. If there is a claim or a dispute related to the debt, the bankruptcy action should be refused.3. However, the claim should be serious. This is appreciated by the court discretionary power.4. The power of court in this regard is to examine the seriousness of the debt without dealing with the substantial defenses or merits.5. Consequently, the court can not transfer the action to investigate or examine a claim of falsification. 31
The debt should be commercial -41. A merchant can not be declared bankrupted if he stops paying his civil debts.2. A merchant can not be also declared bankrupted if he stops paying taxes or criminal fines or social insurance.3. The appreciation of the commercial character of the debt is at the moment of discontinue of payment and not when the debt has been created.4. According to article 554 : a civil creditor could request the bankruptcy if he proofs that his debtor stopped paying his commercial debts. 32
1- Persons entitled to initiate the bankruptcy procedures 34
The debtor -1 The debtor is most people knowing his financial status. Presenting a bankruptcy declaration protects the debtor from exposing himself to the criminal sanction of stated in the case of bankruptcy by negligence. The court can confine the debtor if he presents a request of bankruptcy within 15 days of his discontinue of payment. Regarding companies., the legal representative is the one who is entitled to present such a request. If the court refuses the debtor request, it can order how to be a fine for superficially creating a bankruptcy status. 35
One of the creditor -2 This is the most common way to request bankruptcy. This is allowed to all kind of debtor even those with a civil debt. A partner in a company could present a bankruptcy request if he is a creditor of the company. The debtor could be declared bankrupted although he has only one creditor. Rules of bankruptcy are related to public order and can not be contracted in any agreement. Any agreement to avail a debtor from declaring 36 his bankruptcy is considered void.
The competent court -3 Before 2008, the subject matter jurisdiction of the bankruptcy request was in the competence of the primary court regardless the amount of the dispute. After the promulgation of the law no120 for the year 2008, the competence is now transferred to the economic courts. Regarding the local jurisdiction, the competent court should be the court of the commercial domicile of the debtor or his regular place of residence. Regarding companies, the action must be filed in the company head-office or the company local-office if the head –office is abroad. 37
the authority of the court in -3 postponing the bankruptcy action According to article 702, the court is entitled to postpone the bankruptcy action, only for companies and not individuals. The postpose should be for a period of 3 months and should be done once. This faculty is restricted on two conditions : A- the potentiality of a support to the debtor financial status. B- The need to protect the interest of the national economy. 38
Characteristics of the bankruptcy -5 judgment The res judicata of the bankruptcy judgment is absolute and not relative as ordinary judgments :A- regarding the persons : the debtor is considered bankrupted in his relationship with the all his creditor not only the one who filed the bankruptcy claim.B- regarding the assets : the judgment is not only related to the debt subjected to the claim but all the debtor money even though those unrelated to commercial activities. 40
Characteristics of the bankruptcy -5 judgment1. The double nature of the bankruptcy judgment:A- Declaring or Clearing judgment : as it declares the status of discontinue of payment as well as the invalidity of the transactions committed by the debtor during the suspect period.B- Constitutive judgment : as one of its result lead to the creation of the creditors assembly – confining the debtor from the management of his assets – stopping the unilateral actions - 41
1) Effects of bankruptcy judgment s to the debtor assets before the issuance of bankruptcy declaration The suspect period1. The meaning of the suspect period2. The sanction ( the non-enforcement)3. Types of non-enforcement 44
1- The meaning of the suspect period Performing certain transaction during the suspect period is not void in itself. On the other hand, there is a fear that certain transaction could affect the creditor rights. The suspect period starts from the date of discontinue of payment till the date of the issuance of the bankruptcy judgment. The court has discretionary authority in determining the date of the discontinue of payment. according to article 563 the suspect period can not go retroactively to more than 2 years before issuance of the bankruptcy judgment 45
Firstly : Mandatorynon- enforcement The court has no authority regarding the mandatory non- enforcement. The action should be initiated by the trustee Conditions of mandatory non- enforcement : The transition should be among those enumerated in article 598. The transaction should be performed during the suspect period. The transaction should be from the debtor and concerning his assets. 47
The date of discontinue of paymentAbsolute non-enforcement Relative non-enforcement suspect period The issuance of the bankruptcy judgement 48
Donations -1 All donations made by the debtor is not enforced towards the creditors regardless its objective or substance. Donations for charity reasons are also not enforced. The court has discretion to qualify the transaction regardless the parties agreement. The dowry (wedding gift) is not considered donations as contract of marriage is not donation contract. Life insurance policy for the debtor son or his wife is not a donation contract however the premium paid is considered indirect donation and should be restituted. Small gifts are excepted according to customs.49
2- Settling debts before its maturity date It should be noted that the main objective of the bankruptcy system is to achieve equity between all creditors. This case could lead to a violation of the equity between the creditors as it shows that the debtor favored one of his creditor on the others. Creation a consideration for an undue commercial paper (cheque –bill of exchange) is considered as settlement before the maturity date. In the previous case the paper will remain valid but the consideration will be part of the debtor estate. 50
3- Settling due dates with a thing other than the agreed upon The aim of such interdiction is the fear that the debtor could fulfill his obligation with a thing more valuable from the thing originally agreed upon. Interdiction in this case also aims to achieve equity between all creditors and not to disadvantage one of them. Exception : commercial papers and banking transfer are considered equivalent to money. 51
4- issuance of securities or pawn after the debt has been created The assumption here is the debt was created clear from any securities and then a pawn has been created during the suspect period. Interdiction in this case also aims to achieve equity between all creditors and not to disadvantage one of them. Example : Mortgage – Pledge - HYPOTHECATION. Privileged rights are out of scope of this interdiction. 52
4- issuance of securities or pawn after the debt has been created HYPOTHECATION An agreement whereby someone puts up collateral to secure the debt of another. This means that someone may agree that a piece of real estate will be collateral for a debt. If the debt isnt paid the creditor may have the property seized to satisfy the debt, although the person hypothecating the property is not personally liable if the collateral doesnt pay off the debt. Thus the property is liable for the debt, not the person guaranteeing the debt. 53
OPTIONAL NON-ENFORCEMENT -2 This decision is in the discretion authority of the court. The optional non enforcement of all the transaction performed by the debtor during the suspect period is the rule and not the exception. According to article 600 : the payment of commercial papers is excluded from the scope of optional non- enforcement. The previous exception tends to balance between two different interests : on the one hand, the creditor union and on the other hand, the interests of those using the commercial papers. 54
Conditions of OPTIONAL NON- -2 ENFORCEMENT Firstly : The transaction should be preformed during the suspect period. Secondly : The transaction should prejudice the interests of the creditors unions. This condition is left to the appreciation of the court. The court should take in consideration the interests of the entire creditor not few of them. Thirdly : The other contracting party should be aware the debtor stopped paying his debts. The legislator didnt require the knowledge of the financial turbulence of the debtor. The burden of proof of the previous conditions is on charge of the trustee. 55
2) Effects of bankruptcy judgment s to thedebtor assets after the issuance of bankruptcy declaration Binding the debtor hands from managing and disposing his assets = article 589. 56
Binding the debtor hands from managing and disposing his assets = article 589. Binding the debtor hands is a mean to liquidate his assets collectively and distribute it fairly between his creditors each according to his proportion. This effects is not considered as an expropriation or sealing the debtors assets. Banding the debtor hands doesn’t mean that he lost his legal capacity. Banding the debtor hands shall not prevent him from taking the necessary measures towards maintaining and preserving his rights.57