GAFI ready to announce amendments to the currently complex bankruptcy procedures
CAIRO: As part of the national financial banking reform program undertaken by the Egyptian government with the help of the private sector and international organizations, the General Authority for Free Zones and Investment (GAFI) is on the brink of announcing a set of new amendments to bankruptcy procedures in the country.
This is a long time in coming for companies that have wished to exit the Egyptian market gracefully over the years. In fact, Egypt’s current bankruptcy laws are one of the worst globally. While the official numbers claim that it takes up to one month to finalize bankruptcy procedures in the country, experts claim that it can take up to four and a half years to do so, thus making it one of the longest recorded across the globe.
Furthermore, according to an Al-Ahram Weekly 2005 article, which sites a study entitled, “The Efficiency of the Bankruptcy System in Egypt, by Omnia Helmy, principal economist at the Egyptian Center for Economic Studies (ECES), the whole process could cost up to 18 percent of the company’s total assets.
For a country that is striving to encourage more business, such outdated procedures don’t do much for companies going out of business.
According to claims made by Helmy s study, a good bankruptcy system should keep costs to a minimum, protect creditors rights, encourage debtors to meet their debts, and make the most of the funds available to be divided between the debtor, creditors, workers and the government.
Unfortunately, Egypt’s bankruptcy system fails to do any of these things. On a scale of 80, Egypt scored 39 in terms of the efficiency of the system. Helmy attributes this inefficiency to a lack of appropriate incentives for the different parties involved in the bankruptcy process – not only the debtor and his creditors, but also the bankruptcy judge who steers the whole procedure.
For example, in the past, tough penalties were imposed on the debtor-who is already in financial straits as is. This finds many a debtor in a catch-22 situation: unable to pay their penalty for bankruptcy specifically because they are bankrupt.
Furthermore, debtors are not cleared for a period of three years after filing bankruptcy, rendering them unable to re-establish or start up a new business venture. In the meantime, because the law does not offer debtors a grace period, they must face creditors beating on their doors, demanding payment. Incidentally, under the bankruptcy law, creditors are the last to recover their investments, while employees and the tax authority are first in line for payments. All in all, it’s a bad situation. And for companies interested in establishing operations in the country, the bankruptcy procedure currently in place provides a very unattractive incentive.
While the new and improved procedures have yet to be announced, the process of filing and finalizing bankruptcy paperwork is expected to be shortened to a mere four days. While that number has left many skeptical, considering the government’s keenness to increase foreign direct investment (FDI) in the country, which has resulted in a slash in tax cuts as well as major amendments to policies and procedures in the financial and banking sector, this may become a real possibility.
In related news, the Minister of Investment Mahmoud Mohieddin announced the establishment of a joint venture between the National Bank of Egypt (NBE) and GAFI to acquire bankrupt businesses for turnaround and resale, with the objective of assisting debtors by easing the burden that comes with going broke, while simultaneously lessening the impact bankruptcy has on the community and industry and perhaps turning loss into profit at the end of the day.
