A recent study reveals that bankruptcy procedures in Egypt are among the worst in the world. Niveen Wahish reports Did you know that it can take up to four and a half years to finalise bankruptcy procedures in Egypt? This is the longest time recorded across the globe -- even worse than the rest of the Middle East and North Africa, Latin America or Sub- Saharan Africa. And in the meantime, the whole process could cost up to 18 per cent of the total assets of the company concerned. These are the finding of a recent study on The Efficiency of the Bankruptcy System in Egypt by Omnia Helmy, principal economist with the Egyptian Centre for Economic Studies (ECES). The situation she describes acts as a radical disincentive to investors. As such, it is scarcely in harmony with current government efforts to improve the country's investment climate. According to Helmy's study, a good bankruptcy system should keep costs to a minimum, protect creditors' rights, encourage the debtor to meet his debt, and make the most of the funds available to be divided between the debtor, creditors, workers and the government. But Egypt's bankruptcy system fails all of these criteria. On a scale of 80, Egypt scored 39 in terms of the efficiency of the system -- only South Asia and sub-Saharan Africa showed worse results. Helmy attributes this lack of efficiency to the lack of appropriate incentives for the different parties involved in the bankruptcy process -- not only the debtor and their creditors, but also the bankruptcy judge who steers the whole procedure. For starters, she points out, tough penalties are imposed on the debtor, stripping him of any professional or political rights, as well as the right to manage his own money. His name cannot be cleared until three years after the bankruptcy, so he has no hope of a fresh start in the near future. And the law does not provide for a period during which the debtor can adjust without having other creditors file suits against him, thus complicating his situation even further. In the meantime, the creditors are last to recover their investment, while the workers and the tax authority are first in line for payment. Nor are there any provisions to protect them against the effect of settlements that may take place in favour of other creditors while the debtor was still trying to pay off their debts. The third party to the procedure is the bankruptcy judge. Since he is legally responsible for any mistakes made in surveying, selling or distributing the debtor's assets, he will understandably take his decisions very slowly, thus spinning the whole procedure out to great length. Furthermore, with his fees depending on the duration of the procedures, he also has a positive interest in delaying the settlement. These problems are complicated by the fact that the system also grants the judge too wide an authority, Helmy says. Over and above these specific problems, Helmy describes the system as plagued by its complexity and by the fact that it lacks a mechanism to ensure a commitment to execute. The study makes several suggestions for the improvement of the system. Among Helmy's recommendations are that the debtor should continue to own and manage his assets and re- organise his activity during a specific period following his declaration of bankruptcy (90 to 120 days). She also strongly advises that during that period no one should be allowed to file suits against him. If the debtor needs ample space to turn the performance of his company around, Helmy also believes that creditors need to be assured that the restructuring plan will either be approved or rejected within a certain period, for example, 60 days. If the debtor fails to prepare a restructuring plan, or it is refused by two-thirds of the creditors, then a creditors' committee is formed to propose alternative plans and supervise the debtor's business. And any unfair transactions that may have taken place in favour of some creditors during the year prior to the debtor filing for bankruptcy should be cancelled. In the meantime, the bankruptcy judge should only be appointed in cases which involve the liquidation of the company. Also, the fees of the judge should be a function of the revenues of the company if liquidated, or its profits if restructured, rather than of the duration of the procedure. These incentives, says Helmy, should go hand-in-hand with efforts to simplify the whole process. In addition to an overall time limit, measures should be taken to encourage direct negotiation between the debtors and creditors, and penalties should be imposed on any party which fails to commit.
