New bankruptcy law in the works

The Cabinet is preparing a bankruptcy law that would enable ailing companies to restructure, Justice Minister Nayer Osman told the state-owned Middle East News Agency (MENA) on Monday.

A new arbitration law would further assuage investors’ concerns, he added.

Local and foreign investment dramatically declined after the January 2011 uprising, and economic recovery has been consistently hampered by subsequent bouts of political turmoil. Beyond the ongoing instability, though, experts say structural problems inherent in Egypt’s economic framework will continue to weigh down any attempts to stimulate the economy.

A labyrinth of red-tape, bureaucracy, an inefficient judicial system and the absence of certain laws all negatively affect the ease of doing business and, in turn, investor appetite.

Osman also told MENA that a newly drafted arbitration law would mitigate the judicial system’s notorious sluggishness in handling legal proceedings.

The government is keen on drafting laws that meet international standards and create a safe, investor-friendly environment, Osman continued.

Ministers in the multiple cabinets formed since 2011 have repeatedly promised a package of laws that would answer investors’ concerns and address longstanding challenges, but some of these laws have raised new problems instead.

Draft amendments to Egypt's Investment Law, for example, block so-called third parties from challenging contracts between the Egyptian government and foreign or national investors. The draft states that complaints can be filed by "parties of [these] contracts and no one else.”

These amendments were billed as an attempt to make Egypt more attractive to investors by providing safeguards and assurances, but some warn they could foster more opaque, unaccountable business practices.

When it comes to the country’s outdated bankruptcy laws, however, this may be a different scenario, as it was historically more difficult to close a business in Egypt than to open one. The higher risk makes local and foreign investors wary of putting their money into a business.

In the World Bank’s “Doing Business 2014” report, Egypt ranked 128th out of 189 countries in the ease of doing business category, falling one place from the previous year. The country came in 50th place in the starting a business category, and a low 146 when it came to resolving insolvency, both rankings a drop from 2013. 

The report found that in Egypt, “resolving insolvency takes 4.2 years on average and costs 22 percent of the debtor’s estate, with the most likely outcome being that the company will be sold as piecemeal sale.”

A solid bankruptcy law and the ability to resolve insolvency is critical not only for large corporations, but also for small businesses.

 “When economies strengthen the legal rights of lenders and borrowers under collateral and bankruptcy laws, and increase the scope, coverage and accessibility of credit information, they can increase entrepreneurs’ access to credit,” according to the report.

It added, “A robust bankruptcy system functions as a filter, ensuring the survival of economically efficient companies and reallocating the resources of inefficient ones.”