Why Bankruptcy Reform

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Bankruptcy, as a system, provides a legal mechanism for creditors to recover their debts through seizing and selling the assets of the debtor; and thus, it has gained high importance as a main pillar of commercial law. Most related global approaches fall within two main trends: the first is the Roman collective liquidation system which ensures equality among all creditors in recovering their debts by means of attachment of debtor’s property and distributing the outcome on the creditors based on the amount of each one’s debt. The second approach is the Germanic system, where the creditor attaches in advance part of the debtor’s property, as a guarantee to recover his debt, in case of nonfulfillment, prior to all other creditors. It should be noted that the legislations that govern the bankruptcy systems are different in terms of their extent of comprehensiveness when applied. Therefore, in several Middle Eastern and African countries, including Egypt and Jordan, bankruptcy is exclusively applicable to traders; whereas in some other countries like Germany, the United States of America, and Switzerland, bankruptcy is applied on citizens, both traders and non-traders alike, without exceptions.
Bankruptcy, which is a highly correlated concept with the credit system, serves not only as a cornerstone to an effective commercial system, but also as the pushing force which encourages all sorts of commercial relations and transactions. Such transactions would be no doubt enhanced through an effective and solid lending process that in turn requires trust in the legal system that governs them in such a way that protects debts and the ability to collect them; specifically in terms of recovering the amount of money that has been loaned.
Any business (whether owned by an individual or a company) may go through financial crises. These crises may start to happen before the trader reaches the state of cessation of payment, either because of bad or unreasonable project management or because of external objective economic conditions, like (war, corruption…, or other several reasons…). In all of these cases, the cessation of payment is either because of a temporary shortage in liquidity- though not necessarily in solvency (the enterprise
might own assets that largely exceed its liabilities), or because of a permanent shortage in liquidity which manifests weakness in solvency.
Recently, The system of bankruptcy has witnessed several developments, especially in view of the current globalization, the expansion of trade outside the region limits, and the intensification of the economic competition, whether within the country or abroad; the positive balance accounts of the trader accounts are no longer based on his keenness and intelligence only, but it is also based on external factors that are inevitable1, which leads to a disturbance in the business of the trader and thus the cessation of payment. This problem led many international organizations, including the International Trade Organization, UNCITRAL, the World Bank, and others to work on the protection of creditors and investors, as well as on enhancing the process of lending and commercial trust through setting out a set of international principles and guidelines (World Bank Principles for Effective Insolvency and Creditor’s Rights System and UNCITRAL Legislative Guide on Insolvency Law) which help and motivate the countries to reform their legal system. Bankruptcy is no longer an internal concern only, but an external one as well.

Yet, and in spite of what was mentioned previously, the bankruptcy laws of most Arab countries, including Egypt and Jordan, which are inspired from the old French legal system, have not witnessed any radical modifications. A few other Arab countries, however, like the Gulf countries and some northwest African Arab countries have modernized their commercial legislation in conformity with the recent endeavor of developed countries to find new ways to avoid bankruptcy through reorganization. In this regard, there are two approaches.
The Anglo-Saxon approach: it paved the way to save the business before it actually defaults; thus, whenever there is any indication that the business is going to suffer from defaulting, either because of personal or external circumstances (disturbance in the financial markets, shortage in the primary resources, sudden and high increase in the prices of raw materials, etc…). This rescue operation manifests the importance of the business enterprise as a strong keystone to the national economy, since it aims to end its defaults and reorganize it either by merging it with another project, or by increasing its capital or any other solution. As for the French approach, its whole strategy is based on the idea that no attempts to rescue shall be made unless the business enterprise has already entered into the phase of defaulting (a significant decrease in liquidity, and a significant decrease in solvency) which precedes the phase of cessation of payment.
Thus, rescuing attempts can be proposed either by reorganizing the capital of the business or by rescheduling the debts (same solutions of reorganization that was mentioned previously), or any other rescue solutions that are different in nature and mechanism from what is proposed by the bankruptcy prevention settlement system (composition), which remains valid as one of the settlements to rescue the defaulted business.
In Egypt and Jordan, bankruptcy plays a very important role in improving the business environment and making it more enabling for credit and investment. Thus, the modification, addition, and abrogation of some bankruptcy provisions is highly necessary and should be a priority for the Egyptian and Jordanian legislators, especially in view that the bankruptcy systems there are quite old and have not been modified in a very long time.

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