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The Legal 500 EMEA

Insolvency between Now & Then…


The IMF “International Monetary Fund” has been actually promoting the growth of effective and orderly insolvency processes among its members throughout time. Experience has demonstrated that reform in this area can significantly boost a nation’s economic and financial infrastructure.

By enabling banks to halt the deterioration of the quality of their claims, particularly those against the corporate sector, whether through a court-approved restructuring or, whenever necessary, thru an effective liquidation, an effective insolvency system, for instance, provides an important pillar of support for the domestic banking system.

In any case, experience shows that the degree to which an insolvency law is viewed as pro-creditor or pro-debtor is ultimately less important than the degree to which these regulations are effectively implemented by strong institutional infrastructure.

Given the urgency and complexity of bankruptcy proceedings, efficient implementation requires judges and administrators who are competent, moral, and knowledgeable about business and financial issues as well as the specific legal obstacles presented by insolvency processes.

The financial markets will place greater trust in a pro-debtor statute that is applied successfully and consistently than in a law that benefits creditors inconsistently.

What Is Insolvency?

Insolvency is a term for when an individual or company can no longer meet their financial obligations to lenders as debts become due.

Before an insolvent company or person gets involved in insolvency proceedings, they will likely be involved in informal arrangements with creditors, such as setting up alternative payment arrangements.

Insolvency can arise from poor cash management, a reduction in cash inflow, or an increase in expenses.

What is the difference between Solvency and Insolvency?

1- Solvent Liquidation

Solvent Liquidation is defined as the company’s ability to pay its debts in full together with interest within a period of time, from the commencement of the winding-up.

The board of directors will evaluate the company’s financial situation before recommending to shareholders that it enter Members’ Voluntary Liquidation (MVL) and a Liquidator be appointed. The proposed resolutions are subsequently put to a vote by shareholders.

In an MVL, the Liquidator’s function is to:

  • Realize the company’s assets for best value;
  • Discharge the costs of the liquidation;
  • Agree and settle creditor claims;
  • Distribute surplus funds and/or assets to shareholders.

2- Insolvent Liquidation

Insolvent Liquidation is the state of being unable to pay the debts, owed by an individual or company (the debtor), when due; one who is in this position is referred to as being insolvent.

There are two types: insolvency on the balance sheet and insolvency on the cash flow statement.

To be clear about the abovementioned terms of the balance sheet and the cash-flow statement, simply these can be defined as:

Cash-flow insolvency is When a person or company is insolvent due to cash flow, it usually means that they have the assets necessary to fulfill their debts but lack the proper funding source, on other hand, when a person or business doesn’t have enough assets to cover all of their debts, this situation is known as balance-sheet insolvency.

The person or business might declare bankruptcy, but it’s not a guarantee. Negotiation frequently succeeds in resolving conflicts without declaring bankruptcy once a loss has been accepted by all parties.

It has been recommended that in order to always be unambiguous, a speaker or writer should use the terms “technical insolvency” or “actual insolvency”.

Where “technical insolvency” is a synonym for “balance sheet insolvency,” which means that a company’s liabilities exceed its assets, and “actual insolvency” is a synonym for the first definition of insolvency (“Insolvency is the inability of a debtor to pay their debt”).

Cash-flow insolvency and actual insolvency are not synonymous, but technical insolvency and balance-sheet insolvency are. Contrary to the term “actually insolvent,” “cash-flow insolvent” strongly implies—though perhaps not in absolute terms—that the debtor is a balance-sheet solvent.

IOW, Lack of funds to pay debts as they become due constitutes cash-flow insolvency, The balance sheet Negative net assets—where obligations outweigh assets—represent insolvency.

Insolvency is not the same as bankruptcy, which is an assessment of insolvency conducted by a court of law and followed by judicial orders meant to end insolvency.

Explanation Commentary

It is easy to pinpoint two overarching goals that are typically shared by most systems, despite the fact that the insolvency laws of different nations differ in significant ways.

  • First:

The first overarching goal is the predictable, equitable, and transparent management of risk among market economy participants. The accomplishment of this goal is essential for encouraging the economic growth that enriches all participants and restoring confidence in the money system.

Likewise, for the interest of borrowers, an insolvency law distributes risk among several creditors. For instance, if the insolvency law grants secured creditors preferential treatment over unsecured creditors, such protection of the value of the security may be particularly meaningful for debtors who, due to their credit risk, are unable to obtain (or cannot afford) unsecured credit.

  • Second:

Protection and value maximization for the benefit of all parties involved and the economy as a whole constitute the second objective of insolvency law. The obvious time to pursue this goal is during recuperation when value is increased by maintaining a profitable business.

However, it is also one of the main goals of the procedures used to liquidate failing businesses. The accomplishment of the objective of equitable risk allocation frequently facilitates the value maximization objective.

In order to ensure that creditors are paid fairly and to increase the value of the debtor’s assets, for instance, fraudulent transactions that took place prior to the filing of an insolvency procedure can be revoked.

An efficient insolvency law can undoubtedly be highly vital in a variety of areas when seen from the viewpoint of the economic policymaker and in light of the aforementioned goals.

In general, the discipline it imposes on a debtor raises the competitiveness of the business sector and makes it simpler to extend credit. More precisely, subjecting the business to the application of the general insolvency legislation sends a strong message about the limits of public financial support to the extent that the industry is owned by the state.

In that situation, the rehabilitation provisions of an insolvency law can effectively ensure that creditors assist in resolving the fiscal issues of state-owned firms, thereby reducing the rehabilitation’s cost to the general public.

When does a company fall insolvent?

If a company’s assets are insufficient to pay off its responsibilities and debts, it is considered insolvent. An insolvent business frequently finds itself unable to pay its debts as they become due (cash-flow insolvency).

Insolvency proceedings are typically initiated after less formal measures have failed and might be the result of poor financial management, shifting market trends, increased expenses, and decreased income.

Balance sheet insolvency, or when a company’s liabilities exceed its assets, is also referred to as technical insolvency. The first definition of insolvency is a synonym for actual insolvency (“Insolvency is the inability of a debtor to pay their debt.”).

Technical and real insolvency are the same thing, however, cash-flow insolvency is not. Technical insolvency is defined as having a negative cash flow. Unlike the phrase “truly insolvent,” “cash-flow insolvent” clearly implies—though possibly not in the strictest sense—that the debtor is a balance-sheet solvent.

Egypt in Insolvency

The new insolvency law was released in tandem with recent attempts by the Egyptian government and the minister of investment to promote both domestic and foreign investment in Egypt, as well as in light of the release of the executive regulations for investment that entered into force in June of 2017.

On March 22, 2018, the newly enacted Insolvency Law No. 11/2018 went into effect. Prior to the publication of this law, bankruptcy and insolvency cases were handled by Egyptian courts on an individual basis, with decisions based on the applicable civil and business laws.

The Cairo Economic Court was granted jurisdiction to handle all cases and disagreements relating to bankruptcy and insolvency as a result of the new law. A Committee made up of Insolvency Experts will oversee Insolvency matters as a result of the new law No. 11/2018.