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Insolvency Proceedings and Security Interests: What You Need to Know

In the event that a company defaults on its payments, creditors may initiate insolvency proceedings against it. But what happens to security interests granted by the company prior to such proceedings? Can they still be enforced?

Conditions for Company Rescue

Before initiating insolvency proceedings against a company, creditors must ensure that they meet certain conditions. These include:

• Being a merchant for at least two years prior to filing
• Not having committed fraud
• Suffering from a turbulent financial status that makes it unable to pay its debts
• Filing the request within 15 days of default on payments
• Not being subject to liquidation procedures
• Obtaining approval from the majority of partners or general assembly, depending on the type of company

Priorities in Insolvency Proceedings

When a court declares a merchant bankrupt, all its debts become due. Liens mandatorily preferred by law, such as those related to judicial expenses and tax dues, take priority. After these are satisfied, secured creditors recover outstanding debt from assets taken as security according to the ranking of registration.

Unsecured creditors then share any remaining proceeds pro rata to each creditor’s participation in the total indebtedness. The same priorities apply when a bank is declared bankrupt, with some variations.

Preferential Creditors

Certain creditors have priority over others in insolvency proceedings. These include:

• Those entitled to amounts paid to keep and maintain movable assets
• Those entitled to amounts due to the treasury, including taxes and fees
• Those entitled to amounts due to the seller of movable or immovable assets
• Those entitled to amounts due to partners who own the assets along with the debtor

Contractual Subordination

Egyptian law does not specifically regulate contractual subordination. In practice, creditors may enter into subordination agreements, but their treatment in the event of bankruptcy has not been fully tested.

Priority among Secured Parties

Priority among secured parties is determined by relevant subordination agreements. This means that if multiple creditors have security interests in the same assets, those with priority under the agreement will recover their debt first.

Summary

In summary, security interests can still be enforced after a declaration of bankruptcy, but only up to the amount recovered from assets taken as security. Creditors must meet certain conditions before initiating insolvency proceedings, and priorities are determined by law and subordination agreements.