On 06 July 2020 and by virtue of law No. 143 of 2020, a significant amendment was introduced to the Central Depositary Law No.93 of 2000 (the “Amended Central Depositary Law”) whereby a more lenient approach was introduced in relation to the procedures of enforcement of pledges over Egyptian centrally deposited securities and financial instruments.
The Amended Central Depositary Law marks a change in the Egyptian regulator’s stance in relation to enabling foreign lenders to enforce pledges over centrally deposited securities directly and without any need for prior court orders/procedures. In this note, we highlight the historic issues around the enforceability of share pledges (and more generally securities pledged) in favour of lenders not licensed by the Central Bank of Egypt. We then highlight the significance of the changes introduced by the Amended Central Depository Law in this respect.
1. Regulatory Regime Governing Commercial Pledges: The Egyptian commercial code No. 17 of 1999 (the “Commercial Code”) sets out the regulatory framework governing the creation, validity and enforcement of commercial pledges. In that sense, commercial pledges covered all forms of physical securities (including shares) in materialized form. Article 119 of the Commercial Code stipulates that “Without prejudice to the provisions governing specific types of commercial pledges, the provisions of this chapter shall apply to pledges created over movable property to secure a debt deemed as a commercial debt in relation to the debtor.” Until the issuance of the Amended Central Depositary Law, no separate regulatory regime existed for the enforcement of pledges over centrally deposited securities (including shares) barring minor reference to procedural company (MCDR), the only current central deposit entity in Egypt.
2. Process for Enforcement of Commercial Pledges: Article 126 of the Commercial Code sets out the procedural requirements for enforcing commercial pledges. According to Article 126, in order to enforce a commercial pledge, the pledgee must first request payment of the secured debt by the debtor/pledgor, usually through service of an official notice through a court bailiff. If the pledgor does not pay the secured debt within five days following such request, the pledgee may apply to the competent court for a sale order in relation to all or part of the pledged assets. Unless otherwise ordered by the court, the sale must be carried out by way of public auction.
Article 126 further stipulates that the sale of the pledged asset shall only take place upon the elapse of a five-day period from the date on which the pledgor is notified of the sale (including the place and time on which the sale is to take place). The same enforcement process applied for securities in physical form (materialized) and de- materialized form (as in case of centrally deposited shares) excluding where the pledgee is a bank licensed by the Central Bank of Egypt where in such case, enforcement can be direct as an exception from Article 126. The same exception did not historically (prior to the Amended Central Depositary Law) exist for non- Egyptian banks.
3. Instances of Nullity of Commercial Pledges: Article 129 of the Commercial Code stipulates that “All agreements concluded at the time of or after the pledge is created, granting the pledgee, in case of failure by the debtor to settle the debt on its maturity date, the right to posses the pledged asset or sell it without observing the procedures prescribed under Article 126 of the Commercial Code, shall be null and void.”
4. The Need for a Two-Tier Security Structure: In light of the complexity and lengthiness of the enforcement procedures set out above, particularly in relation to enforcement over pledged shares held in Egyptian companies, IFIs were forced to adopt a two-tier security structure for the purpose of securing their interests and ensuring the full repayment of amounts payable by the pledgor/borrower. The two- tier security structure consisted of: (i) a pledge over the shares held by the non- Egyptian sponsor company in the project company (usually the debtor) incorporated in Egypt, and (ii) a pledge over the shares held by the ultimate beneficial owner in the non-Egyptian sponsor company outside of Egypt.
Due to the difficulties surrounding enforcement, any pledge created over shares held in an Egyptian project company was created merely as a form of defensive security, one which is meant to lock up the existing ownership structure and which was unlikely be enforced by the pledgee. Accordingly, the second layer of security taken over shares held in a non-Egyptian entity outside of Egypt was usually created for the purpose of acquiring a directly enforceable security which is unhindered by lengthy procedural requirements.
In relation to banks not registered with the Central Bank of Egypt, the provisions of the Amended Central Depositary Law reflect a clear departure from the previous regulatory regime set out under the Commercial Code in relation to enforcement over centrally deposited securities.
With respect to centrally deposited securities only, Articles 51 (bis 1) of the Amended Central Depositary Law sets out the requirements to be met for a valid pledge over securities and registration requirements before Misr Central Depository, Clearing and Settlement need for the pledge to have been created in writing as well as the need for the share pledge agreement to have an established date and for the pledged asset to be clearly identified.
With respect to the enforcement of pledges created over securities and financial instruments, Article 51 (bis 3) of the Amended Central Depositary Law stipulates that “the pledgee, upon the occurrence of the event triggering the pledgee’s right to enforce the pledge and upon the elapse of five (5) days from the date of requesting payment by the debtor by virtue of registered mail, has the right to enforce the pledge through taking possession of or the sale of the pledged securities and financial instruments.”
Article 51 (bis 3) requires, for the purpose of direct enforcement of pledges and/or assuming title to pledged securities, that the pledge agreement (i) specifically grant the pledgee the right to enforce the pledge directly, and (ii) include a method for the valuation of the securities and financial instruments for the purpose of enforcement.
Additionally, Article 51 (bis 3) further prohibits any agreement to postpone enforcement over the pledged securities or financial instruments (that are centrally deposited) until an administrative decision, a court order, or an auction is conducted, or until a certain period of time has elapsed, thus emphasizing the pledgee’s right to directly enforce the pledge.
Article 107 of the New Banking Law stipulates that “Should an agreement between the bank, in its capacity as a pledgee/creditor, and the debtor/pledgor grant the bank the right to sell the pledged securities and financial instruments in the event that the debtor/pledgor fails to settle the amounts payable to the bank and secured by the pledge on the maturity date, the bank shall, without being bound by the provisions of Articles (126,129) of the Commercial Code, be entitled to sell the pledged securities and financial instruments in accordance with the provisions regulating trading or dealing in securities or financial instruments on the stock exchange upon the elapse of ten working days from the date on which the pledgor is requested to settle the amounts due to the bank.”
The wording of Article 107 of the New Banking Law, as set out above, does not prohibit the ability of foreign banks to enforce directly over pledged securities to the extent that a specific law would provide for such right. Such right is now existing under the Amended Central Depository Law with respect to centrally deposited securities.
The regulatory changes introduced to the Amended Central Depositary Law have meant that pledged shares centrally deposited with MCDR now fall outside the enforcement regime set out under the Commercial Code and are governed by the specific enforcement regime as newly introduced under the Amended Central Depositary Law.
The provisions of the Commercial Code specifically provide under Article 119 that such law would not apply to the extent that specific law would govern a specific type of collateral. Also, the Amended Central Depositary Law provides that its regulations should not be read with prejudice to the Commercial Code. When reading both provisions, this could only mean that enforcement over centrally deposited shares/securities does not require a court order or further procedures for Egyptian and non-Egyptian lenders. However, enforcement over physical shares/securities would require following the process under Commercial Code for non- Egyptian lenders while Egyptian lenders can enforce directly as per Egyptian new Banking Law.
