After almost two decades, the 1995 financial leasing law and the 2003 factoring law became history. The Egyptian Parliament passed on August 15, 2018 the new Law No. 176 of the year 2018 regulating both financial leasing and factoring activities (“Law”).
BELOW ARE SOME HIGHLIGHTS OF THE MOST NOTABLE POINTS OF THE NEW LAW:
Objective. The Law develops and regulates non-banking financial instruments. The objective of Financial Leasing is different than that of Factoring; while the former aims at steering economic volume and increasing production, the latter aims at accelerating the availability of cash flow of small and medium-size businesses while avoiding the need for expensive, lengthy banking facilities with accompanying guarantees, whether personal, commercial or corporate.
Compliance. The Law requires companies working in these two fields to comply with its provisions within six months (i.e. by mid-February 2019 at most) while existing contracts will still be subject to the previous taxation treatment up until such contracts’ expiry date. The Financial Regulatory Authority (“FRA”), as the competent administrative authority, may extend such deadline twice to grant companies enough time to comply.
Requirements. Financial Leasing or Factoring activities may only be carried out by joint stock companies with paid-in capital of not less than EGP 10 Million, or the equivalent in foreign currency, after obtaining a license from FRA.
Definitions. In accordance with the new Law, Financial Leasing is a financial contract applicable on assets or usufruct rights concluded between two parties, i.e. the lessor and the lessee, whereby the lessor allows the lessee to use their asset for a certain period of time in consideration of a rental fee as per the provisions stipulated under the financial leasing contract, provided that by the end of the contract term, the lessee must be having the option to purchase such asset. The FRA provides the template contract having among its provisions that lessee has a purchase option of all or part of the leased asset upon the expiry of its term. As to Factoring, it is a financing instrument, pursuant to which a business owner may purchase existing and future financial rights generated from a commercial sales and provision of services.
Structure and Contractual Obligations. The new Law regulates financial leasing and factoring contracts and distinguishes between them. The contract terms and conditions included therein should take precedence even if some of the provisions are not explicitly stipulated by law. Thus, the contracts must include all the information about the contracting parties, the leased asset and the purpose of the lease. Furthermore, the Law regulates the parties’ obligations resulting from the contract. Accordingly, the lessor should be responsible for maintenance, taxes and insurance, whilst the lessee pays timely lease and may only use the leased asset as provided in the agreement. The new Law also recognizes the new movable securities registry law in respect of using movable assets as collateral for obtaining finance.
Scope and Exceptions. Contracts qualifying as Financial Leasing must include a purchase option provision of the asset and such asset must be directly necessary to the activities of the lessee. The Law does not govern contracts related to usage and exploitation of natural resources such as oil and gas, or assets that are not commercially used. The lessor may be registered with the Import Register regardless of its capital structure requirements.
Term and Termination. The Law regulates the termination and expiration of such contracts. According to the Law, Financial Leasing and Factoring contracts are automatically terminated without recourse to any judicial proceedings in certain cases, among which is the lessee’s failure to pay the agreed upon lease, bankruptcy or dissolution or death of the lessee. Besides, the contract may be annulled by virtue of law in case the leased asset is in total loss status without prejudice to any of the parties’ contractual obligations.
Guarantees and Penalties. For the protection of this type of business, various instruments are provided for filing complaints, prescribed penalties in case of any violation of the Law. FRA is tasked to prove violations of the Law, having the authority to check all records, books, documents and data of the companies and organizations. In case of a violation, the company may be banned from practicing all licensed activities or a compensation may be imposed for any damage incurred. Further, a union will be established for companies operating in the Financial Leasing and Factoring businesses each, and subject to FRA supervision. The FRA may call for the company’s GA or Board to convene discussing the violation, noting the FRA may dismiss the Chairman or Managing Director by a reasoned decision.
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If you would like to discuss the impact of the Law and implementation of compliance requirements on existing business or status of contracts concluded prior to the Law, please feel free to reach out to your usual contact at Shahid Law or write to us at info@shahidlaw.com.
