By Hatem Soliman (Baker McKenzie Egypt)
I. Corporate liability deriving from criminal activity
Corporate governance matters are regulated in Egypt by various laws, primarily the Companies Law No. 159 of 1981 (the “Companies Law”), the Capital Markets Law No. 95 of 1992 (“CML”), and the Investment Law No. 72 of 2017 (“New Investment Law”). The last was issued on 31 May 2017, superseding its predecessor, the Investment Incentives and Guarantees Law No. 8 of 1997. Pursuant to the Companies Law, joint stock companies are managed by a board of directors (BOD), which is entrusted with the day-to-day operations of the company. The BOD has full authority to represent the company vis-à-vis third parties. The BOD and the general assembly of the shareholders may undertake any action in the name, and on behalf, of the company. It acts under the supervision of the shareholders, and its authority excludes matters explicitly reserved by law, or the company’s constitutive documents for the general assembly. Furthermore, the general assembly may ratify any act that the BOD undertakes.[1]
The BOD is headed by a chair who is appointed from among the directors. By virtue of the Companies Law, the chair has the authority to call board meetings in addition to being the company’s legal representative before courts. This is pursuant to Article 85 of the Companies Law, which states:
“The board of directors shall appoint a chairman from within its members, and may appoint a vice-chairman to replace the chairman in case of his absence. The board may delegate to the chairman the powers of the managing director. The chairman shall represent the company before the courts, and the Statutes shall determine other powers vested into the chairman.”
In accordance with the Companies Law, and given that the chair is regarded as the legal representative of a company, the chair’s liability is divided between civil liability (which includes corporate liability) and criminal liability. We hereunder distinguish between civil and criminal liabilities for which a company chair may be held responsible.
Article 92 of the New Investment Law provides that: “where a crime is committed in the name and for the account of the private juristic person, those responsible for the actual management shall not be held liable, unless it is evidenced that they were aware of the crime, or have committed the crime with the intent of making a personal benefit or that of a third party, without prejudice to any civil liabilities.
Further, and in the case where the liability of the natural person is not evidenced in the manner set out in the preceding paragraph, the juristic person shall be subjected to a fine of no less than four times and not exceeding 10 times the fine applicable by law. In the case of a recurrence, the court may decide to revoke the operating license or dissolve the entity, as the case may be. The decision shall further be published in two daily newspapers at the expense of the entity.”
Having said the above, we note that the New Investment Law is rather novel and has not yet been well tested before courts. Hence, there remains a degree of uncertainty as to the interpretation and application of the said provisions by the competent courts and regulatory bodies.
Further, and unlike in other jurisdictions, the legislation and precedents in relation to corporate liability are not very extensive and detailed. Hence, there remains some ambiguity in this regard and competent courts enjoy wide discretion in such matters.
1. What is the nature of corporate liability deriving from criminal activity? What is its legal basis?
By default, criminal liability is personal in nature.[2] Thus, the company chair is personally liable for any criminal offense they may commit and will be civilly liable for any damages arising therefrom. The company will ordinarily not bear any responsibility in this respect. Felonies for which the chair will be held personally liable under the Penal Code include but are not limited to the following:
- Fraud that leads to the company’s bankruptcy
- Distribution of false dividends to shareholders to misrepresent the competent authority
- Misappropriation of its funds
- Use of the company’s capital and/or funds for illegitimate activities (such as gambling)
- Disregard for the update of the company’s commercial books.
The penalty for such violations will vary between two (2) and five (5) years of imprisonment
In addition, the Companies Law also contains provisions that would entail imprisonment of not less than two (2) years and a fine of not less than EGP 2,000 and not more than EGP 10,000 for any board member who distributes dividends and/or interests contrary to the law or the constitutive documents of the company.[3]
The CML provides for a wide range or penalties, including imprisonment for directors who present false information in offering prospectuses, distribute dividends in violation of the law, or take any other actions with regard to issuance of securities (equity and/or debt) based on misrepresentations or omissions.
2. Type of crimes/administrative offenses from which, according to the legislature, corporate liability may arise
As a general rule, members of the BOD are not held liable for losses incurred by the company, unless it has been proven that such losses are a consequence of the BOD’s wrongful actions. Nevertheless, a chairperson may be in violation of the Companies Law and/or the company’s constitutive documents, such as in the following cases: issuing false balance sheets; distributing dividends without the shareholders’ approval; and negligence in keeping and maintaining the company’s commercial books.[4] It should also be noted that the chair will be liable for violations committed during their term as a board member. However, they will not be liable for losses discovered after they leave their position as company chair, unless such losses are a consequence of the chair’s wrongful act.
Egyptian jurisprudence has established that any civil liability to which the directors (including the chair) may be subjected, vis-à-vis the company, any shareholders or third parties will be jointly liable.[5] Corporate liability is thus looked at as being collective liability.[6] In other words, the directors of the board will be collectively held responsible for any actions that are contrary to the law and/or the company’s regulations. Nevertheless, a board member who has documented their objection during the meeting in which the act has been adopted will not be held liable.
A chairperson’s act may be of detriment to the company (shareholders) or a third party. A chair’s liability thus varies in terms of the entity before which they could be held liable (ie, the company and/or the shareholders on one hand, or third parties on the other hand).
3. Identification of companies and entities to which liability may apply
Liability vis-à-vis the company or the shareholder(s)
A chairperson is personally liable vis-à-vis both the company and the shareholder(s)/partner(s) for any damage incurred by the company and/or shareholder(s)/partner(s) caused due to their fault in their capacity as chair. In such case, both the company and/or the shareholders may have recourse against them. Note that it is the shareholder’s right to file said lawsuit. If a lawsuit is brought against the chair, the shareholders will appoint another BOD member to act on behalf of the company. Where the BOD is collectively liable, the shareholders will appoint a representative before courts.
It is worth noting that the general assembly may absolve the board from liability, save from that arising out of gross negligence and deliberate misconduct. This is in accordance with Article 63 of the Companies Law, which provides that, “… the general assembly shall be competent to undertake the following … (2) supervise the acts of the BOD and consider whether to absolve the same from liability.” It is thus common practice to have a resolution in the annual general assembly meeting absolving the BOD from liability for the lapsing financial year. However, this neither absolves the board or the chair from liability with respect to gross negligence or misconduct, nor does it prevent third parties from bringing claims against the board of directors or the chair. Rather, it operates as a defense for the board members and the chair in the event any such claim is brought.
If the act has been presented to the general assembly of the company, then the liability will prescribe by lapse of one year from the date of the general assembly’s decision,[7] unless it relates to a criminal offense, in which case the general prescription periods for the relevant criminal offenses will apply.
In the event that the shareholders do not bring a lawsuit against the chair, a sole shareholder may use this right on behalf of the company. Such action may only be brought within the one-year prescriptive period. The action taken by the sole shareholder is considered to be on behalf of the company rather than a personal action. Therefore, any compensation ordered in this lawsuit will be the property of the company as a whole.
Liability vis-à-vis third parties
An act committed by a chairperson may be detrimental to third parties acting in bona fide. The Companies Law tackled this issue by including certain provisions in support of third parties acting in good faith. Principally, the company will be held liable for any wrongful act committed by the chair vis-à-vis third parties acting in good faith.[8] In this respect, the company may not claim that it had nothing to do with the wrongful act or that the chairperson’s act is contrary to the company’s statutes.[9] Nevertheless, this does not affect the shareholders’ rights in holding the chair liable, as explained above.
The general rule is thus that the chair is not personally liable vis-à-vis third parties for damages that they cause, in their capacity as such, to said third parties. While the third party may have recourse against the company, the third party will not have recourse against the director/chair in person.
However, such rule is subject to a number of exceptions, including, inter alia, the following: (i) In the case of bankruptcy, if it were proven that the chairperson/director used the company’s properties as their own, then they may also be declared bankrupt;[10] and (ii) in the case of bankruptcy, if the assets of the company fall short of covering at least 20% of its dues, then the competent court may hold the director(s) personally liable for the company’s dues, unless the director(s) can prove that they expended the efforts of a diligent person in the management of the company.[11]
In the aforementioned provisions, the Companies Law explicitly refers to “a board member.” This clearly indicates that only the violator will be criminally held liable. In other words, criminal liability is not applied collectively, which is contrary to the case in civil liability. However, there are certain Egyptian laws that will hold both the company and the violator liable without expressly distinguishing between board member and chairperson.
4. Corporate liability for crimes committed abroad by representatives or subsidiaries
In principle, Egyptian courts should have jurisdiction to adjudicate any cases filed against an Egyptian national, as well as any cases filed against a foreign national, should such foreign national be a resident of or domiciled in Egypt, or has selected Egypt as their chosen domicile, without prejudice to the exceptions set out under the Procedural Law. Further to the above, we note that Egyptian courts may have jurisdiction over cases filed against a foreign national who is not domiciled in or a resident of Egypt, should such case relate to, among others, any of the following: (i) funds or assets located in Egypt; (ii) an obligation that originated in Egypt; or (iii) an obligation that was enforced or is due for enforcement in Egypt; or (iv) bankruptcy filed in Egypt.[12]
5. Corporate liability in the case of transactions taking place after the commission of a crime (acquisitions, mergers, demergers, etc.)
In general, if the act has been presented to the general assembly of the company, then the liability should prescribe by lapse of one year from the date of the general assembly decision,[13] unless it relates to a criminal offense, in which case the general prescription periods for the relevant criminal offenses will apply. We note that in case of mergers, the entity that has been merged into or the entity resulting from the merger is considered a successor to the merging entities and legally replaces same in all rights and obligations, as agreed upon in the merger agreement and without prejudice to debtors’ rights.[14]
II. Applicable sanctions
1. Type of sanctions applicable to the company
Further, and as indicated above, the New Investment Law provides that a company may be subjected to a fine amounting to no less than four times and not exceeding 10 times the fine applicable by law, if the liability of the natural person is not evidenced in the manner set out under the said law.
In accordance with the Customs Law, Article 118 states that if a juristic person has committed certain actions, the person in charge of the company’s management will also be held liable with the company if they had knowledge of the act, and/or if such violation was a consequence of their negligence. In this regard, although the law does not explicitly stipulate whether the chair or the board member will be held liable, it is conceivable that ― as both board members and the chair manage the company ― they may be held, either individually or collectively, liable. Penalties vary between fines and/or a percentage of the customs that should have been paid by the violator.
Article 133 of Tax Law No. 91 of 2005 states that any taxpayer (this includes companies) who evades tax payment will be penalized with imprisonment for a period that is not less than six (6) months and not longer than five (5) years, and/or a fine that is equal to the unpaid/undeclared tax amount. In practice, the lawsuits brought for tax evasion are typically brought against the chair and/or the managing director, in which case the person against whom the judgment has been issued will be subject to the penalty in person. In practice, many similar cases end in settlement.
In addition, Article 135 of the Tax Law imposes a fine of not less than EGP 5,000 and not more than EGP 20,000 on “any person” who refrains from submitting a declaration of activity or a tax statement; or refrains from applying a withholding system for taxes and submitting tax amounts to the Tax Authority in due time.
2. Interim measures, cease and desist orders, bans and confiscatory measures
The Procedural Law sets out certain types of seizures as well as the conditions and procedures regulating same, which include: (i) the precautionary seizure, which the debtor may apply on the borrower’s movables, should the debtor fear that their rights or dues might be lost and conditioned upon such debt being due and enforceable[15]; (ii) seizure of the borrower’s debts or movables held by third parties, should the debt be considered due and enforceable[16]; and (iii) the execution seizure,[17] which is subject to compliance with the conditions and procedures prescribed in the respective types of seizures. The Procedural Law also grants the right to petition for temporary measures or suspension of judgment enforcement, in accordance with the conditions set out in the law as may be applicable.[18]
3. Liability of directors or managers for not having adopted (intentionally or negligently) measures for the prevention of the crime
Corporate and criminal liability may be applicable to actions or omissions, which have led to crime or violations of the prevailing Egyptian laws, as set out in Section I above and provided that the Board of Directors and its chairperson are in compliance with their duties.
Set out below are the general categories of duties and liability to which a Director could be subject to pursuant to Egyptian law. The liability could arise from suits by the company, third parties or shareholders:
- Fiduciary Duty
A Director owes a “fiduciary duty” to the company to act honestly and in the company’s best interest. The Egyptian Conseil D’Etat has issued a ruling to the effect that a Director is deemed to be an agent of the shareholders and in this respect, they owe a fiduciary duty to the company to act honestly. A Director may be liable for failure to act in accordance with this fiduciary duty.
- Statutory Duty
In accordance with the prevailing laws and regulations in Egypt, the Board of Directors is bound to run the affairs of the company and to conduct the necessary activities to carry out such an obligation. Thus, the Board of Directors is subject to several statutory duties spread out under various provisions of the laws and regulations. In general, there are certain duties that may be deemed relevant in this case and to which sanctions are normally prescribed:
- In the event a Director would resolve matters related to distribution of dividends in violation of the law or articles of association of the company, or
- In the event a Director would intentionally commit an act of forgery in the documents of the company or, otherwise, present misleading documents to the General Assembly
The Director may be subject to imprisonment and a fine personally borne by the perpetrator in either of the following circumstances:
-
-
- In the event a Director fails to observe the parameters of directorship
- To intentionally obstruct the invitation of the General Assembly
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The Director may also be subject to sanctions of a fine personally borne by the perpetrator.
- Contractual Duty
Pursuant to the Companies Law, any act conducted by the Board of Directors in the course of carrying out its regular managerial duties will be binding to the company. Thus, a bona fide third party may hold the company liable for such an act even if the Board of Directors has exceeded its scope of duty and has not followed the proper course of action in this respect. A Director, in turn, shall be held liable vis-à-vis the company on such an act and the company accordingly may seek recourse against a Director who has exceeded their scope of duty.
- Tort Liability
In accordance with the fundamentals of tort liability under the Egyptian Civil Code, a Director who may have committed an act of default that caused damage to a third party could be liable for damages.
- Criminal Liability
In addition to the civil liability of Directors, they could also be held liable for their actions if criminal behavior is attached thereto in the course of performing their duties and exercising their managerial powers. We note that the Companies Law provides wide- reaching language that would provide for criminal liability, as well as certain specific sanctions for specific company-related crimes. In addition to the Companies Law, the Egyptian Penal Code provides for various criminal sanctions in company-related actions and inactions.
III. Measures and “models” of prevention and effects of the same on corporate liability and applicable sanctions
1. Consequences of the adoption of a compliance “model” and effects on corporate liability for crimes committed by the company’s managers, directors or representatives (cases in which it is possible to obtain an exemption from liability or a mitigation of the sanction)
Conceptually, such model may serve as an internal tool at the company monitoring and supervising the actions of the Chair and BOD, which may in turn be considered an additional layer of corporate liability prevention. However, we understand that this concept is not well regulated and has not been well tested before court. Essentially, it would remain in the court’s discretion to assess whether the acts committed fall within the scope of those penalized under Egyptian law and the applicable sanctions.
2. Modality according to which a compliance “model” must be adopted in order to benefit from exemption from responsibility or mitigated punishment (codes of ethics, procedures, etc.)
Not applicable
3. Monitoring: independent person or body to control/supervise, with the purpose of verifying the correct application of the “model”. Model of operation of such person or body
Not applicable
IV. Judicial proceedings to determine corporate liability
1. Court competent to decide the liability of and penalties applicable to the company
With respect to cases relating to existing companies, associations or private institutions, or those under liquidation, the competent court shall be the court within which circuit the headquarters of the entity is located, regardless of whether the case is filed by or against the company, association or institution, or by or against one of the shareholders or directors.[19] Further to the above, pursuant to the Economic Courts Law No. 120 of 2008, the Economic courts (first instance and appeal circuits) should generally have exclusive jurisdiction over any criminal cases arising in connection with the crimes prescribed under certain laws, including but not limited to the Companies Law, the Capital Markets Law, the Investment Law, the Central Depository Law, and the Banking Law.[20]
2. Possibility of the application of interim measures
In general, the Procedural Law sets out certain types of seizures as well as the conditions and procedures regulating same, which include the precautionary seizure, which the debtor may apply on the borrower’s movables, should the debtor fear that their rights or dues would be lost and conditioned upon such debt being due and enforceable. The Procedural Law also grants the right to petition for temporary measures or suspension of judgment enforcement, in accordance with the conditions set out in the law as may be applicable. It would generally be up to the court’s discretion in light of the case under review.
3. Plea bargains and related effects on corporate liability
Not applicable
4. Imposition of sanctions against the company
Please refer to the applicable sanctions referenced under Sections I and II above.
5. Persistence of corporate liability if the crime is extinguished
Criminal offenses are generally penalized in accordance with the laws applicable at the time when the criminal offense was committed. If new legalization is introduced subsequent to the issuance of a final judgment, removing the criminalization of an act that has been previously penalized, the enforcement of the final judgment will be suspended and all criminal effects thereof will be ceased.[21]
V. Corporate liability in multinational groups
1. Liability of parent companies located abroad in the case of offenses committed by directors, managers or representatives of the local company
Pursuant to the Companies Law, joint stock companies are managed by a BOD, which is entrusted with the day-to-day operations of the company. The BOD has full authority to represent the company vis-à-vis third parties. The BOD and the general assembly of the shareholders may undertake any action in the name, and on behalf, of the company. It acts under the supervision of the shareholders, and its authority excludes those matters explicitly reserved by law, or the company’s constitutive documents for the general assembly.[22] A juristic person may be a member of the company’s BOD, provided that the juristic person immediately appoints a natural person as its representative on the BOD, who shall comply with all conditions regulating the BOD membership and their obligations and liabilities, as prescribed by law. A shareholder may be the board member and appoint a representative accordingly, bearing in mind that shareholder may remain liable for actions carried out by its representative on the BOD.[23]
2. Basis of liability and applicable sanctions
Please refer to Sections I and II above regarding the liability of the BOD and the applicable sanctions.
VI. Significant case law concerning corporate liability arising from crimes and draft laws under discussion
1. Significant case law, if any
Not applicable
2. Proposed or contemplated new legislation
We understand that the executive regulations of the New Investment Law (issued on 31 May 2017) are expected to be issued in the near future.
[1] Article 54 of Companies Law No. 159 of 1981.
[2] This is an established constitutional principle.
[3] Article 162 of Companies Law No. 159 of 1981.
[4] Article 162 of Companies Law No. 159 of 1981.
[5] This position is based on Article 707 of the Egyptian Civil Law, which provides that in case of plurality of Agent, they will be jointly liable for any default on their part. In analogy, the same was applied to the directors as they are, more or less, the agents of the shareholders.
[6] Article 161 of Companies Law No. 159 of 1981.
[7] Article 102 of the Companies Law.
[8] Article 161 of Companies Law No. 159 of 1981.
[9] Article 55 of the Companies Law No. 159 of 1981.
[10] Article 704/1 of the Trade Law No. 17/1999.
[11] Article 704/2 of the Trade Law No. 17/1999.
[12] Articles 28, 29 and 30 of the Procedural Law No. 13 of 1968.
[13] Article 102 of the Companies Law.
[14] Article 132 of the Companies Law.
[15] Articles 316 to 324 of the Procedural Law No. 13 of 1968.
[16] Article 325 of the Procedural Law No. 13 of 1968.
[17] Article 353 of the Procedural Law No. 13 of 1968.
[18] Article 312 of Procedural Law No. 13 of 1968.
[19] Article 52 of Procedural Law No. 13 of 1968.
[20] Article 4 of Economic Courts Law No. 120 of 2008.
[21] Article 5 of the Penal Code No. 58 of 1937.
[22] Article 54 of Companies Law No. 159 of 1981.
[23] Article 236 of the Executive Regulations of the Companies Law.