Retention of Title in Egypt

A sale contract is defined as a legally binding agreement whereby the seller agrees to transfer ownership of a specific item or financial right to the buyer in exchange for a monetary price. According to Article 430 of Law No. 131 of 1948 ("Egyptian Civil Code"), the concept of retention of title is explicitly recognised. This provision enables the seller to retain possession of the goods until the purchase price is fully satisfied, even if the goods have already been delivered to the buyer. In instances where the purchase price is to be paid for in installments, such as in the case of the sale of movable goods (for example, cars or mechanical equipment), the seller may retain ownership as security for any unpaid installments. 

Upon full settlement of the purchase price or all installments, ownership is retroactively transferred to the buyer, as of the time of the original sale. In the event that the buyer disposes of the goods prior to the settlement of the full price or the final installment, the seller reserves the right to demand immediate payment of the outstanding installments. This principle is reinforced by Article 106 of Law No. 17 of 1999 ("Commercial Law"), which states that ownership is only transferred upon payment of the final installment, thereby aligning with the retention of title provision outlined in the Egyptian Civil Code.

In Challenge No. 4609 of 1961 civil, the Egyptian Court of Cassation elucidated that a sale with retention of title constitutes a completed transaction. The Court further elaborated that the sole condition for the transfer of ownership is the full settlement of the stipulated price. The Court emphasized that the delay in transferring ownership does not render the sale conditional upon payment, but instead suspends the transfer of ownership until the payment is fulfilled.

Although retention of title is recognized in the Egyptian Civil Code, its enforcement, particularly in bankruptcy proceedings, presents significant challenges. Specifically, the question of whether a seller can reclaim goods delivered to the buyer in the event of the buyer's bankruptcy, in instances where the retention of title clause has not been properly documented or secured, is not addressed. According to the Egyptian Civil Code, possession of movable property serves as the title to ownership. However, this principle also exposes sellers to various risks.

According to Article 106 of the Commercial Law, the Retention of Title clause must be documented in writing with a fixed date prior to any third-party rights or enforcement actions. This stipulation is a prerequisite for the clause's enforceability in bankruptcy or against external third parties. Absent proper documentation and registration, the retention of title clause cannot take precedence over the rights of other creditors.

Furthermore, Article 150 of Law No. 11 of 2018 ("Bankruptcy Law") stipulates that the retention of title clause will not have any legal effect in the event of bankruptcy unless the seller has secured the goods through a guarantee agreement. In the absence of such measures, the seller's ability to reclaim the goods is extinguished, and their claim is treated as a general debt within the bankruptcy estate.

Egyptian Collateral Registry (ECR)

A potential solution for sellers to protect their interests in bankruptcy proceedings is the Egyptian Collateral Registry ("ECR"), which was established under Law No. 115 of 2015 ("Movable Collaterals Law") This law allows creditors to register movable goods as collateral prior to the commencement of bankruptcy proceedings, thereby giving them preferential treatment over other creditors.

• Article 11 provides that once the goods are registered in the ECR, the seller's security right is effective against third parties.
• Article 20 further provides that if the debtor is declared bankrupt, the goods registered in the ECR shall not be deemed to form part of the bankruptcy estate, provided that the registration took place before the commencement of the bankruptcy or liquidation proceedings.
• If the goods are properly registered, the seller has the right to recover or sell them under the terms of the security agreement. Any surplus from the sale of the goods will be returned to the debtor.
• If the goods are not registered, the seller will lose its priority in bankruptcy proceedings and will rank alongside other unsecured creditors competing to recover the debt.

Financial Leasing Register

One strategy to mitigate the challenges of recovering goods in bankruptcy is to structure sales as leases. Under such arrangements, the goods are leased to the buyer with an option to purchase on completion of payments. In this scenario, ownership of the goods remains with the seller until all payments have been made.

If the buyer goes bankrupt before the payments have been completed, the seller retains the right to recover the goods as ownership has not yet been transferred, provided the lessor is registered in the Financial Leasing Register. In other words, such arrangements are subject to the supervision of the Financial Supervisory Authority.

The retention of title clause must be explicitly incorporated within the contractual documentation between the vendor and the buyer. This written form is imperative for the retention of title clause to be legally effective.

Although registration of the retention clause is not mandatory, it is strongly recommended that it be registered with the (ECR). Registration serves to ensure the clause's enforceability against third parties, a matter of particular relevance in cases of bankruptcy or insolvency. 

Article 106 of the Commercial Law underscores that the enforceability of the retention of title clause against third parties is contingent upon its documentation in writing with a fixed date prior to the third party acquiring rights or initiating enforcement actions.

This underscores the necessity for meticulous documentation of the retention of title clause, inclusive of a fixed date, to ensure its preeminence over claims or actions initiated by third parties.

Following Article 419 of the Egyptian Civil Code, the buyer is obligated to possess sufficient knowledge of the item in question, a prerequisite that is deemed to be fulfilled if the contract encompasses a precise delineation of the goods and their fundamental characteristics.

The Retention of Title clause, a provision that is of particular significance in the context of commercial transactions, can be incorporated into a framework contract, such as a general supply agreement. However, the goods subject to the clause must be explicitly specified or identifiable within the contract itself. Vague or generic descriptions may render the retention of title clause unenforceable.

Pursuant to the provisions stipulated in the Movable Collaterals Law, the establishment of a security interest and its subsequent effectiveness among the parties involved is contingent upon the fulfillment of the following conditions:

• Firstly, a security agreement must be concluded in writing, either in a customary or official document. It may also be in an electronic form, in accordance with Law No. 15 of 2004 on E-signature and Establishment of the Information Technology Industry Development Authority (ITIDA).
• The creditor must be duly authorized to establish a security interest over the collateral in question.
• The creditor must commit to providing the agreed financing or consideration to establish the security right.

The security agreement must include, at a minimum, the following conditions:

• A general or specific description of the secured movable property, with the description being clear, especially if the collateral consists of items intended for personal or household use.
• The duration of the security right must be specified.
• The debtor's or security provider's acknowledgment of the creation of the security right.

The parties to the security agreement can establish any commercial terms they deem appropriate for the contract, including the following:

• The debtor is obligated to maintain, preserve, and repair the collateral, and to notify the creditor of any events that may affect its use. 
• The creditor reserves the right to supervise the debtor's compliance with the property's intended use and maintenance.
• In the event that the debtor fails to fulfill their obligations, the creditor is entitled to priority in the sale of the secured property.