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The Crime of Distributing Fictitious Profits Under Companies Law No. 159 of 1981

Increasing profits is the main driving force behind the continuity and diversification of companies’ activities. This in turn feeds back into each country’s GDP, in addition to acting as an incentive for entrepreneurs to continue investing, and for companies to increase their market share.

Internally, shareholders within a company await distribution of dividends when a company’s performance is high, however, there are certain circumstances within which profits may not be distributed in this manner:
-Profits which are not distributable:
● Those resulting from the sale of one of the existing assets of the company. Distribution, in this case, is considered a deduction from the company’s capital and therefore would not be the real ‘profit’ that the company has realized.
● If the distribution of profits would prevent the company from fulfilling its obligations within the legally prescribed time frames.
The legislator has categorized the above as a crime, namely, the ‘distribution of fictitious profits’. If proven, each member of the company’s board of directors, and the company auditor will be punished by imprisonment for no less than two years, and a fine no less than one thousand Egyptian pounds.

Furthermore, the auditor may be investigated for forgery of the documents in question, and for fraud committed by managers within the company. In the event that there are multiple crimes proven, the parties will be punished for the most severe crime carried out.

The main reason for criminalizing fictitious profit distributions is that such distribution ultimately leads to the squandering of the company’s capital, and affects the company’s performance of its obligations. Additionally, the fictitious distribution of profits is in fact, disguised as the repatriation of the company’s capital. Such deception also affects the stock market since the false prosperity of the company will cause individuals to flock to invest further within it, and banks provide loans and open lines of credit to these companies.

To conclude, the aim of this article is to highlight that Companies Law No. 159 of 1981 has established controls in order to protect publicly issued stocks in joint-stock companies and to ensure that any dividend distributions are based on the real and actualized profits resulting from the company’s activities.

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Written By

Noor Mahdy – Attorney At Law

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