Hisham Almansoor – Associate ([email protected])
Having a sound insolvency legal framework is essential in securing a business-friendly environment which fosters the interests of entrepreneurs and start-ups. Insolvency and bankruptcy regulation in the Kingdom of Bahrain are addressed under two distinct regimes, targeting financial institutions, as well as companies licensed under Decree Law 21/2021 Issuing the Commercial Companies Law (the “Commercial Companies Law”).
The significance of insolvency regimes must be considered against a broader context. The economic crises in the wake of the global financial crisis of 2008 as well as the COVID-19 pandemic have debilitated economies across the world. In recent years, the Gulf Cooperation Council (GCC) members have recognised the need to gradually decrease their long-standing dependence on oil revenues and have since enhanced their efforts to secure a business and investor-friendly environment. One facet of this is the reform of the insolvency legal framework.
This article provides an overview of the insolvency framework in the Kingdom of Bahrain by first addressing the regime governing financial institutions regulated by the Central Bank of Bahrain (the “CBB”) before delving into the regime which applies to non-CBB regulated companies.
Legal Instruments & Scope of Application
As expressed above, Bahrain’s insolvency framework may be broken down into two components: one geared towards financial institutions and licensees of the CBB, and the other concerning companies that are not CBB licensees.
The first of these two regimes is governed by Decree Law No. 64/2006 Issuing the Central Bank of Bahrain and Financial Institutions Law (the “CBB Law”), whilst the second is covered by Decree Law 22/2018 Issuing the Reorganisation and Bankruptcy Law (the “Bankruptcy Law”) which came into force on 7 December 2018
CBB Insolvency Regime
The insolvency of a CBB licensee is a matter that is regulated by Chapter 10 of the CBB Law with Article 133 stipulating that “A Licensee is deemed to be insolvent if its financial position becomes unstable and it stops paying its due debts other than administrative fines and whatever type of tax”.
An insolvent CBB Licensee is required under Article 134 of the CBB Law to immediately: (i) cease to carry out any of the regulated services provided for in Article 39 of the CBB Law (“Regulated Services”); and (ii) cease to make any payments or to carry on any business whatsoever in relation to Regulated Services unless otherwise agreed in writing by the CBB.
The insolvency of a CBB licensee will result in such licensee being placed under administration by the CBB. The administration of a CBB licensee will take one of two forms under Article 136(a) of the CBB Law: (i) administration by the CBB; or (ii) administration by an external administrator appointed by the CBB (to act in accordance with any instructions issued by the CBB from time to time pursuant to Article 137(a) and 173(b) of the CBB Law).
The administrator will, pursuant to Article 140(a) of the CBB Law, possess the power to manage and run the business of the licensee under administration, including the authority to: (i) to continue or to temporary suspend the licensee operations; (ii) to suspend or limit the discharge of financial obligations of the licensee; (iii) to conclude agreements and to sign any documents on behalf of the licensee; and (iv) to commence and defend any legal proceedings in the name of the licensee or taking any other legal proceedings to which the licensee is a party.
The administrator, in addition to the authorities bestowed upon it under Article 140(a) of the CBB Law, may undertake any of the following: (i) declare a moratorium in respect of any debts of the licensee; (ii) discharge obligations of the licensee to certain creditors in preference to other creditors, if it is to the advantage of the licensee; (iii) dismiss officers and employees of the licensee, provided that reasons shall be given for the dismissal decision; (iv) appoint officers and employees for the licensee; and (iv) undertake any necessary actions in the interest of the licensee and for the protection of the interests of its customers and creditors.
The insolvency of a CBB licensee also renders such licensee exposed to petitions for its compulsory liquidation under Article 144(a) of the CBB Law being submitted by the administrator and third party creditors. The said Article provides that “The Administrator, the Licensee or any of its creditors may submit a petition to the Competent Court for compulsory liquidation of the Licensee […]”.
A CBB appointed liquidator will, pursuant to Article 147 of the CBB Law, have all the necessary powers to carry out the compulsory liquidation of a licensee, restricted only by the requirement that it must obtain the consent of the competent court before proceeding with any of the following: (i) sale of any of the assets or properties of a licensee under liquidation the market value of which exceeds Bahraini Dinars one hundred thousand; (ii) transfer or allocation of any of the assets or properties of a licensee under liquidation as security for any debt owed by the licensee; and (iii) settlement of any claim or waiver of any right of a licensee where its value exceeds Bahraini Dinars fifty thousand.
The liquidator is, pursuant to Article 149 of the CBB Law, under a duty to ensure that the assets and properties of a licensee under liquidation are properly accounted for, collected, realised and distributed to a licensee’s creditors and, the surplus, if any, to be distributed to the entitled persons.
The CBB Law provides for a priority of claims, determining the rights of interested parties in the property of a licensee under liquidation namely: (a) administrator’s fees and expenses incurred during the administration period of a licensee, and the wages and salaries of officers and employees up to the date of petition for compulsory liquidation filed at the competent court; (ii) liquidator’s fees and expenses incurred during the period of liquidation; (iii) fees and taxes due to the government, its organisations, agencies and the CBB; (iv) deposits and loans taken with the approval of the CBB to protect the a licensee from insolvency; (v) deposits of value not exceeding Bahraini Dinars twenty thousand per depositor and other unsecured debts; (vi) other deposits that exceed Bahraini Dinars twenty thousand per depositor, and all other unsecured debts; and (vii) amounts due to the shareholders in proportion to their shareholding in the licensee under liquidation.
Secured creditors of a licensee under liquidation are paid without reference to the order of priority set out above.
Bankruptcy Law Insolvency Regime
Under the Bankruptcy Law, either a creditor or debtor may commence insolvency proceedings where one of the two limbs of the ‘insolvency test’ has been satisfied. Article 6 of the Bankruptcy Law lays out the insolvency test for debtors whilst Article 8 covers the same for creditors.
A debtor satisfies the insolvency test under Article 6 of the Bankruptcy Law where: (i) it is unable to pay its debts within thirty days of their maturity date or if it will become insolvent to pay such debts on their maturity dates; or (ii) the amount of its financial obligations exceeds the value of its assets.
Meanwhile, a creditor satisfies the insolvency test under Article 8 of the Bankruptcy Law where: (i) a debtor fails to pay its debt on its maturity date after being notified, in writing, yet he fails to initiate such settlement within thirty days from his notification date; or (a) the amount of the debtor’s financial obligations exceeds the value of its assets.
By virtue of Article 8(c), bankruptcy proceedings must be initiated by at least three creditors where the total value claimed is less than Bahraini Dinars twenty thousand.
Article 48 of the Bankruptcy Law specifies what assets are subject to insolvency proceedings. The law addresses these assets under the term ‘Bankruptcy Estate’. The Bankruptcy Estate may comprise of the following: (i) movable property of any kind, nature or location whether located inside or outside of Bahrain existing at the time bankruptcy proceedings are initiated; (ii) property acquired after the commencement of bankruptcy proceedings; (iii) the rights of the debtor in any property owned by third parties; (iv) funds and proceeds arising from the continuation of the business of the debtor or the running of his establishment; (v) proceeds of the Bankruptcy Estate of any kind or nature; and (vi) property recovered through the nullification procedures or other procedures.
Once insolvency proceedings have formally commenced, the Bankruptcy Law imposes an initial one hundred and twenty day moratorium, which automatically stays lawsuits, judicial and execution proceedings against the Bankruptcy Estate or the debtor.
Intended to provide much-needed breathing space for the insolvent business, the moratorium enables the business to continue trading whilst managing the reorganisation process, and it may be extended beyond the initial one hundred and twenty day period upon the bankruptcy trustee’s request following the consent of secured creditors, or where the court deems the extension vital to maximise the Bankruptcy Estate’s value. The Bankruptcy Trustee has a fiduciary duty to act in the Bankruptcy Estate’s best interests and performs a wide range of functions, including the preparation of the debtor’s inventory of assets. Article 40 of the Law outlines the other functions of the Bankruptcy Trustee.
Article 93 of the Bankruptcy Law specifies the hierarchy of priority for various parties’ recovery of debts, which is specified as follows: (i) amounts attributed to any unsecured credit procured after commencement of bankruptcy proceedings; (iii) costs and expenses of the bankruptcy procedures and all associated legal costs; (iii) claims arising prior to the bankruptcy proceedings in the following manner: (a) salaries and financial benefits to the employees capped at Bahraini Dinars three thousand per employee; (b) claims of clients with respect to any installment paid to debtor capped at Bahraini Dinars one thousand per client; and (c) government authority taxes and fees due (if any) capped at Bahrain Dinars ten thousand per authority; (iv) all unsecured claims arising before the proceedings and those not included above; (v) all unsecured claims that were not presented to the court during the proceeding, but subsequently raised; (vii) taxes and fees due to foreign governments; (viii) unsecured claims to compensate their holder for the default in payment; (ix) shareholders’ claims in tandem with the priority requirements for each.
A noteworthy feature of the Bankruptcy Law is the fact it envisages cross-border insolvency, a first for any GCC country. It follows the common practices in various jurisdictions around the world and draws upon the UNCITRAL Model Law on Cross-Border Bankruptcy (1997), and those principles have been enshrined under Title 5 of the Bankruptcy Law. Cross-border insolvency refers to the circumstance where an insolvent debtor has assets and creditors in more than one country.
Essentially, requests may be filed before Bahraini courts by foreign courts to initiate bankruptcy cases that run simultaneously in both nations, which is done in a bid to preserve a cooperative relationship with courts of a different jurisdiction. To confirm its approach to recognising different jurisdictions being involved in said proceedings, Article 161 of the Bankruptcy Law stipulates that the Title 5 provisions are without prejudice to any obligations which stem from a treaty to which Bahrain is a signatory, which subverts the impact of domestic laws.
As expressed earlier in this article, the commencement of bankruptcy proceedings does not prevent the business from continuing its trading activities, which reflects the ‘enablement’ rather than punishment-based approach adopted by the legal framework. The insolvent debtor is not prevented from trading or using his funds for any transactions, provided they are necessary and within the ordinary course of business unless the court determines otherwise, as stipulated by Article 11.
The possibility for a financially-distressed company to raise credit whilst insolvent is yet another feature which typifies the debtor-friendly approach of the Bankruptcy Law. This enables the insolvent company to, with the court’s approval, raise credit where it deems that the terms are fair and reasonable, the financing is necessary for the proper administration of the Bankruptcy Estate, and to preserve the value of the same as enshrined under Article 79 of the Bankruptcy Law. The key advantage here is that the debtor is more likely to remain afloat during the reorganisation process and it allows it to continue trade during financial hardship.
Case Study – GARMCO
GARMCO (Gulf Aluminum Rolling Mill Co.) is a Bahraini-based company which is also known to be the first company to file proceedings under the Bankruptcy Law. Initially troubled with massive debts exceeding $200 million, the company sought relief through restructuring mechanisms to prevent its liquidation.
The moratorium allowed the company to focus on developing and implementing a restructuring plan in cooperation with the company’s creditors. The restructuring plan was initially proposed by the company, and with the oversight of the court-appointed Restructuring Trustee, conducted routine meetings with its creditors to suggest amendments to the plan, which was later approved by the creditors and in turn by the court. A portion of the debt was converted into equity in the form of shares, and some were converted into long-term loans with interest and others as loans without interest. Notably, the plan also restructured the board of directors such that four out of the eight members are creditors of the company. Hence, GARMCO has managed to rise above its financial distress and secured the jobs of more than 700 employees by virtue of a sound reorganisation plan.
This article has demonstrated that the bankruptcy framework in the Kingdom of Bahrain is modelled in a way that enhances the business-friendly environment by drawing upon the UNCITRAL Model Law on Cross-Border Bankruptcy (1997) as well as Chapter 11 of the US Bankruptcy Code, particularly in its recognition of cross-border bankruptcy, the automatic moratorium imposed on the insolvent company, and the debtor-friendly approach which allows the company’s administrative and management functions to remain in place whilst an independent Bankruptcy Trustee is appointed. Finally, the GARMCO case study epitomized the positive impact the Bankruptcy Law may have on financially distressed companies where they choose to follow the restructuring route under Title 3 of the Law.
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