Insolvency Law at Bahrain
Insolvency law in Bahrain is primarily governed by the Commercial Companies Law and Bankruptcy Law. In 2018, Bahrain introduced a new Bankruptcy Law (Law No. 22 of 2018), which significantly modernized and reformed the insolvency regime to improve business efficiency and creditor protection. This law aligns with international standards and aims to make the bankruptcy and insolvency process more transparent, predictable, and fair for both creditors and debtors.
Key Features of Insolvency Law in Bahrain
Types of Insolvency Procedures:
Bankruptcy: When a debtor (whether an individual or a company) is unable to pay its debts as they fall due, the debtor can be declared bankrupt. This is typically the last resort after other measures like restructuring have been exhausted.
Rehabilitation: The Bankruptcy Law introduced the concept of a rehabilitation procedure, allowing a debtor company facing financial difficulties to attempt a debt restructuring plan instead of undergoing liquidation. The rehabilitation plan may involve a compromise or settlement with creditors and can help the company to continue its operations.
Liquidation: If a business or individual cannot be rehabilitated or cannot reach an agreement with creditors, liquidation is a procedure that involves the selling of assets to pay off debts. The company is then dissolved, and the bankruptcy process is completed.
Types of Debt Restructuring:
Reorganization of Debt: In the rehabilitation procedure, debt restructuring is aimed at reorganizing the debtor’s business affairs and its financial obligations, often through a court-approved plan. This may include the extension of time for repayment, reduction of debt, or other terms.
Out-of-Court Settlements: There is also room for out-of-court settlements and compromises between the debtor and creditors before bankruptcy proceedings are initiated.
The Role of the Court: The courts in Bahrain play a significant role in insolvency proceedings. The court’s approval is necessary for various steps, including initiating bankruptcy procedures, confirming rehabilitation plans, and appointing bankruptcy trustees or experts. A Bankruptcy Trustee may be appointed by the court to oversee the process, manage the debtor's assets, and make decisions regarding the liquidation or restructuring.
Bankruptcy Trustee and Experts: A bankruptcy trustee plays a vital role in managing the process, ensuring that all parties comply with the law, and representing the interests of the creditors. The trustee is typically an expert in insolvency and is responsible for managing the debtor’s assets during liquidation or rehabilitation.
Creditor’s Rights and Priority:
Secured Creditors: Secured creditors have a higher priority in the repayment process, meaning they can claim their debts from the proceeds of the sale of the debtor’s secured assets before unsecured creditors.
Unsecured Creditors: Unsecured creditors are next in line to receive payment, often receiving a reduced amount depending on the funds available after secured creditors' claims are settled.
Employee Claims: Employees, including unpaid salaries and severance payments, are typically given priority in the repayment order.
Cross-Border Insolvency: Bahrain's insolvency law allows for some cooperation in cross-border insolvency matters, especially concerning companies with international interests. The insolvency process can involve recognition of foreign insolvency proceedings and coordination between Bahrain’s courts and foreign courts.
Innovative Provisions in the Bankruptcy Law:
The Bankruptcy Law of 2018 encourages rehabilitation rather than liquidation, offering a fresh start to companies in financial distress through restructuring.
The law includes provisions to avoid fraudulent transactions, ensuring that companies cannot avoid liability by transferring assets or entering into other fraudulent arrangements before declaring bankruptcy.
Temporary Protection: Under the bankruptcy law, there is temporary protection from creditors for a company that has filed for rehabilitation, offering a "breathing space" to formulate and propose a recovery plan.
Insolvency Practitioners: Insolvency practitioners in Bahrain must be licensed, and they play a vital role in ensuring the proper conduct of the bankruptcy and restructuring procedures. Their duties may include advising the debtor, assisting in the preparation of the rehabilitation plan, managing the liquidation process, or representing creditors.
Corporate Governance and Duties: Directors of companies in financial distress must act in the best interest of creditors once insolvency is imminent. They may face legal consequences if they engage in wrongful trading or fraud, including continuing to trade when the company is insolvent or misusing company assets.
Legal Framework
Bankruptcy Law No. 22 of 2018: The most important piece of legislation governing insolvency, providing a comprehensive approach to insolvency, bankruptcy, and debt restructuring.
Commercial Companies Law: Governs the formation, operation, and dissolution of companies in Bahrain, including provisions for insolvency within the context of corporate governance.
Bahrain Chamber for Dispute Resolution (BCDR): The BCDR provides a platform for resolving commercial disputes, including insolvency-related issues.
Reforms and Improvements
The introduction of the 2018 Bankruptcy Law marked a significant shift toward a more modern, creditor-friendly, and rehabilitation-oriented approach. This law aims to:
Facilitate early intervention and rehabilitation of distressed companies.
Provide more protection for creditors while offering the possibility of restructuring.
Align Bahrain's insolvency regime with international best practices, thereby making it more attractive to foreign investors and businesses.
Conclusion
Bahrain's insolvency laws have been designed to provide a clear, structured process for businesses facing financial difficulties, with an emphasis on rehabilitation over liquidation. These reforms reflect Bahrain's commitment to creating a stable and predictable legal environment for both businesses and creditors, aligning with international standards while promoting opportunities for recovery and restructuring.
RELATED Blog
0 comments