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We are excited to share the latest edition of the Law Update, beautifully and appropriately titled “Sustainable Horizons: The Saudi Arabian Vision.” Giving special honor to the Kingdom’s 2030 vision, this update focuses on a collection of both informative and inspiring articles.
For those in construction, you can learn about how the tendering environment impacts risk-pricing for contractors, the updates on the legal framework of the construction industry and how contractors can protect themselves against financial difficulties.
There is good news too from the kingdom’s banking sector, from which the practice of “Open Banking” is being pushed for! But what is open banking? We’re answering that too.
Also . . . Are there any women trail blazers in Saudi Arabia you can name? We’ll help you with that. We cover how the Middle East has been making strides in empowering women in the entrepreneurial space,most notably in STEM fields.Read the full edition
In line with Bahrain’s Economic Vision 2030, the Kingdom of Bahrain recently introduced Law No. (22) of 2018 promulgating the Restructuring and Insolvency Law (‘New Law’), as a step towards strengthening the legal framework and business ecosystem in Bahrain. The New Law is expected to boost transparency and efficiency in the insolvency process and improve the ease of doing business in Bahrain.
Published on 30 May 2018, and coming into force on 30 November 2018, the New Law repeals the old Bankruptcy and Composition Law (Law No. (11) of 1987).
The Ministry of Justice and Islamic Affairs (‘Ministry’) will be in charge of matters relating to restructuring and insolvency, and the competent court will be the High Civil Court of Bahrain (‘Court’).
This article focuses on the ways in which the New Law will bring in reforms to bolster globally accepted good practices in Bahrain that include:
Application of the New Law
The New Law defines ‘debtors’ in insolvency proceedings as:
Two noteworthy aspects of the New Law are it:
An action to commence insolvency proceedings may be instituted by either a debtor or a creditor upon satisfaction of the insolvency test. A debtor satisfies the insolvency test if the:
The Court, before approving an application by either party to commence insolvency proceedings, will verify whether the conditions stipulated above are satisfied and will provide the debtor (where a creditor institutes an action) or a creditor (where a debtor institutes an action) the opportunity to object to such action.
The New Law compels the Court to decide on an application for restructuring before hearing an application for liquidation. The Court is bound to agree to restructuring if:
By promoting and prioritising debt restructuring proceedings over liquidation procedures, the New Law aims to prevent the liquidation of businesses with potential and reduce failure rates amongst small and medium-size enterprises.
However, in cases where the Court approves the commencement of liquidation proceedings, the debtor is deemed bankrupt and must declare its bankruptcy.
The New Law also provides affected stakeholders with a right to object to the Court’s decisions regarding the commencement of proceedings and sets out grounds on which the Court’s decisions may be challenged before the Supreme Civil Court of Appeal.
The Insolvency Trustee (alternatively referred to as a Restructuring Trustee or a Liquidator where relevant) is appointed by the Court to perform related duties and tasks in liquidation or restructuring proceedings.
The Court may appoint an Insolvency Trustee based on one of the following:
The powers of the Insolvency Trustee are regulated by the New Law and include, amongst others:
The New Law significantly widens the net of assets which may now be subject to insolvency proceedings. These include:
The commencement of insolvency proceedings automatically causes a stay of any other judicial proceedings or execution procedures on the insolvency assets, such as any debt enforcement procedures against the debtor’s insolvency assets, any attachment or enforcement on encumbered properties of the debtor, or any acquisition over any ‘insolvency asset’ (as defined above).
Unless the Court specifies otherwise, the moratorium continues until:
Set-off rights arising prior to the commencement of insolvency proceedings may be invoked against the insolvency assets if they are effective under the applicable law, but are subject to the stay of proceedings and moratoria, as discussed above.
However, the Court may, at the request of an unsecured creditor, terminate the stay of unsecured claims if both the:
Importantly, commencement of insolvency proceedings does not prevent the debtor from continuing its day-to-day business as well as utilising its properties for necessary transactions, if carried out in the ordinary course of business.
In the case of a restructuring, the Insolvency Trustee may, with due authorisation, manage the debtor’s business and execute unperformed contracts concluded by the debtor in the ordinary course of business. Whereas, at a liquidator’s request, the Court may approve the operation of the debtor’s business for a limited period if doing so maximises the value of the assets.
The Insolvency Trustee may, with the Court’s approval:
The disposal of insolvency assets outside the ordinary course of business may be undertaken with the Court’s approval, if such disposal is considered to be in the best interests of the insolvency assets. A disposal of a secured asset may be done free of security only with a creditor’s consent, and if:
If the asset is disposed of free of security, then security will be granted over the proceeds from the disposal. A secured creditor may also purchase assets and set off the disposal amount against the secured claim.
The Insolvency Trustee may, with the Court’s approval, invalidate any disposition performed or obligation of the debtor if it:
The voidable transaction(s) must have occurred in the six month period prior to commencement (i.e. the clawback period).
The New Law stipulates that the Restructuring Trustee may submit the proposed scheme of restructuring to the Court after consultation with the debtor, the secured and unsecured creditors, and any other stakeholders. Alternatively, creditors (whose claims amount to at least one third of the total claims) may, with the Court’s approval, submit the restructuring scheme if the Restructuring Trustee fails to make appropriate progress and the scheme is in the best interests of the debtor’s assets.
The scheme of restructuring will be subject to a vote by the creditors whose rights are affected by the scheme and the Court may either ratify or reject the scheme. Ratification of the scheme will discharge the debtor from all financial obligations and rights arising prior to such ratification. The Restructuring Trustee is responsible for making the distributions to all creditors in accordance with the scheme.
The Liquidator is responsible for selling the insolvency assets in accordance with a scheme for such sale and must submit an application to the Court along with a report that determines:
The priority of creditor distributions is set out in the New Law in the following order:
A feature of the New Law that particularly stands out is the provision of a mechanism for cooperation between courts and competent authorities in foreign countries and Bahrain which are involved in cross-border proceedings.
The cross-border insolvency provisions in the New Law apply to:
A ‘foreign proceeding’ is defined as any judicial or administrative proceeding taken in accordance with the foreign country’s insolvency law, and in which the debtor’s properties and affairs are subject to the supervision of a foreign court. Foreign proceedings are further classified into:
Foreign creditors are accorded equal rights and treatment as creditors in Bahrain with respect to the commencement and participation in insolvency proceedings under the New Law.
For recognition of foreign proceedings, the foreign representative must apply to the Court, upon which the Court will classify proceedings either as a ‘foreign main proceeding’ or as a ‘foreign non-main proceeding’. The recognition of a foreign proceeding as a ‘foreign main proceeding’ will result in the stay of judicial or enforcement proceedings against the debtor’s assets and is proof of the debtor’s insolvency.
The provisions governing cross-border insolvency will be interpreted in accordance with the guidelines of the UNCITRAL Model Law on Cross-Border Insolvency.
The New Law is a significant step towards dissolving the stigma of insolvency amongst businesses operating in Bahrain, by providing efficient exit frameworks, whilst allowing lenders in the market to make significant recoveries. An effective insolvency system enables capital and labour reallocation as well as the re-entry of entrepreneurs into the economy when small and medium-sized businesses fail, thus preventing the loss of investments, jobs and viable businesses.
Al Tamimi & Company’s Corporate Commercial team regularly advises on all aspects of corporate restructuring and insolvency law. For further information, please contact Foutoun Hajjar (firstname.lastname@example.org) or Siddharth Goud (email@example.com).
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