Bahrain bankruptcy law
The Bahrain Bankruptcy Law (Law No. 22/2018) (the Law) came into force on 8 December 2018 with the overriding intention of developing a sophisticated rescue culture in Bahrain and in order to encourage foreign investment and greater entrepreneurship.
Who does the Law apply to?
The Law applies to commercial companies that have been established in Bahrain, including fully or partially state-owned companies, and traders (including natural persons) whose head offices are situated in Bahrain. It does not apply to companies licensed by the Central Bank of Bahrain or established by a law which excludes them from compliance with provisions of the Law.
Initiating bankruptcy procedures
Under the Law, companies are eligible, and indeed arguably obliged, to commence bankruptcy proceedings or may alternatively have a lawsuit filed against them by a creditor if any of the following apply:
a) the company fails to pay its debts within thirty days from maturity;
b) the company will be or is likely to be unable to pay its debts on maturity. This excludes circumstances where the full debt is the subject matter of a legal dispute or under which a set-off is invoked for the amount of the claimed debt; or
c) the amount of its financial obligations exceeds the value of its assets.
Prior to the Law coming into effect, debtors in Bahrain would only be deemed bankrupt by a court order should the debtor suspend payment of its debts as a result of its financial affairs.
The Bahrain High Civil Court's approval is required before proceedings can be initiated. The court will initiate restructuring procedures if it decides that such procedures will achieve a more appropriate outcome for the creditors than liquidation and if it deems it just for the debtor to continue its business operations.
The court may reject an application altogether if it deems the necessary circumstances do not apply.
After giving either the creditor or debtor ample opportunity to respond to either party's petition to commence insolvency proceedings, the court will make its decision whether or not to approve the restructuring process.
The restructuring process
Upon the initiation of the restructuring process, an insolvency trustee is appointed and a moratorium is triggered. The effect of the moratorium is a stay on legal proceedings being taken against the debtor for up to 120 days in order for the trustee to optimise the value of the debtor's assets and to give the debtor's management breathing space. This is to ensure that no action against the assets of the debtor company is exercised by a creditor or group of creditors to the exclusion of others. The moratorium also prevents any set-off rights from being applied against the debtor. However, any stay on legal proceedings would not apply against rights which arise from financial derivative contracts.
A creditors' committee will be appointed by the court, consisting of up to five unsecured creditors whose claims, in aggregate, amount to at least 25% of the total claims against the debtor. The trustee is expected to propose a restructuring plan, in consultation with the debtor and creditors, for the creditors to vote on and the court to ratify. If no progress has been made six months subsequent to the trustee's appointment, the creditors' committee, or any creditor or group of creditors holding at least one-third of the total claims, can present their own restructuring plan to the court.
In the meantime, the debtor can continue to manage its business under the supervision of the bankruptcy trustee. However, the trustee can apply to the court to restrict the debtor's powers of running its business.
The scope of assets that may be considered part of the bankruptcy estate is wide-ranging. It includes movable property of any kind, nature or location whether acquired before or after the opening of bankruptcy proceedings; any rights the debtor holds in properties owned by third parties; and any proceeds raised from the continuation of the debtor's business.
Debtor in possession financing
An important development is the introduction of debtor in possession financing. This enables the bankruptcy trustee to obtain unsecured credit to facilitate the purchase of goods and services in the ordinary course of the debtor's business. Payment of debtor in possession financing will take priority ahead of all other claims in the bankruptcy.
Ratification of the restructuring plan
Within thirty days of the plan being filed the creditors will vote on whether to approve it. The approval of all categories of creditors (e.g. secured, unsecured, employee-creditors) is required. A creditor category will be deemed to have approved the plan if the majority of its voting creditors approve the plan, provided that they account for at least two-thirds of the total accepted claims within their respective categories.
The plan is then submitted to the court to ratify and it then becomes binding on all creditors. Minority creditors who vote against the plan are subject to a cramdown.
In certain cases the court may approve the restructuring plan even if the plan has not met the required approval threshold.
The ratification of the restructuring plan will also discharge the debtor from any other obligations and debts to creditors that arose prior to the ratification of the plan. The implementation of the restructuring plan shall be supervised by the trustee who will inform the court should there by any violations to the terms of the plan.
The trustee can request a charge to be made against the debtor's assets at the Survey and Land Registration Bureau to ensure the rights of the relevant creditors within the restructuring plan are protected. This charge is to be lifted once the restructuring is concluded.
After payments are made to secured creditors, as per their rights with respect to their respective securities, the distribution of assets in line with the restructuring plan shall be made in the following order of priority: 1) repayment of debtor in possession financing 2) administrative claims (expenses related to the restructuring process itself); 3) payment of salaries (not to exceed BD3,000 per employee), repayments to customers (not to exceed BD1,000 per customer), and government taxes and fees (not to exceed BD10,000 per government authority); 4) all other claims which have arisen prior to the commencement of bankruptcy proceedings 5) claims not submitted in time to form part of the restructuring plan; 6) claims by foreign government authorities in relation to taxes and other fees; 7) compensation to unsecured creditors for default of payment; and 8) claims by shareholders.
The Law is a significant development for Bahrain and will be pivotal in ensuring the continued development and growth of its economy. The restructuring components of the Law in particular are welcome additions which should assist struggling companies to survive and recover.
Achieving a harmonious balance between the delicate mechanisms of protecting bankruptcy assets and promoting economic growth and entrepreneurship is a challenge. The restrictive rights to set-off and the wide-ranging moratorium, may trigger caution among lenders, and constrain access to credit in the near term. As use of the Law becomes further tested and embedded, we will know with greater certainty how this balance develops.