New amendments to Bahrain's Commercial Companies Law

Legislative Decree No. 21 of 2001 promulgating the Commercial Companies Law (Commercial Companies Law) has been amended by the recently issued Legislative Decree No. 50 of 2014 amending the Commercial Companies Law (New Law), introducing reform to Bahrain’s corporate environment.

New Rules

Article 3 of the New Law provides that all references to 60 days in the Commercial Companies Law shall now be replaced by 15 days. Thus, all procedures can now be completed within a quarter of the time previously required in accordance with the Commercial Companies Law. One such procedure, for example, is the conversion of companies. Instead of requiring a period of 60 days from the publishing of a resolution for conversion of a company in the Official Gazette and a daily newspaper before such conversion is to be effected, the period now required is 15 days. This change can be seen as government recognition that the modern corporate sector requires operations to be fast-paced. Pace, however, is also heavily dependent on the efficiency of the systems of the Ministry of Industry and Commerce, which have recently been updated to a fully online-based system that requires constant maintenance and supervision.

A similar issue is that the Central Bank of Bahrain (CBB) now has authority over listed companies. According to the New Law’s amendment of Article 119 of the Commercial Companies Law, share trading, registering, depositing, owner transferring, clearing, settling, and mortgaging, placing attachment thereon or a company buying its own shares, must now be done in accordance with the provisions of the CBB Law of 2006 (CBB Law).

Currently, the CBB Law only applies to CBB licencees such as banks and other financial institutions, as these were the only companies the CBB had jurisdiction over. The introduction of the New Law now requires coordination between the Bahrain Bourse (BHB) and the CBB, something which has not been necessary in the past. It remains to be seen whether the CBB will lay out new regulations applicable only to companies listed on the BHB.

Greater Authority

The New Law adds Article 21(bis) to the Commercial Companies Law, which allows the minister of industry and commerce to issue resolutions specifying the minimum capital requirements for some forms of companies. Although the New Law does not remove the existing right of a company’s founder(s) to determine the business’s capital, changes were made to Articles 109, 228, 249(e), 264 and 293 so that this right is now subject to the provision of Article 21(bis).

Order No. 55 of 2015 amending some provisions of the implementing regulations of the Commercial Companies Law (Implementing Regulations) clarified that a joint stock company’s minimum capital remains at BD1m ($2.6m), a closed joint stock company’s minimum capital remains at BD250,000 ($658,000) and a commandite company’s minimum capital remains at BD20,000 ($52,600). However, minimum capital requirements for a limited liability company and single person company are not set out in the Implementing Regulations. There is a requirement that capital be “sufficient to attain its objects”. Furthermore, Article 64 of the Commercial Companies Law, which required that all shareholders in a public joint stock company shall be of Bahraini nationality, has been repealed by the New Law, which arguably will attract more foreign investors.

Article 65 of the Commercial Companies Law has been amended to allow the incorporation of public joint stock companies with foreign capital and expertise, whilst giving the minister of industry and commerce the power to impose foreign ownership restrictions within certain business sectors or when undertaking certain activities. In addition, Article 65 of the Commercial Companies Law previously restricted trading in stocks and shares representing foreign capital in a public joint-stock company until a three-year period from incorporation had lapsed. The New Law amends Article 65, removing this restriction, encouraging foreign investment in Bahrain and reinforcing Bahrain’s position as an open and competitive economy in the region.

Open Doors

The New Law also amends Article 347 of the Commercial Companies Law so that branches of foreign entities no longer require a Bahraini sponsor to set up in Bahrain. With the exception of companies exclusively incorporated by the government, the New Law amends Article 75(d) so that the minimum number of founders required for a joint-stock company in Bahrain has been reduced to two instead of seven as per the requirements of the Commercial Companies Law, allowing for easier incorporation of joint stock companies. Article 203 of the Commercial Companies Law provides that, where proxies are used in general assembly meetings, a single representative may not represent a number of votes exceeding 5% of the company’s issued share capital. The New Law has removed this restriction and is thus more flexible in this regard.

Article 187(a) of the Commercial Companies Law has been amended by the New Law to introduce the right of a shareholder to file a claim against the board of directors for damages incurred. A shareholder is entitled to initiate such a case where the company has failed to sue a director. This change empowers shareholders, who are ultimately the owners of the company’s capital. This amendment also ensures minority shareholders have recourse where their rights may be prejudiced by their inability to pass resolutions through the general assembly.

The New Law introduces a new Article 18(bis) to the Commercial Companies Law, holding shareholders and directors of all types of companies in certain circumstances personally and jointly accountable to each other and third parties, up to the company’s entire capital, for any damages affecting the firm.

The amendments referred to in the New Law and the Implementing Regulations reflect the government’s goal to implement the Bahrain 2030 Economic Vision, which aims to increase investor confidence in the kingdom’s economy and create a business friendly environment. By introducing more relaxed rules in relation to administrative matters and foreign investments, the New Law reinforces the principle of openness within Bahrain’s corporate environment, hopefully leading to increased investor confidence and sustainable economic growth.

Labour Law Three Years Later

Almost three years down the line, the relatively new Labour Law for the Private Sector promulgated by Law No. 36 of 2012 (Labour Law) remains unamended in substance since its introduction. Having said that, however, since its introduction in 2012, the Ministry of Labour (MoL) and the Labour Market Regulatory Authority (LMRA) have taken on a more active role in ensuring compliance with the law and regulations, as well as protection of workers. The MoL, over the course of the past three years, has passed several ministerial orders that are more comprehensive than their respective forerunners and impose higher penalties for non-compliance thereof. The most prominent and influential of these shall be discussed herein. The LMRA has also been tackling the issues of undocumented workers and the human trafficking crisis by declaring a period of amnesty, which shall also be discussed herein.

Ministerial Order No. 29 of 2014 regards specifying and regulation of basic health care for workers of an institution. The previous position was that the obligation to provide basic health care for workers only applied to institutions with over 50 employees. This order, however, extends the obligation to all employers, regardless of the size of the institution, and provides institutions with over 50 workers with the option to obtain private health care from a licensed health insurance company in Bahrain or to establish their own medical unit to be licensed by the National Health Regulatory Authority.

Furthermore, contribution obligations for basic health care have been increased from BD18 ($47.42) to BD22.50 ($59.28) for Bahraini nationals and from BD30 ($79.03) to BD72 ($189.68) for non-nationals. The previous position was that all contributions are paid to the Ministry of Health; however, this order requires contributions for non-Bahraini workers to be paid to the LMRA in advance at the time of visa application and renewal of permits for employees. The fines for non-compliance have increased from the range of BD50-300 ($131.72-790.35) to a range of BD500-1000 ($1310-2630) and/or a maximum of three months’ imprisonment.

Ministerial Order No. 31 of 2013 details the protection of workers from the dangers of electrical power lines in institutions and worksites. This order covers all workplaces irrespective of their nature – industrial, agricultural, hospitality, craftsmanship or otherwise – and the term worksite is defined to include any place, room, hall, hallway, stairway or road on which the worker may be in or pass by in and out of the workplace. Whereas, the previous position was that such protection was only required from employers in institutions that utilise electricity as part of their business objectives.

Providing a wide definition as above and broadening the scope of application of this order demonstrates a major step towards according workers at all types of institutions higher standards of protection from electrical shocks in the workplace and holding employers responsible for such protection. This order introduces fines for non-compliance ranging from BD500-1000 ($1310-2630) and/or imprisonment for a maximum period of three months.

Other Ministerial Orders

The MoL has also issued other ministerial orders that are worth noting, such as Ministerial Order No. 27 of 2013, which specifies the types of work and circumstances that require continuous working hours without periods of rest, such as jobs that are on a shift basis or are related to security, sanitation, freight or health. The order also specifies jobs for which a worker’s one-hour rest period shall be calculated as part of actual working hours. Such jobs include but are not limited to welding and using gases or electricity, melting glass, and manufacturing asphalt and its derivatives. This provision is new to labour regulations.

Another order to be noted is Ministerial Order No. 25 of 2013, which specifies jobs which are intermittent in nature and in which a worker may be required to be present at the workplace for a period exceeding the 11-hour per day limit (including rest periods) as stated in the Labour Law. Such jobs include but are not limited to pharmacists, warehouse caretakers, and jobs related to repairing ships, wholesale in produce or fish, and airports.

Moreover, new ministerial orders have been passed that further enhance the protection of women’s rights from dangerous professions that involve exposure to poisonous fumes and chemicals that may have health and fertility implications. Ministerial Order No. 16 of 2013 prohibits the employment of women between the hours of 7.00pm to 7.00am at industrial institutions such as those related to shipbuilding, electricity generation and construction projects involving demolitions and renovations. Ministerial Order No. 32 of 2013 further prohibits the employment of women in certain professions, some of which involve mining or entail exposure to intense heat, such as working in the vicinity of smelting furnaces. Order 32 also prohibits the employment of pregnant women in professions that entail exposure to atomic, nuclear or x-rays during the woman’s period of fertility or pregnancy, and any work involving trading in or exposure to vapours or fumes of gasoline and any of its derivatives.

LMRA Declares Amnesty

On June 28, 2015, the LMRA declared a six-month period of amnesty, commencing on July 1, 2015 and ending on December 31, 2015. During this period, expatriate workers who have fled their worksites or have been terminated and overstayed their work permit unlawfully, or workers who have overstayed on a work permit that has not been renewed, shall be eligible, without any penalty fees, for the following two options:

• Undocumented workers may either legalise their presence in Bahrain through obtaining legal employment (without the consent of the previous employer) and have any offences on their current record expunged; or
• Leave the country during this period without facing penalties or blacklisting (even if their passports are withheld by their respective employers).

The incentive of availing oneself to these two options is that the workers who overstay their visas can choose to leave Bahrain during this period and may return to Bahrain at a future date without facing obstacles or penalties from the authorities. Those who do not avail themselves of these options during this amnesty period will not have the same rights extended to them at a later date and may face fines and deportation after January 1, 2016.

The last amnesty period for unauthorised workers was in 2010, which enabled approximately 6000 expatriate workers to leave the country, and it is hoped that this new amnesty will further enable vulnerable workers to rectify their legal status so that they may reside in Bahrain lawfully without exploitation from others or leave without penalties.

Better Rules

In examining the Labour Law post-2012, in comparison to its predecessor from 1976 and regulations related thereto, the improvements are substantial and have considerably enhanced the private labour law sector. In addition to the legislature’s initiatives to revamp the labour sector, the MoL and the LMRA, as demonstrated above, are together moving towards a better position, which is complementary to the updated Labour Law. Nevertheless, it may be worth noting from a business perspective that the law mainly focuses on safeguarding workers’ rights, and that the MoL and LMRA’s focus lies largely on worker’s well-being, which means that employers may face additional expenses that may have not been taken into consideration pre-2012 and before the new regulations were introduced.

Close-Out Netting Resolution 2014

In 2014, the CBB promulgated Resolution No. 44 for Closeout Netting under a Market Contract (the Resolution). The promulgation was an exercise in the CBB’s powers conferred under Article 108 of the CBB and Financial Institutions Law (CBB Law).

While Section 6 of the CBB Law had already laid the legal groundwork for close-out netting in 2006, the Resolution is a formal adoption of the Model Netting Act published by the International Swaps and Derivatives Association. The Resolution now underlies a comprehensive statutory regime for close-out netting in Bahrain. With this, a relatively new legal term, close-out netting, surfaced in the legal and financial sector of Bahrain and has generated some debate due to its significance. This article sets to define close-out netting and explain the major changes brought about by the Resolution to the legal framework of Bahrain.

In general terms, close-out netting provision means a contractual provision on the basis of which, upon the occurrence of a predefined event in relation to a party to the contract, the contractual obligations owed by the parties to each other, whether or not they are at that time due and payable, are automatically (or at the election of one of the parties) reduced to or replaced by a single net obligation representing the aggregate value of the combined obligations, which is thereupon due and payable by one party to the other. Close-out netting is an essential component of the hedging activities conducted by a number of financial services institutions and by other users of derivatives.

The Resolution sets out the basic legal principles necessary to ensure the enforceability of bilateral close-out netting, including bilateral close-out netting on a multi-branch basis, as well as the enforceability of related financial collateral arrangements. Furthermore, the Resolution ensures that, upon the commencement of an insolvency proceeding in relation to a party to a close-out netting provision, the operation of the close-out netting provision is not stayed, avoided or otherwise limited by:

• Any action of the insolvency administrator, liquidator, receiver, conservator or any other person(s) that administers the affairs of an insolvent party during an insolvency proceeding under the laws of Bahrain;
• Any other provision of the law in relation to bankruptcy, reorganisation, composition with creditors, receivership, conservatorship or any other insolvency proceeding an insolvent party may be subject to in Bahrain; or
• Any other provision of law that may be applicable to an insolvent party subject to the conditions contained in the applicable netting agreement.

Bottom Line

Therefore, since the promulgation of the Resolution the close-out netting provisions are enforceable between the parties and against third parties. In the event of the commencement of insolvency proceedings in relation to one of the parties, the insolvency administrator is prevented from demanding from the other party performance of any of the obligations covered by the close-out netting provision while rejecting the performance of any obligation owed to the other party that is covered by the close-out netting provision. In addition, the mere entering into and operation of the closeout netting provision as such would not constitute grounds for the avoidance of the close-out netting provision on the basis that it is deemed inconsistent with the principle of equal treatment of creditors.

Finally, the Resolution aims at protecting the operation of close-out netting provisions from any of the effects of the application of any other domestic laws, such as the Bankruptcy and Composition Law, Decree No. 11 of 1987, which may hinder the operation of close-out netting provisions whenever the application of such laws would be in conflict with the objectives of the Resolution.

However, close-out netting is not shielded against every rule of commercial or insolvency law. The demarcation between those legal rules that should not apply to close-out netting and other legal provisions that should continue to apply requires careful consideration in relation to laws and regulations of a general nature, as well as in relation to restrictions specific to situations of insolvency or in the context of the Resolution regime. As a general rule, provided that the general requirements for the valid creation of contracts are fulfilled, the sole fact of entering into a close-out netting provision should not be subjected to additional conditions under contract or commercial law and likewise should not trigger the application of insolvency avoidance rules. However, if a situation involves qualifying elements, for example, fraud vis-à-vis other creditors, the relevant contract law and insolvency law tools and remedies for fraud should continue to apply.

New Lease Law

A new lease law, Law No. 27 of 2014 (Lease Law) went into effect on February 7, 2015, and is a significant development in the Bahrain real estate market. The previous laws on leases were hard to enforce, as they divided the kingdom into two municipalities only, Manama and Muharraq, and applied only to certain premises, specific types of building and for specified purposes. In addition, lease laws were difficult to source, as there was no single consolidated law under the legal framework.

As a result of regulations not being consolidated into one source, inconsistency issues often arose, along with confusion over which laws to apply. The centralisation of this entirely new law on leases, applicable to almost all types of properties in all areas of Bahrain, achieves the aim of providing clarity and consistency to an extremely important sector of the region’s legal system.

The following types of leases are exempt from the provisions under the Lease Law:

• Industrial tenancies which are subject to Law No.
• 28 of 1999 in relation to the establishment and organisation of industrial zones;
• Leases for agricultural land;
• Properties leased for the purposes of hospitality-and tourism-related activities;
• Leases of furnished apartments which do not exceed a period of one month;
• Leases of units which are used for work-related circumstances; and
• Properties subject to musataha, or long-term lease arrangements that include a mandatory development obligation.

As a result, the comprehensiveness of the Lease Law and its applicability to exclusive types of properties in all areas of Bahrain achieves the aim of providing clarity and consistency to an extremely important sector of the kingdom’s legal system, by codifying previous lease laws into one single piece of legislation. The most significant change is that all previous lease laws themselves are contained within one single piece of legislation. Doing so removes any ambiguity while still maintaining sections of the core framework. The new rules revoke five previous rent laws, including the Manama Act and the Rents Act, which may be seen by some as a drastic change. However, this measure will ensure uniformity among all types of rental premises in all areas of the Kingdom of Bahrain, which can only be seen as a positive development for the property sector.

The documentation and registration of the existing and new leases have been addressed in the Lease Law. Under the Lease Law, all existing and new leases must be documented and registered by the landlord, with the Municipal Lease Registration Office, which is the government entity responsible for the registration and management of leases, upon payment of a fee ranging from BD1-5 ($2.63-13.17) for residential leases and BD5-10 ($13.17-26.34) for other types of leases within six months from the effective date of the new Lease Law. This may potentially be a time-consuming process, however.

Rent Controls

One entirely new provision that has the potential to impact every leased property governed by the Lease Law is the requirement for the landlord to wait two years from the lease commencement date or the last rent increase date before having the right to increase the rent. The maximum increase is now set by the Lease Law at 5% for residential properties and 7% for commercial and other properties, unless otherwise agreed in writing. A landlord must notify the tenant of his intention to increase the rent at least three months before the lapse of the second year. Under this Lease Law, the landlord is not entitled to increase the rent more than five times during the term of the lease.

Payment of rent under the new Lease Law should be completed within the first week of the due date. If the lease agreement/contract does not specify a due date, the rent shall be due on the first day of each month of the term. One of the most prominent outcomes of the new Lease Law is the introduction of the Rent Disputes Committee. Under the Lease Law, all disputes related to any provision of the new Lease Law will now be resolved out of court in a timely manner by the Rent Disputes Committee. This new approach will hopefully result in an overall reduction of the number of cases at national courts.

We hope that the new Lease Law, which is considered a long awaited development in the regulation of the property sector, will be an important step towards resolving the numerous rental disputes that are creating a burden for Bahrain’s courts.