Hatim Q Zu’bi, Zu’bi & Partners, Attorneys & Legal Consultants: Viewpoint

Law No. 22 of 2018, known as the Reorganisation and Bankruptcy Law (New Law), was published in the Official Gazette on June 7, 2018 and came into effect on December 7, 2018. This repealed and replaced the Bankruptcy and Composition Law of 1987. The New Law brings innovation in bankruptcy dealings to the GCC, and encourages investment by laying out transparent and flexible regulations for insolvency.

The New Law applies to both commercial companies established in Bahrain (including companies that are created by law or decree and that are fully or partially owned by the government), and individual traders in Bahrain who are engaged in commercial activities. The New Law does not apply to companies excluded by law or Central Bank of Bahrain licensees, which are instead covered by the insolvency provisions of the Central Bank of Bahrain and Financial Institutions Law of 2006, as amended. The New Law does not apply to personal, family or household debts, swaps or other derivatives.

The High Civil Court has jurisdiction over matters related to bankruptcy and reorganisation. Under the New Law, both creditors and debtors can file an insolvency case. If the petition is granted, the High Civil Court will immediately appoint a bankruptcy trustee to take control of the debtor’s assets, and carry out the duty to act in the best interest of the estate and achieve the best possible recovery for all creditors.

Perhaps the most important feature of the New Law is the moratorium, which automatically applies upon the start of a bankruptcy case and continues until the end of the case. This prohibits even secured creditors from seizing assets, blocks actions to collect debts, and aims to preserve the value of assets while the best recovery plan for creditors is crafted, negotiated and implemented. Another distinguishing factor of the New Law is that it follows, in part, the model of Chapter 11 of the US Bankruptcy Code by introducing debtor-friendly reorganisation provisions. In doing so, the New Law focuses heavily on maximising the value of debtor assets and allows for extensive flexibility. Maintaining ongoing contracts is allowed to keep reciprocal benefits, as is assigning contracts to gain value. Due to this, automatic bankruptcy termination clauses in contracts are generally unenforceable in Bahrain. The New Law also allows for business to continue if this will achieve a better result for the creditors, and grants the right for debtors to obtain loans or financing without the approval of the High Civil Court.

The New Law is the first in the GCC to cover cross-border insolvency provisions to protect foreign investment, making it a novel development required by modern global business. Chapter 5 of the New Law addresses requests filed in Bahrain by foreign courts in relation to foreign bankruptcy proceedings, requests filed in foreign countries in relation to Bahrain insolvency cases, foreign proceedings taking place concurrently in respect of the same debtor and foreign requests for participation in Bahrain insolvency procedures. In so doing, the cross-border provisions aim to encourage cooperation between the courts of Bahrain and those of foreign countries, and ensure equitable and efficient administration of cross-border bankruptcy cases to protect the interests of both creditors and debtors.

Furthermore, the New Law focuses on transparency in insolvency proceedings by introducing the reorganisation and bankruptcy register, made available online by the Ministry of Justice, Islamic Affairs and Waqf. Comprehensive details of each reorganisation and bankruptcy case listed on the register are available at www.moj.gov.bh/ar/reorganization-bankruptcy-cases.

The New Law is a significant development in Bahrain’s regulatory environment. It is set to aid investment by providing certainty in the way insolvency cases will be handled going forward. By focusing on well-rounded precision and adaptability, the New Law is an amalgam of the most effective and innovative provisions of insolvency regimes globally that have been successful in achieving the best returns for debtors and creditors.