A Critical Overview of Kuwait’s Insolvency Regime and its Implementation
Banking & Finance / Kuwait
The current insolvency regime of Kuwait is organised under Law No. 71 of 2020 (the "Bankruptcy Law"), which was legislated in 2020.
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Yousef AlShereedahAssociate,Banking and Finance
The current insolvency regime of Kuwait is organised under Law No. 71 of 2020 (the "Bankruptcy Law"), which was legislated in 2020 with the aim of removing an important obstacle to doing business in Kuwait and drastically modernising bankruptcy proceedings. The previous regime, which was set in place in 1980 and slightly reformed in 2009, offered minimal insolvency protections and debt restructuring mechanisms, and deterred foreign investment. The Bankruptcy Law introduced a court supervised corporate restructuring as an option for insolvent persons, in addition to bankruptcy and preventative settlement, to allow for early debt restructuring for distressed businesses. It further extended debt restructuring routes to companies beyond the financial sector. Among the most notable reforms, the Bankruptcy Law established specialist bankruptcy bodies, decriminalised bankruptcy, and accelerated the procedures of bankruptcy and other insolvency measures. The Bankruptcy Law now allows for the reinstatement of a debtor's pre-bankruptcy rights upon the lapse of one year from the discharge of a bankruptcy. Further, preference periods are now generally fixed by legislation instead of being entirely subject to the court's jurisdiction.
The Bankruptcy Law sets out three court supervised mechanisms under which a person may be subject to liquidation or administration as follows:
A Declaration of Bankruptcy, whereby the assets of the bankrupt are liquidated by a court appointed Bankruptcy Trustee;
A Restructuring, whereby the affected person retains full capacity to manage their assets but is placed under the supervision of the court appointed Bankruptcy Trustee who supervises the restructuring plan and may impose certain restrictions on such person's disposition powers; and
A Preventative Settlement, whereby the affected person retains full capacity to manage their assets unless the Bankruptcy Court decides otherwise. Any creditor or a competent Kuwaiti regulatory authority may petition the Bankruptcy Department (a judicial subdivision) to make a Declaration of Bankruptcy of or impose a Restructuring Plan on a debtor.
Moreover, a debtor may also petition the Bankruptcy Department to subject them to a Declaration of Bankruptcy, Restructuring, or a Preventative Settlement, noting that Restructurings and Preventative Settlements require the approval of certain majorities of the debtor's creditors. While we are not aware of any precedents under the current Bankruptcy Law with respect to consummated restructurings or preventative settlements, however, we know that multiple applications for restructuring and preventative settlement have been recently made to the Bankruptcy Department.
Furthermore, the Bankruptcy Law established the following specialist bodies:
The Bankruptcy Court, which is a specialised court with sole jurisdiction over disputes that arise under the Bankruptcy Law and with the authority to decide on the requests submitted to it in accordance with its provisions;
The Bankruptcy Department, a judicial division which oversees the functions of the Bankruptcy Court; and
The Bankruptcy Commission, which is a bankruptcy commission formed by the Kuwait Ministry of Commerce and Industry and comprises members qualified to be bankruptcy trustees. The Commission serves a technical support function and may also include financial, legal, or economic experts. Certain corporate debts are subject to supervision of the Commission. These include debts of listed companies, collective investment schemes, Capital Markets Authority or Central Bank of Kuwait regulated entities, and state-owned companies. The Commission reviews insolvency applications and related documentation submitted by any of the foregoing companies throughout the insolvency proceeding and opines on the same. Other functions include appointing bankruptcy trustees and determining their remuneration.
Given the recent legislation of the Bankruptcy Law and the establishment of its regulatory public bodies, application of the Bankruptcy Law remains nascent, and many areas covered by the legislation have not been sufficiently tested in practice. Furthermore, the Bankruptcy Law left a number of relevant issues largely undefined or unregulated. For example, the Bankruptcy Law only applies to natural persons in their capacity as 'traders'. The legislation does not definitively define what constitutes a trading activity, which leaves the issue to be decided by the courts based on the general provisions of Decree Law No. 68 of 1980 promulgating the Kuwaiti commercial code. In a ruling by the Kuwait Court of Appeal in December 2023, doctors who own and run private medical clinics were excluded from the scope of the Bankruptcy Law. The ruling raises serious questions as to whether the Bankruptcy Law applies to other professional businesses of individual nature (such as law firms, auditors, engineers, and other consultants).
In addition to natural persons having a trader's capacity, the applicability of the Bankruptcy Law extends to Kuwaiti companies (including companies owned by the State) and collective investment schemes (such as funds). However, the legislation is silent with respect to public corporations and other entities established by Emiri decrees. Therefore, it is unclear whether these entities are subject to the Bankruptcy Law.
Another area of ambiguity under the Bankruptcy Law is the point at which the outset of insolvency begins. This is especially relevant to the court's determination of preference periods. The legislation equates the suspension of debt payments with the outset of insolvency for the purposes of setting preference periods. This may not be a definitive factor in assessing when a debtor's insolvency began, and it is not in line with best international standards. Another particular concern is the overlap of competences created by the Bankruptcy Law between the Bankruptcy Court, the Bankruptcy Department, and the Bankruptcy Commission. Since implementation, these bodies constantly defer jurisdiction to each other (and in certain cases, refuse to accept the same), which causes a bureaucratic 'ping-pong' process and excessive delays for both debtors and creditors. Another material issue of application is the prioritisation of judgement-creditors (i.e., creditors whose debts are adjudicated by a competent court) over all other creditors of the same rank, even though the Bankruptcy Law does not provide for such distinction. Unlike the previous insolvency regime, the Bankruptcy Law restricts the use of sett-off of debts (i.e., netting) between a debtor subject to any proceedings under the Bankruptcy Law and another creditor, which may cause lengthier and less efficient liquidation processes than if netting was a permitted course of action.
Overall, the Bankruptcy Law of Kuwait aimed to modernise the insolvency regime and provide more options and protections for distressed businesses and their creditors. However, the law suffers from several ambiguities and shortcomings that limit its effectiveness and create uncertainty and delays in its application. The law does not clearly define the scope of its applicability, the criteria of insolvency, the roles and powers of the specialist bodies, and the rules of debt prioritisation and set-off. Moreover, the law has not been sufficiently tested in practice and has not resulted in any successful restructurings or preventative settlements so far. Therefore, the Bankruptcy Law of Kuwait requires further clarification and improvement to achieve its objectives and align with international standards.
For further information,please contact Yousef AlShereedah and Omar Handoush.
Published in May 2024
