An overview of the insolvency regime in Bahrain

The Insolvency Law (Law No. 22 of 2018) and the Central Bank of Bahrain (‘CBB’) and Financial Institutions Law (Law No. 64 of 2006, as amended) (‘CBB Law’) are the primary pieces of legislation under which insolvency or analogous proceedings to which a company incorporated under the Companies Law (Law No. 21 of 2001, as amended) can be subject to in the Kingdom of Bahrain (‘Bahrain’). The Insolvency Law applies to any company that is not licensed by the CBB. The CBB Law applies to any company that is licensed by the CBB. There are no laws that govern insolvency proceedings of an individual in Bahrain.

The CBB Law

The CBB Law covers insolvency of a CBB licensed entity (‘Licensee’). Two options are available namely:

(a) administration; and

(b) compulsory liquidation.

The CBB Law provides that a Licensee is deemed to be insolvent if its financial position becomes unstable and it stops paying its due debts other than administrative fines and any applicable tax. Once a Licensee is insolvent, it must immediately cease to undertake any regulated services in Bahrain, make any payments or carry on any business in relation to regulated services, unless otherwise agreed in writing by the CBB. ‘Regulated services’ is defined as financial services provided by the financial institutions including those governed by Islamic Sharia principles under the CBB Law.

Administration

The CBB may assume the administration of a Licensee or appoint an external administrator to conduct the administration of the Licensee on behalf of the CBB, if:

(a) the Licensee becomes insolvent or appears most likely to be insolvent;

(b) the Licensee’s licence is amended or cancelled due to failing to satisfy any of its licence conditions or failing to start business within six months from the date of the licence; or

(c) continues to provide regulated services resulting in inflicting damage to the financial services industry in Bahrain.

Powers of the administrator

The CBB shall specify the terms and conditions under which an external administrator practises its duties and obligations and the administrator shall possess all the necessary powers to manage and run the business of the Licensee including the power to:

(a) continue or temporarily suspend operations;

(b) suspend or limit the discharge of financial obligations;

(c) conclude agreements and sign documents on behalf of the Licensee

(d) commence and defend any legal proceedings in the name of the Licensee; and/or

(e) take any other legal proceedings to which the Licensee is a party.

The administrator may also:

(a) declare a moratorium in respect of the debts of the Licensee;

(b) discharge obligations of the Licensee to certain creditors in preference to other creditors, if this is to the advantage of the Licensee;

(c) dismiss officers and employees, provided that reasons should be given for the dismissal;

(d) appoint officers and employees;

(e) nullify any agreement entered into by the Licensee (by way of a court order) before placing the Licensee under administration; and

(f) undertake any necessary action in the interest of the Licensee, its customers and its creditors.

The administrator may, after obtaining the approval of the courts of Bahrain (‘Bahraini Court(s)’) and where applicable, the rights of the other party to be compensated, nullify any agreement (other than derivative contracts) entered into by the Licensee before placing the Licensee under administration if such action is in the interest of the Licensee or taken to protect the interests of its customers, or to avoid occurrence of irrevocable damage. This power would be used by the administrator under the supervision of the Bahraini Court if the administrator can satisfy the Bahraini Court that these actions are in the interest of the financial institution or to protect the interests of its customers or to avoid the occurrence of irrevocable damage. In practical terms, this power would be used where, for instance, retail depositors are unable to access deposits and the assets are required to be sold or to meet operating expenses of the financial institution.

Duties of administrator

Within 30 days of commencing the administration, the administrator shall compile two copies of an inventory of the rights, assets and liabilities of the Licensee. One copy should be kept at the principal place of business (available for inspection by creditors and stakeholders) and the other at the CBB. In accordance with the powers of the administrator, the inventory should be updated from time to time and the administrator should take all the necessary measures to collect all the entitlements due to the Licensee.

Suspension of proceedings

Any action in relation to enforcing any security over the property of the Licensee, legal proceedings or any other measures, may not be commenced or continued without the approval of the administrator.

Termination of administration

Within a period of two years from the commencement of the administration, the administrator shall submit a petition to the Bahraini Court for either compulsory liquidation of the Licensee or terminate the administration and restore the management to the officials of the Licensee.

Compulsory liquidation

The administrator, the Licensee or any creditor may submit a petition to the Bahraini Court for compulsory liquidation of the Licensee, and serve such petition at the Licensee’s principal place of business. The petition should be made available to the shareholders and creditors of the Licensee and may be requested by any interested party. The entity orindividual who submits the petition for compulsory liquidation should advertise the petition in the Official Gazette and in two Arabic and English newspaper at least 15 days before submitting to the Bahraini Court. The court shall then appoint a liquidator and determine their fees with the guidance of the CBB. All liquidator fees shall be borne by the Licensee.