Insolvency 2024 Comparisons

The legal framework for reorganisation, liquidation, and insolvency of entities in the Kingdom of Bahrain comprises of several laws, depending on the activity of the entity and the nature of the action in question.

When it comes to financial institutions licensed by the Central Bank of Bahrain (the “CBB Licensees”), Law No 64 of 2006 promulgating the Central Bank of Bahrain and Financial Institutions Law (the “CBB Law”) provides for a regime of administration and liquidation that applies specifically to insolvent CBB Licensees and which will be conducted under the supervision of the Central Bank of Bahrain (the “CBB”), which is the regulator. The process provided for under the CBB Law commences with a period of administration, where the CBB-appointed administrator will attempt to restore and enhance the entity’s position, failing which the CBB Licensee will then move to the liquidation phase through a court process.

With regard to other commercial entities or individuals practising a commercial activity in Bahrain, Law No 22 of 2018 (the “Bankruptcy Law”) will apply when those entities become insolvent. The objective under this law is, where possible to restore the entity or individual’s financial position to the extent possible, and to capitalise on the assets thereof and try to protect them in order to enhance the benefit therefrom for the entity’s or individual’s creditors.

Legislative Decree No 21 of 2001 promulgating the Commercial Companies Law (the “Commercial Companies Law” or “CCL”) will apply in the event of voluntary liquidation for both CBB Licensees and other entities taking one of the forms of companies set out under the CCL.

Voluntary Process

Voluntary liquidation is provided for under the CCL. The company will dissolve in the event that the partners or shareholders unanimously decide to dissolve it, the duration of the company expires, or the assets of the company are destroyed, rendering its continuation pointless (Article 320 of the CCL). Under Article 325 of the CCL, every company in a dissolution position will be liquidated. The process of voluntary liquidation is supervised and controlled by the shareholders or partners, who will be empowered to appoint the liquidator. The process will generally be supervised and monitored by the Ministry of Industry and Commerce (the “MOIC”).

Involuntary Process

Involuntary liquidation will be done through the CBB for CBB Licensees. The CBB may place the CBB Licensee under administration under the CBB’s supervision or request the competent court place the CBB Licensee under liquidation, as need be. The request to place a CBB Licensee under liquidation may also be made by the CBB Licensee itself or one of its creditors. For a non-CBB Licensee, the process of involuntary reorganisation or liquidation of its assets will be done in compliance with the Bankruptcy Law. The insolvent debtor or an interested creditor may file an action before the court requesting commencement of the reorganisation or liquidation process. The court, once convinced that the requirements set out under the law have been met, will appoint a bankruptcy trustee who will be mandated by the court to assist in the plan either to reorganise or liquidate the entity.

The Bankruptcy Law recognises several statutory officers who play key roles in the reorganisation and liquidation processes.

Temporary Bankruptcy Trustee

A temporary bankruptcy trustee is appointed as a provisional measure after bankruptcy has been filed for but before the court approves the opening of bankruptcy proceedings under the Bankruptcy Law. The temporary bankruptcy trustee serves as a temporary overseer of the debtor’s assets and operations until a permanent trustee is appointed.

Bankruptcy Trustee

A bankruptcy trustee is selected by a majority of creditors within seven days of the court’s approval to open bankruptcy proceedings. If creditors fail to make a selection, the court may appoint a bankruptcy trustee. The bankruptcy trustee plays a central role in managing the debtor’s assets, preparing financial reports, and assisting with the development and implementation of reorganisation plans.

Liquidation Trustee

The liquidation trustee title is given to a bankruptcy trustee once the court approves the commencement of liquidation proceedings under the Bankruptcy Law. They are primarily responsible for protecting and maximising the value of the bankruptcy estate, selling assets, and distributing proceeds to creditors according to legal priority.

Reorganisation Trustee

The reorganisation trustee title is assigned to a bankruptcy trustee during reorganisation proceedings under the Bankruptcy Law. They oversee the management of the debtor’s business and the implementation of the reorganisation plan to improve the debtor’s financial position and operations.

Administrator/Liquidator (for CBB Licensees)

For entities licensed by the CBB, the CBB may assume administration itself or appoint an administrator to act on its behalf. The CBB or the appointed administrator can also apply to the court for the appointment of a liquidator to manage the liquidation process for CBB Licensees.

Interaction with Debtor/Directors

Bankruptcy trustees report directly to the court and are responsible for overseeing the debtor’s assets and operations. In reorganisation proceedings, the trustee works closely with the debtor’s management to develop and implement a viable reorganisation plan while also monitoring the debtor’s business activities. During liquidation, the trustee takes control of the debtor’s assets and is responsible for selling them and distributing the proceeds to creditors in accordance with legal priorities.

Selection and Appointment

Bankruptcy trustees are typically selected by creditors at a meeting held within seven days of the court’s approval to open bankruptcy proceedings. If creditors do not make a selection, the court has the authority to appoint a trustee. Creditors have the right to request the replacement of a trustee within 30 days of their appointment.

Trustees must be registered experts who are independent, impartial, and free from any conflicts of interest. They cannot have served as the debtor’s insider, creditor, employee, auditor, or agent in the two years prior to their appointment.

For CBB Licensees, the CBB has the power to assume administration itself or appoint an administrator to oversee the proceedings on its behalf.

The Bankruptcy Law recognises different types of creditors and establishes a hierarchy for the priority of their claims. The main categories of creditors and their priority rankings are as follows.

Secured Creditors

Secured creditors hold a lien or security interest over specific assets of the debtor. They have priority over unsecured creditors and are entitled to recover their claims from the proceeds of the sale of the secured assets.

Estate Claims

Estate claims arise from the costs and expenses incurred during the administration of the bankruptcy estate. These claims have priority over all other unsecured claims and are paid from the bankruptcy estate before any distributions are made to other creditors.

Preferential Claims

Preferential claims are unsecured claims that are given priority by law over other unsecured claims. Examples of preferential claims include employee wages, social insurance contributions, and certain tax liabilities.

Non-preferential Claims

Non-preferential claims, also known as ordinary unsecured claims, are those that do not fall into any of the above categories. These claims rank equally among themselves and are paid on a pro-rata basis after secured, estate, and preferential claims have been satisfied.

Subordinated Claims

Subordinated claims are those that rank below all other unsecured claims by agreement or by law. These claims are only paid after all other creditors have been satisfied, and they may include claims held by the debtor’s shareholders or related parties.

The Bankruptcy Law sets out eight priority levels for claims in relation to bankruptcy proceedings and after the payment of the rights of secured claims. The order is as follows.

First Level

This is reserved for amounts due to any unsecured form of financing obtained after the commencement of the bankruptcy proceedings in order to finance the continuation of the debtor’s facility operation or for the purpose of maintaining the value of bankruptcy assets and protection of the value.

Second Level

This level is for bankruptcy costs and expenses, including without limitation the fees of the bankruptcy trustee, lawyers, agents or experts who provide their services in the course of bankruptcy, and amounts due on contracts entered into by the bankruptcy trustee or the debtor after the commencement of the bankruptcy proceedings.

Third Level

The third level covers the following claims that arose prior to the commencement of the bankruptcy in proportion:

• salaries and financial benefits due to the debtor’s employees, capped at BHD3,000 for each employee;
• clients’ claims for instalments paid to the debtor in order to purchase goods and services from the debtor, capped at BHD1,000 for each client; and
• taxes and fees due to government authorities and agencies, capped at BHD10,000 for each authority.

Fourth Level

All unsecured claims that arose before the approval of the commencement of the bankruptcy proceedings, including the remaining amounts of the claims outlined under the third level of priority, are covered by this level.

Fifth Level

This level includes all other unsecured claims that arose before filing for bankruptcy and were not presented to the court in time but were presented to the court in a timely manner as regards the reporting of distribution rights in the bankruptcy claim.

Sixth Level

Claims for taxes and fees due to foreign governments are included in the sixth level.

Seventh Level

The seventh level covers unsecured claims to compensate owners for late payments due to them from the debtor.

Eighth Level

Shareholders’ claim of their ownership of shares in accordance with the priority prescribed for each one is covered by the eighth level.

Secured creditors can take various types of liens or security interests over the debtor’s assets. This includes the following.

• Real estate: mortgages over land and buildings.
• Equity shares: pledges over shares in companies.
• Movable property: possessory pledges or registered security interests over tangible assets, such as equipment, inventory, or vehicles.
• Intangible property: security interests over intangible assets, such as bank accounts, receivables, or contractual rights.

Outside of a restructuring or insolvency context, secured creditors have the right to enforce their security interests in accordance with the terms of the security agreement and the applicable laws. Enforcement mechanisms may include:

• selling the secured assets and applying the proceeds to satisfy the secured debt;
• taking possession of the secured assets and using them to generate income to repay the debt; and
• initiating legal proceedings to obtain a court order for the sale or foreclosure of the secured assets.

Outside of a restructuring or insolvency context, unsecured creditors have various rights and remedies available to them under Bahraini law. They include the following.

Pre-judgment Attachments

Unsecured creditors may apply to the court for an order to attach the debtor’s assets before obtaining a judgment if they can demonstrate a prima facie case and a risk that the debtor may dissipate assets.

Retention of Title

Suppliers of goods may include retention of title clauses in their contracts, allowing them to retain ownership of the goods until the debtor has paid for them in full. If the debtor defaults on payment, the supplier can reclaim the goods subject to the retention of title clause.

Set-Off

Unsecured creditors may have the right to set off mutual debts owed between themselves and the debtor, subject to certain conditions. Set-off can be exercised outside of a restructuring or insolvency context, provided that the debts are due, payable, and of the same nature.

Unsecured creditors can also initiate legal proceedings to obtain a judgment against the debtor and then seek to enforce the judgment through various means, such as attachment of the debtor’s assets, garnishment of the debtor’s bank accounts, or a court-ordered sale of the debtor’s property.

Formal requirements for entering into consensual out-of-court restructurings do not exist under Bahraini law. These restructurings are not specifically regulated, allowing parties the flexibility to agree on the contractual terms of the arrangement.

Entering into consensual restructuring negotiations is not mandatory before initiating formal insolvency processes. However, banks and financial institutions in Bahrain are open to amicable restructuring agreements, which often involve the debtor and creditors entering into a protocol where creditors set up a committee to supervise the debtor’s management for a period to ensure continuity and income flow.

Relations between the debtor and creditors in a consensual restructuring are governed by the contractual terms agreed in the restructuring agreement or protocol. In a typical arrangement, major creditors manage the debtor in co-ordination with smaller creditors.

The protocol details the fees and management process, aiming to enhance the debtor’s financial position. Creditors closely monitor the debtor’s activities and may require approval for actions creating obligations on the debtor’s assets.

As consensual restructurings are contractual, dissenting parties are not bound unless they agree to the terms. Dissenting creditors retain their rights to pursue legal remedies outside the restructuring. Parties cannot be forced to co-operate in a consensual out-of-court restructuring, as it is a voluntary process.

Bahraini law does not specifically address holding parties liable for not co-operating or obstructing a consensual restructuring plan. However, general principles of contract law under the Civil Code and Law of Commerce would apply to the parties’ conduct in negotiating and implementing the restructuring agreement.

The limited regulation of out-of-court restructurings provides flexibility but also means the process is largely dependent on the parties’ willingness to negotiate and reach a mutually acceptable agreement. Dissenting creditors’ rights and potential liability for obstructive conduct would be determined on a case-by-case basis in line with the specific circumstances and general legal principles.

Legal Status of Out-of-Court Restructurings

Consensual out-of-court restructurings in Bahrain are primarily contractual arrangements governed by the terms agreed upon between the debtor and participating creditors. These arrangements are not specifically regulated under Bahraini law, allowing flexibility in negotiating terms. However, the Bankruptcy Law allows for a contractual reorganisation plan agreed upon between the debtor and creditors to be submitted to the court for ratification, giving it legal recognition.

Invoking the Restructuring

The restructuring agreement is binding on the creditors who are parties to the agreement, as it forms a contractual obligation. Participating creditors are required to adhere to the terms of the agreement, such as modifying repayment terms, providing new financing, or refraining from enforcing legal actions against the debtor.

Dissenting creditors who do not participate in the consensual restructuring are not bound by the agreement. They retain their rights to pursue legal remedies against the debtor under the general law, such as filing for the debtor’s bankruptcy or enforcing their claims through court proceedings.

The debtor is bound by the terms of the restructuring agreement as a contractual obligation. The debtor must comply with the agreed terms, such as making payments according to the modified schedule, providing information to creditors, and seeking approval for certain actions affecting its assets.

The contractual nature of the restructuring agreement means it is generally not binding on third parties who are not signatories. However, if the restructuring agreement is ratified by the court under the Bankruptcy Law, it may gain legal recognition and enforceability against third parties, depending on the terms of the ratification order.

Initiating the Procedure

The Bankruptcy Law allows the debtor or any creditor to file for the opening of bankruptcy proceedings, which include restructuring and reorganisation. The debtor must file for bankruptcy within 30 days of ceasing to pay debts exceeding BHD5,000 due to financial distress or instability. Failure to file within this period may result in liability for the debtor’s management. Creditors may file for the debtor’s bankruptcy at any time, provided the debt owed is at least BHD5,000 and the creditor has notified the debtor of the debt at least 30 days prior to filing.

Formal and Material Criteria

To initiate bankruptcy proceedings, including restructuring and reorganisation, the debtor must have ceased paying debts exceeding BHD5,000 due to financial distress or instability. The Bankruptcy Law does not define “financial distress” or “instability,” but these terms generally refer to the debtor’s inability to meet financial obligations as they fall due. The filing must be made with the High Civil Court and include supporting documents such as the debtor’s financial statements; a list of creditors and debtors; and a description of the debtor’s financial position.

Eligibility for the Procedure

The Bankruptcy Law applies to commercial companies, individual merchants, and civil companies conducting commercial activities in Bahrain. This includes corporate entities and sole proprietorships. Certain entities are excluded from the scope of the law, such as government bodies, banks, insurance companies, and special purpose vehicles unless the CBB approves their inclusion.

The Bankruptcy Law does not apply to individuals not engaged in commercial activities. While the law does not explicitly address group insolvency, it is possible for multiple related entities to be subject to bankruptcy proceedings if they meet the eligibility criteria individually.

The fundamental principles and key objectives of the statutory restructuring and reorganisation procedures under the Bankruptcy Law in Bahrain are defined in Article 2 of the Bankruptcy Law. When interpreting and implementing the Bankruptcy Law, regard should be had to its following goals:

• preserving and protecting the bankruptcy estate;
• maximising the value of the bankruptcy estate;
• considering matters related to the bankruptcy proceedings with integrity and transparency and in an expeditious and orderly manner;
• reorganising the debtor and avoiding liquidation wherever reasonably possible; and
• providing fair distribution to creditors and equal treatment of creditors with similar claims and fair treatment to all persons having an interest in the bankruptcy proceedings.

Termination, Closing or Completion of the Procedure

The restructuring procedure can end in several ways. If the creditors approve the restructuring plan and the court ratifies it, the debtor must implement the plan within the specified timeframe (up to five years, extendable by another three years).

The procedure is considered completed once the debtor fulfils all obligations under the plan. If the creditors or the court reject the restructuring plan, the procedure terminates, and the debtor may be placed into liquidation if it is insolvent. The court may also terminate the procedure if the debtor fails to co-operate with the bankruptcy trustee or if the trustee determines that restructuring is not feasible.

Fairness Test for Restructuring Plan

The Bankruptcy Law requires the restructuring plan to be fair and equitable to all classes of creditors. For the court to approve the plan, it must not unfairly discriminate against any dissenting class, and dissenting creditors must receive at least as much as they would in liquidation.

The plan must also be feasible, meaning it is likely to succeed in rehabilitating the debtor’s business and ensuring its continued operation.

Judicial Involvement

The court plays a crucial role throughout the restructuring process. The court decides whether or not to accept the bankruptcy filing and opening of proceedings; appoints the bankruptcy trustee; and oversees the process.

The restructuring plan must be submitted to the court for ratification after creditor approval. The court will review the plan to ensure it meets the fairness and feasibility requirements before ratifying it. The court may also intervene if the debtor fails to implement the plan or if disputes arise during the implementation phase.

Consequences of Non-compliance with the Restructuring Plan

If the debtor fails to observe the terms of the agreed restructuring plan, creditors can petition the court to terminate the plan and convert the proceedings into liquidation. The court may also hold the debtor’s management personally liable for any losses caused to creditors due to non-compliance with the plan. If a creditor fails to observe the terms of the plan, such as by pursuing individual enforcement actions against the debtor, the court may impose penalties on the creditor and void any actions taken in violation of the plan.

The position of the debtor in reorganisation is as follows.

Continuation of Business Operations

Under the Bankruptcy Law, the debtor is allowed to continue operating its business during the restructuring procedure, subject to the supervision of the bankruptcy trustee appointed by the court. The trustee oversees the debtor’s management and may require the debtor to obtain approval for certain actions that fall outside the ordinary course of business. The primary objective of allowing the debtor to continue its business operations is to maintain the debtor’s going concern value while restructuring its debts and operations to ensure long-term viability.

Restrictions on Use of Assets

The Bankruptcy Law imposes certain restrictions on the debtor’s use of its assets during the restructuring process to safeguard the interests of creditors. The debtor is required to obtain the approval of the bankruptcy trustee for any actions that may have an impact on the value of the bankruptcy estate, such as selling assets; entering into new contracts; or making payments to creditors.

The trustee will review the proposed actions to ensure that they are necessary for the continuation of the debtor’s business and do not unfairly prejudice the rights of creditors. The court may also impose additional restrictions or conditions on the debtor’s use of assets if it deems necessary.

Standards and Process for Obtaining Authorisations

To obtain the bankruptcy trustee’s approval for actions outside the ordinary course of business, the debtor must demonstrate that the proposed action is necessary for the preservation or enhancement of the value of the bankruptcy estate and does not unfairly discriminate against any creditors. The debtor is required to provide the trustee with relevant information and documentation supporting the request.

The trustee will review the request and make a decision based on the best interests of the bankruptcy estate and creditors. If the trustee denies the request, the debtor may appeal to the court for a review of the decision.

Borrowing Money and Seeking Funding

The Bankruptcy Law permits the debtor to borrow money and seek new funding during the restructuring process, subject to the approval of the bankruptcy trustee and the court. This new financing, also known as “debtor-in-possession” (DIP) financing, is granted priority over other unsecured claims and can be secured by unencumbered assets or through a junior lien on already encumbered assets.

The debtor must demonstrate that the new funding is necessary for the continuation of its business operations and the successful implementation of the restructuring plan. The terms of the new financing must be fair and reasonable, and the debtor must provide adequate protection to existing secured creditors whose interests may be affected by the new lien.

The tasks and powers of the trustees in the reorganisation process are as follows.

Appointment and Qualifications

Upon accepting the bankruptcy filing and opening the restructuring proceedings, the court appoints a bankruptcy trustee. The trustee must be a natural person registered with the MOIC and must possess the necessary expertise and qualifications to carry out their duties. The trustee is an impartial party who acts in the best interests of the bankruptcy estate and all stakeholders.

Key Tasks and Responsibilities

The key tasks and responsibilities of the trustee are as follows:

• overseeing the debtor’s business operations and management during the restructuring process;
• verifying and admitting creditors’ claims and maintaining a register of claims;
• preparing an inventory of the debtor’s assets and liabilities;
• investigating the debtor’s financial affairs and transactions to identify any fraudulent or preferential transfers;
• developing and proposing a restructuring plan in consultation with the debtor and creditors;
• convening and presiding over creditors’ meetings to vote on the restructuring plan;
• implementing and supervising the execution of the approved restructuring plan; and
• reporting to the court on the progress of the restructuring process and any issues that arise.

Powers and Authority

The powers and authority of the trustee include the following:

• approving or rejecting the debtor’s actions outside the ordinary course of business;
• accessing and examining the debtor’s books, records, and financial information;
• interviewing the debtor’s management, employees, and other relevant parties to gather information;
• engaging professionals such as attorneys, accountants, and appraisers to assist in the restructuring process;
• selling or disposing of the debtor’s assets with court approval, if necessary for the restructuring;
• pursuing legal actions on behalf of the bankruptcy estate, such as clawing back fraudulent transfers or preferential payments;
• modifying or rejecting executory contracts and unexpired leases to which the debtor is a party; and
• obtaining new financing for the debtor’s business operations with court approval.

The Bankruptcy Law governs the rights and remedies of shareholders and creditors in reorganisation proceedings. The law seeks to balance the interests of the various stakeholders while facilitating the successful restructuring of the debtor’s business as follows.

Pre-restructuring Rights and Remedies

Prior to the commencement of restructuring proceedings, creditors may exercise their contractual rights and remedies against the debtor, such as attachments, retention of title, and set-off. These rights are generally governed by the terms of the contract between the creditor and the debtor, as well as the relevant provisions of the Civil Code and the Law of Commerce.

Intercreditor Agreements

The exercise of creditors’ rights and remedies may be subject to contractual intercreditor agreements, which regulate the relationship between different classes of creditors. These agreements may establish priorities, subordination, and other arrangements among creditors. The Bankruptcy Law does not specifically address intercreditor agreements, but they are generally enforceable to the extent they do not conflict with the Bankruptcy Law’s provisions.

Creditors’ Ability to Disrupt the Process

Secured creditors, unsecured creditors, and shareholders have limited ability to disrupt or block the restructuring process once it has commenced. The Bankruptcy Law provides for a moratorium on individual enforcement actions against the debtor during the restructuring proceedings. However, creditors and shareholders can participate in the process by attending creditors’ meetings, voting on the restructuring plan, and raising objections to the court if they believe their rights are being unfairly prejudiced.

Stay on Enforcement Actions

Upon the commencement of restructuring proceedings, the Bankruptcy Law imposes an automatic stay on all enforcement actions against the debtor. This stay prevents creditors from initiating or continuing any legal proceedings, enforcing judgments, or seizing the debtor’s assets.

The stay remains in effect throughout the restructuring process, unless lifted by the court. The court may grant relief from the stay to a creditor if the debtor’s assets are not necessary for the restructuring or if the creditor’s interests are not adequately protected.

Trading of Claims

The Bankruptcy Law does not explicitly regulate the trading of claims against the debtor during the restructuring process. In practice, claims may be traded subject to the general rules of contract and assignment under Bahraini law. The transfer of a claim would typically be implemented through an assignment agreement between the original creditor and the new creditor.

The debtor and the bankruptcy trustee should be notified of the assignment for it to be effective. The court may require disclosure of claim transfers to ensure transparency and fairness in the restructuring process.

Shareholders’ Rights and Retention of Ownership

The Bankruptcy Law does not specifically address the rights of existing equity owners or shareholders in the restructuring process. In general, shareholders’ rights are subordinate to those of creditors, and they may not receive any distribution under the restructuring plan until all creditor claims have been satisfied.

However, the restructuring plan may provide for shareholders to retain some ownership or other property rights in the reorganised debtor, subject to the approval of creditors and the court. The plan must be fair and equitable to all classes of creditors and shareholders.

Secured Creditors’ Rights

Secured creditors enjoy a higher level of protection in the restructuring process compared to unsecured creditors. They are entitled to priority in the distribution of proceeds from the sale of their collateral.

However, secured creditors’ rights may be subject to modification under the restructuring plan, such as an extension of maturity dates or a reduction in interest rates. Such modifications require the approval of the affected secured creditors’ class and must be fair and equitable.

Unsecured Creditors’ Rights

Unsecured creditors’ rights are subject to the terms of the restructuring plan. They may receive a reduced distribution or have their claims restructured over a longer period. The plan must provide unsecured creditors with at least as much as they would receive in a liquidation scenario.

Unsecured creditors vote on the plan as a separate class and can object to the court if they believe the plan is unfair or discriminatory.

The Bankruptcy Law provides for two main types of liquidation procedures: voluntary liquidation and compulsory liquidation.

Voluntary Liquidation

Formal and material criteria

Voluntary liquidation can be initiated by a solvent debtor who wishes to wind up its business and distribute its assets to creditors and shareholders. The debtor must have sufficient assets to pay off all its debts and liabilities. The decision to initiate voluntary liquidation is typically made by the debtor’s shareholders or owners.

Initiation of the procedure

The debtor’s shareholders or owners can initiate voluntary liquidation by passing a resolution in accordance with the debtor’s constitutional documents (eg, articles of association). The debtor must appoint a liquidator to oversee the liquidation process and notify the MOIC of the commencement of liquidation.

Applicability

Voluntary liquidation applies to both corporate entities and individual merchants registered in Bahrain. The procedure is not available to individuals who are not engaged in commercial activities.

Compulsory Liquidation

Formal and material criteria

Compulsory liquidation is initiated when a debtor is insolvent and unable to pay its debts as they fall due. The debtor must have ceased making payments on debts exceeding BHD5,000 for more than 30 consecutive working days due to financial distress or instability.

Initiation of the procedure

Compulsory liquidation can be initiated by:

• the debtor, who must file for liquidation within 15 days of becoming insolvent;
• any creditor, by filing a petition with the court after notifying the debtor of the debt and the debtor failing to pay within 30 days; and
• the court itself, if it determines that the debtor is insolvent during the course of other proceedings, such as restructuring.

The court will review the petition and supporting evidence and decide whether to accept or reject the liquidation filing. If accepted, the court will appoint a liquidator to manage the liquidation process under the court’s supervision.

Applicability

Compulsory liquidation applies to both corporate entities and individual merchants registered in Bahrain. The procedure can also apply to individuals who are not engaged in commercial activities if they meet the insolvency criteria and have debts exceeding BHD5,000.

Upon the initiation of voluntary or compulsory liquidation proceedings, the debtor ceases to have control over its assets and operations. The debtor’s management and directors are replaced by the appointed liquidator, who assumes control of the debtor’s business and assets. The directors must co-operate with the liquidator and provide all necessary information and documents related to the debtor’s affairs.

In compulsory liquidation, the debtor is prohibited from making any payments or disposing of any assets without the liquidator’s approval. The debtor’s legal capacity is limited to the extent necessary for the liquidation process.

The liquidator acts as an independent officer of the court and owes duties to all stakeholders in the liquidation process, with a focus on maximising the value of the debtor’s assets for the benefit of creditors.

In a compulsory liquidation, the court plays a supervisory role, overseeing the liquidator’s actions and ensuring compliance with the Bankruptcy Law. The court has the power to:

• appoint and remove the liquidator;
• approve the liquidator’s fees and expenses;
• resolve disputes between the liquidator and creditors or other parties; and
• approve the final distribution of assets to creditors.

Moreover, in compulsory liquidation, the court may appoint a creditors’ committee to represent the interests of creditors and supervise the liquidator’s actions. The committee’s role is to:

• consult with the liquidator on matters related to the liquidation;
• review the liquidator’s reports and accounts;
• approve certain actions proposed by the liquidator, such as the sale of significant assets; and
• bring any concerns or issues to the court’s attention.

The initiation of liquidation proceedings does not automatically terminate pre-insolvency agreements, such as contracts and leases. However, the liquidator has the power to disclaim or terminate onerous contracts that are not beneficial to the debtor’s estate. The counterparties to these contracts become unsecured creditors for any damages resulting from the termination.

The liquidation procedure in Bahrain can end in different ways, depending on the availability of funds to pay the creditors.

Sufficient Funds

If there are sufficient funds to pay all the creditors in full, the liquidator will distribute the proceeds according to the statutory order of priority. Once all the creditors have been paid and any remaining assets have been distributed to the shareholders, the liquidator will prepare a final report and account of the liquidation process.

The liquidator will then apply to the court for an order to close the liquidation proceedings. Upon the court’s approval, the liquidation is considered complete, and the debtor entity is dissolved.

Insufficient Funds

If there are insufficient funds to pay all the creditors in full, the liquidator will distribute the available proceeds to the creditors according to the statutory order of priority. Secured creditors have priority over unsecured creditors and will be paid from the proceeds of their collateral. If there are any funds remaining after paying the secured creditors, they will be distributed to the unsecured creditors on a pro-rata basis.

In liquidation, shareholders’ rights are subordinate to those of creditors. Shareholders are not entitled to receive any distribution of the debtor’s assets until all the creditors have been paid in full. If there are any remaining assets after paying the creditors, the shareholders will receive a distribution in proportion to their shareholding. However, in most insolvency cases, shareholders do not receive any distribution, as the debtor’s assets are usually insufficient to fully satisfy the creditors’ claims.

Secured Creditors

Secured creditors have a higher level of protection in liquidation compared to unsecured creditors. They have the right to enforce their security interest and realise their collateral to satisfy their claims. Pre-insolvency attachments, retention of title, and set-off rights are generally respected in liquidation, subject to certain limitations.

Secured creditors are not subject to the automatic stay on enforcement actions that applies to unsecured creditors. However, the court may impose a temporary stay on the enforcement of security interests if it is necessary for the orderly conduct of the liquidation process or to protect the interests of other creditors.

Unsecured Creditors

Unsecured creditors’ rights are more limited in liquidation. They do not have the benefit of any security interest and will only receive a distribution from the debtor’s remaining assets after the secured creditors have been paid.

Pre-insolvency attachments, retention of title, and set-off rights may be subject to challenges by the liquidator if they were obtained in the period leading up to the insolvency and are deemed to be preferential or detrimental to the interests of other creditors.

Unsecured creditors are subject to the automatic stay on enforcement actions upon the commencement of liquidation proceedings. They cannot initiate or continue any legal actions against the debtor or its assets without the permission of the court.

Unsecured creditors can participate in the liquidation process by submitting their claims to the liquidator for verification and admission. They may also form a creditors’ committee to represent their interests and supervise the liquidator’s actions. However, unsecured creditors have limited ability to disrupt or block the liquidation process, as long as the liquidator acts in accordance with the law and the court’s orders.

The primary source of international insolvency law in Bahrain is Chapter Five of the Bankruptcy Law (Law No 22 of 2018), which provides a comprehensive framework for dealing with cross-border insolvency cases, promoting co-operation between courts and competent authorities in Bahrain and foreign states, and protecting the interests of creditors and other stakeholders.

The Bankruptcy Law incorporates many provisions that might be consistent with the UNCITRAL Model Law on Cross-Border Insolvency, although Bahrain has not formally adopted it. The Bankruptcy Law also takes into account Bahrain’s international obligations arising from treaties or agreements with other states.

The Bankruptcy Law provides criteria for determining jurisdiction in cross-border insolvency cases. Bahraini courts have jurisdiction to recognise foreign proceedings and provide assistance to foreign representatives in connection with foreign proceedings.

The Bankruptcy Law distinguishes between foreign main proceedings and foreign non-main proceedings. A foreign main proceeding is one that takes place in the state where the debtor has the centre of its main interests, while a foreign non-main proceeding is one that takes place in a state where the debtor has an establishment.

The Bankruptcy Law provides guidance on the applicable law in cross-border insolvency matters. In general, Bahraini law applies to proceedings under the Bankruptcy Law. However, the Bankruptcy Law allows for co-operation and co-ordination with foreign courts and representatives and the recognition of foreign proceedings.

When recognising a foreign proceeding, Bahraini courts may grant relief consistent with the Bankruptcy Law, including staying proceedings, suspending the right to transfer or dispose of the debtor's assets, and providing for the examination of witnesses and the taking of evidence.

The Bankruptcy Law provides a mechanism for the recognition of foreign insolvency proceedings in Bahrain. A foreign representative may apply directly to the court for recognition of the foreign proceeding in which they have been appointed.

The court will recognise the foreign proceeding if it meets the requirements set out in Article 174 of the Bankruptcy Law, including that the foreign proceeding is a proceeding within the meaning of the Bankruptcy Law, the foreign representative is properly appointed, and the application meets the procedural requirements.

Upon recognition of a foreign main proceeding, certain automatic effects come into play, such as a stay on the commencement or continuation of individual actions against the debtor and a suspension of the right to transfer or dispose of the debtor’s assets.

The Bankruptcy Law does not specifically address the enforceability of foreign judgments against the debtor, but it provides for co-operation and assistance to foreign representatives and courts.

The Bankruptcy Law promotes co-operation and co-ordination between courts and officeholders in cross-border insolvency cases. Bahraini courts are required to co-operate to the maximum extent possible with foreign courts and representatives, either directly or through a bankruptcy administrator.

The Bankruptcy Law provides for various forms of co-operation, including the appointment of a person to act at the direction of the court; communication of information; co-ordination of the administration and supervision of the debtor’s assets; approval of agreements concerning the co-ordination of proceedings; and co-ordination of concurrent proceedings.

The Bankruptcy Law provides that foreign creditors have the same rights as domestic creditors regarding the commencement of and participation in proceedings under the Bankruptcy Law. The Bankruptcy Law does not discriminate against foreign creditors in terms of the ranking of their claims, except to the extent that foreign claims may be ranked lower than general unsecured claims if an equivalent domestic claim would also be ranked lower.

The Bankruptcy Law also requires that foreign creditors be notified of the commencement of proceedings in Bahrain and provided with information on filing claims and other relevant matters.

The duties of directors are primarily governed by the Commercial Companies Law and the Bankruptcy Law. These laws set out the general duties and responsibilities of directors, which apply regardless of the company’s financial situation.

Directors have a fiduciary duty to act in good faith and in the best interests of the company. They must exercise reasonable care, skill, and diligence in the performance of their duties. When the company is financially healthy, directors should take into account the interests of shareholders, employees, and other stakeholders, as well as the long-term sustainability of the company.

In the event of financial distress, directors’ duties shift towards protecting the interests of creditors. The Bankruptcy Law imposes specific obligations on directors when the company becomes insolvent or is likely to become insolvent. These obligations include:

• filing for bankruptcy within 30 days of the company becoming unable to pay its debts as they fall due;
• co-operating with the bankruptcy trustee and providing all necessary information and documents related to the company’s affairs;
• not concealing, destroying, or altering any of the company’s books or records; and
• not disposing of the company’s assets or making payments to creditors outside the ordinary course of business, unless authorised by the court or the bankruptcy trustee.

Directors must also refrain from taking any actions that could worsen the company’s financial situation or prejudice the interests of creditors. The moment at which directors’ duties shift towards protecting creditors’ interests is when the company becomes insolvent or is likely to become insolvent.

Under Bahraini law, directors can be held personally liable for losses suffered by the company, shareholders, or third parties as a result of their wrongful acts or omissions in the performance of their duties. The Commercial Companies Law and the Bankruptcy Law provide grounds for holding directors personally liable.

The duties and personal liability of officers, such as supervisory board members, are similar to those of directors. Officers have a fiduciary duty to act in good faith and in the best interests of the company. They must exercise reasonable care, skill, and diligence in the performance of their duties.

In addition to personal liability, directors and officers may face other consequences for their actions or omissions in the context of financial distress or insolvency. These are as follows.

• civil penalties;
• criminal liability; and
• disqualification.

Under the Bankruptcy Law, certain transactions or transfers made by the debtor prior to the commencement of restructuring or insolvency proceedings can be set aside or annulled if they are deemed to be fraudulent or preferential. The following conditions apply.

• Judicial authority: the court must be involved in setting aside or annulling a transaction or transfer. The bankruptcy trustee or the creditors must file an application with the court to challenge the transaction or transfer.
• Contractual obligations: transactions that the debtor was contractually obliged to make can still be set aside or annulled if they are found to be fraudulent or preferential. The mere existence of a contractual obligation does not protect the transaction from being challenged.
• Identity of the other party: the identity of the other party to the transaction or transfer matters. Transactions with related parties, such as directors, officers, or shareholders of the company, are subject to greater scrutiny and are more likely to be set aside or annulled if they are found to be detrimental to the interests of creditors.
• Look-back period: the Bankruptcy Law provides for a look-back period of two years prior to the date of the bankruptcy judgment. Transactions or transfers made within this period can be challenged if they are found to be fraudulent or preferential.

Fraudulent transactions are those made by the debtor with the intention to defraud creditors or to conceal assets from them. Preferential transactions are those that give an advantage to certain creditors over others, such as paying one creditor while others remain unpaid or granting security to a creditor for a pre-existing unsecured debt.

Under the Bankruptcy Law, both the bankruptcy trustee and individual creditors have the right to initiate claims to set aside or annul fraudulent or preferential transactions or transfers.

Bankruptcy Trustee

The bankruptcy trustee has the primary responsibility to investigate the debtor’s transactions and to identify any that may be subject to challenge. The trustee can file an application with the court to set aside or annul a transaction or transfer.

Individual Creditors

Individual creditors may also file an application with the court to set aside or annul a transaction or transfer if they believe it to be fraudulent or preferential. However, if the bankruptcy trustee decides not to pursue a claim, the creditors must obtain the court’s permission to proceed with the claim themselves.

Claims to set aside or annul transactions or transfers can be brought in both restructuring and insolvency proceedings. In restructuring proceedings, such claims can be used to maximise the assets available for the restructuring plan. In insolvency proceedings, the claims can be used to increase the pool of assets available for distribution to creditors.

If a claim to set aside or annul a transaction or transfer is successful, the court will order the reversal of the transaction or transfer. The specific result depends on the nature of the transaction or transfer.

Transfer of Property

If the challenged transaction involves the transfer of property, the property will be returned to the debtor’s estate. The ownership of the property will not revert to the individual who brought the claim, but rather will be used to satisfy the claims of creditors in accordance with the priority established by law.

Payment of Money

If the challenged transaction involves the payment of money, the court will order the recipient to return the money to the debtor’s estate. The returned funds will be used to satisfy the claims of creditors in accordance with the priority established by law.