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Many of the major structural reforms that the Bahraini startup in the kingdom’s ecosystem could hope for are today up and running. 

That includes the new bankruptcy law which came into effect in Dec 2018 and has since established itself as a modern toolkit to make the regulatory paradigm more conducive for businesses of all types and sizes. 

If you are a Bahraini startup founder eager to tap into the kingdom’s thriving startup ecosystem with your new million-dollar idea, it would perhaps be worthwhile to familiarize yourself with all the structural reforms Bahrain has recently witnessed. Be it the modified Limited Liability Partnership Laws, or of course, the revised Bankruptcy Law, which is precisely what this article will be focusing on.

Bahrain’s Bankruptcy Law: A revolutionary legislation

The seed of Bahrain’s new bankruptcy law was planted nearly a decade back in the aftermath of the financial crisis. The authorities came to the realization that the then-existing laws overseeing bankruptcy and insolvency were not quite in tune with modern restructuring efforts.

With that realization, the government and all the stakeholders prepared the framework for a new bankruptcy law that would serve on dual fronts. On one hand, this new law was aimed at ensuring certainty and protection for all business ventures — as well as startups. On top of that, it was also fine-tuned to have a special restructuring component for enterprises with heavy debt. 

Thus came the new Bankruptcy Law which, among other perks, also facilitates cross-border insolvency.

Startups are also at the heart of this new law as it has been designed to encourage entrepreneurship and innovation by introducing a reliable framework that decriminalizes failure while simultaneously boosting transparency and impartiality. 

Who is it for?

In short, any startup up or commercial company not licensed by the Central Bank of Bahrain (CBB) comes under the ambit of Bahrain’s 2018 Bankruptcy Law. In addition, the law also covers all “natural person traders” whose operations and head office are currently based in Bahrain.

CBB-licensed entities such as banks and financial services providers are excluded because they are regulated by the CBB and the Financial Institutions Law of 2006. 

Bahrain doesn’t currently have any legislation to address issues pertaining to personal bankruptcy. That means the new bankruptcy law doesn’t cover personal, family and consumer debts of the debtor.

The law also excludes all financial derivatives contracts that come under the ambit of the Netting Regulations.

Scopes and features

Either the debtor or its creditors are allowed to kick off proceedings if the debtor has failed to pay off debts for a period of 30 days. Alternatively, they can also apply in advance in case they’re incapable of paying off the debt within the stipulated due date. 

The petitioner may also include evidence to prove that the net financial obligations of the debtor exceed the net value of their assets.

Once it is proven beyond any reasonable doubt that the debtor’s financial obligations come under the ambit of the bankruptcy law, the court asks for a debtor-in-possession framework to be deployed. 

Under this framework, the company that files for bankruptcy gets to retain its management and administrative units. However, the court also appoints an independent Bankruptcy Trustee to help out the debtor with recommendations and action plans. 

The Bankruptcy Trustee also helps the debtor to work on a reorganization plan and furnishes a detailed inventory of its assets.

Moratorium period

This is an important feature of the new bankruptcy law given that the moratorium comes into effect once the bankruptcy proceedings begin and it gives the debtor a breathing period of 120 days so long as they meet certain criteria. 

For example, the creditor must be secured and the debtor has to utilize the moratorium to reorganize its estates and continue trade, where possible. 

The court may choose to extend the moratorium period at the recommendation of the Bankruptcy Trustee. However, for that to happen, the creditor must first give their explicit consent and the court will have to be convinced that the extension will further improve the value of the debtor’s assets.

Sale of property and DIP financing

The court will approve the sale of debtor’s assets if it is proved beyond any doubt that the sale will serve in the best interest of all stakeholders. There are several additional criteria to be fulfilled, though. 

For example, the secured creditors must give their consent to the sale and the proceeds from the sale must not be lower than the fair market value and the secured debt. Also, the sale can only be approved if it is part of a reorganization plan.

As for DIP financing, the Bahraini bankruptcy law seems to have taken a page straight out of Chapter 11 in the US that enables the debtor to raise credit with the court’s prior approval during bankruptcy.

This gives the company some more breathing room by allowing it to continue trade. However, the court has to be convinced that the credit is essential for ensuring proper administration of the bankrupt estate. 

The clear advantage of DIP financing is the ability to provide priority credit. The advantage of DIP financing is that while it provides priority credit to the debtor, the secured creditors can also have their say on the matter in addition to being ensured security per the DIP financing protocols.

So that was in short the perks of Bahrain’s new Bankruptcy Law. As you can see, the law has multiple dimensions to it to prevent commercial failure from being the end of the road for both the debtor and its creditors. 

Of course, the bankruptcy law is vast in its scope and we may have missed out on certain specifics that you probably wanted to know. So if you have any confusion or further query, do not hesitate to reach out to us on our social media channels over at Instagram, Twitter, Facebook, or LinkedIn