Kuwait’s new bankruptcy law gives hope to struggling businesses

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By Nawara Fattahova

KUWAIT: Kuwait’s new bankruptcy law organizes the issue of corporate bankruptcy and debt alongside globally competitive economies. The aim is to provide a legal basis for modernizing the economy, attracting more foreign investment and developing the private sector. But what exactly does the new law say? To answer this question, the Kuwait Times spoke with lawyers and attended seminars to learn about the specific implications of the new law.

No prison sentence for debtors
First, the new bankruptcy law no. 71/2020 abolishes prison sentences for debtors. This has long been a controversial issue in Kuwait and the region. Small and medium-sized business owners often face failure and prison if their business collapses. This has arguably been a key factor in limiting the growth of Kuwait’s private sector.

The new bankruptcy law removed arrest or imprisonment as penalties for debtors and those who file for bankruptcy. In a statement, the commerce ministry noted in October that the abolition of imprisonment for civil debts came after extensive studies. The ministry explained that the harm caused by imprisonment was much greater than its use as punishment, especially since the sentences were usually short and the imprisonment of the debtor interfered with his ability to repay the debt. Helping businesses manage and emerge from failure is a modern approach that focuses on the economic implications of the business.

Specific mechanisms
The new law provides for the creation of a bankruptcy court, a preventive settlement and financial restructuring mechanism to help companies avoid insolvency, and working with creditors to reach agreements satisfactory to all parties.

The new law establishes guidelines for the implementation of bankruptcy trustees who can oversee a bankruptcy filing, specialized bankruptcy investigators who will work with the bankruptcy court and trustees to secure the rights of all parties involved and prevent abuse of the system. A separate bankruptcy commission, established under the aegis of the Ministry of Trade and Industry, will also be set up to oversee bankruptcy filings by public entities.

“The law streamlines and modernizes bankruptcy arrangements,” noted Philip Kotsis, partner and co-head of the Kuwait office at Al Tamimi & Co, speaking at a seminar on the new law organized by the ‘American Business Council-AmCham Kuwait in collaboration with the German Business Council Kuwait and Al Tamimi & Company.

“There is a clear desire to see businesses attempting to get out of these distress situations, and there is an attempt to destigmatize business failure. This will hopefully have a positive impact on various aspects of the corporate culture in Kuwait and help investors outside Kuwait to see that a structure has been put in place which could attract more foreign investors. Kotsis said.

The enforceability of court decisions and actions to be taken – including the initiation of liquidation proceedings, notification of the parties involved, disclosure of decisions to the Kuwait Stock Exchange (if the company is listed) and the investigation of debtor to publicly disclose bankruptcy – are all governed by the new law.

Lawyer Meshari Al-Ayada noted that the new bankruptcy law fills important loopholes in the old business law, especially with regard to fraud, embezzlement and other financial mischief. Penalties, including sentences of up to five years’ imprisonment, remain applicable to those convicted of financial fraud or other financial crimes.

At the same time, the law provides a way forward for debtors looking to get back on their feet financially. The law allows debtors to launch new projects, obtain financing, continue to work, serve in public life and even stand for election. “The creation of a special bankruptcy court will add expertise in bankruptcy litigation for those who work with this law. In addition, the law made the restructuring process shorter and faster, ”Ayada told the Kuwait Times.

Wrinkles remain
However, some wrinkles remain and may take time to dissipate. “The new law limits bankruptcy control to only auditors registered with the Capital Markets Authority. I consider this a prejudice against small businesses because [most of] auditors registered with the Capital Markets Authority deal with large companies for large sums that small companies cannot afford. It will be clear after the law is applied, ”Ayada explained.

Published in the official gazette – Kuwait Al Youm – on October 25, the new bankruptcy law is now in force and the court that will begin to review the bankruptcy proceedings is in the early stages of its implementation. The 308-article law will place Kuwait among the leading countries economically in the coming period, the ministry said.


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