Bahrain

For entities licensed by the Central Bank of Bahrain (CBB), the primary corporate insolvency procedures are administration and liquidation. Administration, governed by Chapter 2 of Part 10 of the CBBFIL, can involve the CBB appointing an external administrator. The administrator’s goal is to either return the licensee’s business to its management or petition for its liquidation.

Liquidation, under Chapter 3 of Part 10 of the CBBFIL, is initiated by a petition from the administrator, licensee, or creditors to the court. The court appoints a liquidator to collect and realise the licensee’s assets, distribute them to creditors, and dissolve the licensee.

For other corporates, the Bankruptcy Law applies, with reorganisation and liquidation being the main procedures. Reorganisation, governed by Chapter 3 of the Bankruptcy Law, allows a debtor to restructure its business to avoid liquidation. The process is overseen by a trustee in bankruptcy and the court, but the debtor manages the business. The aim is to create a viable plan to improve the business and exit insolvency. Creditors vote on the plan, but the court has final discretion.

Liquidation, under Chapter 4 of the Bankruptcy Law, aims to protect the value of the debtor’s assets for creditors. The liquidation trustee manages and controls the debtor’s assets under court supervision, realises the assets, distributes them to creditors, and dissolves the debtor.

Under the Bankruptcy Law, debtors have several options to obtain protection from their creditors pending or during a restructuring process.

Stay of proceedings (Article 51). Upon court approval of ‘bankruptcy procedures’ (which includes reorganisation), all legal actions and enforcement proceedings against the debtor or the bankruptcy estate are automatically stayed. This stay remains until a reorganisation plan is implemented, liquidation is completed, or the property is excluded from the bankruptcy estate. Exceptions are outlined in Article 52.

Under the CBBFIL, debtors have several options to obtain protection from their creditors pending or during a restructuring process.

Administration (Articles 136 and 142). The CBB can assume the position of administrator or appoint an external administrator if a licensee becomes or is likely to become insolvent. The administrator can continue or suspend operations, limit financial obligations, and declare a debt moratorium. Legal actions against the licensee or its property need the administrator’s approval.

Moratorium on debts (Article 140(b)(1)). The administrator can declare a moratorium on the licensee’s debts, providing temporary relief from creditor claims.

Suspension of proceedings (Article 142). During administration, enforcement actions against the licensee’s property and legal proceedings are suspended, except with the administrator’s approval or for executing a court judgment issued before administration.

3.1 What are the conditions to entry?

Under Article 17 of the Bankruptcy Law, reorganisation will be accepted by the court “where it will lead to a settlement more convenient to the creditors than liquidation or there are economic reasons for the Debtor to resume his business.”

The CBBFIL does not contain provisions for debtor-in-possession restructuring regimes, as the CBB may only appoint an external administrator under Article 137 of the CBBFIL.

3.2 Can creditor claims be compromised “within a class”?

The Bankruptcy Law allows creditors to be classified into categories with similar rights. Each category can be treated differently under a reorganisation plan. Claims within a class can be compromised if the plan is approved by the majority of creditors and ratified by the court. The plan must ensure creditors receive at least as much as in liquidation.

Under the CBBFIL, creditor claims can be compromised within a class. Article 140(b)(2) allows the administrator to discharge obligations to certain creditors if it benefits the licensee.

3.3 Is there a “cross-class cramdown”?

Cross-class cramdown is not addressed in the Bankruptcy Law or the CBBFIL.

However, under Articles 114-F, 115-B, and 121-D of the Bankruptcy Law, the court can compromise a class of creditors without their consent if the plan meets legal requirements and protects all parties’ interests.

Article 140(b)(2) of the CBBFIL permits the administrator to discharge obligations to certain creditors if it benefits the licensee.

3.4 Can shareholder claims be compromised?

Under the Bankruptcy Law, shareholder claims can be compromised in a reorganisation plan, provided it has the necessary support from creditors and equity holders.

Under Article 140(b)(6) of the CBBFIL, the powers granted to an administrator/external administrator may indirectly affect shareholder claims, “without prejudice to the provision stated in paragraph (a) of the preceding article, the administrator may carry out the following: … Undertake any necessary actions in the interest of the licensee and for the protection of the interests of its customers and creditors.” Therefore, the administrator is authorised to act in the best interests of the licensee and its creditors. While Article 140(b)(6) does not explicitly mention shareholders, the administrator’s ability to nullify agreements and discharge obligations could lead to the restructuring of liabilities, potentially compromising shareholder interests. Shareholder claims are typically subordinate to creditor claims in insolvency situations. The implication is that shareholder claims can be compromised if it benefits the licensee’s recovery and creditor satisfaction. Any such actions would be subject to the oversight and approval of the competent court.

3.5 Can secured creditors’ claims be compromised? Are deficiency claims treated differently?

The Bankruptcy Law allows secured creditors’ claims to be compromised in a reorganisation plan, which must be approved by creditors and ratified by the court. Deficiency claims, the unsecured portion of a secured creditor’s claim, are treated as unsecured.

Under the CBBFIL, secured creditors’ claims can be compromised, and deficiency claims treated differently. Article 140(b)(2) allows the administrator to discharge obligations to certain creditors if it benefits the licensee. Article 142 restricts enforcement actions against the licensee’s property during administration without the administrator’s approval.

3.6 Can creditors propose competing plans?

Article 107 of the Bankruptcy Law allows creditors to propose competing reorganisation plans if specific conditions are met, including approval from the creditors’ committee or creditors holding one-third of claims, court approval, and a lack of progress by the reorganisation trustee.

The CBBFIL does not explicitly allow creditors to propose competing plans during administration or liquidation.

3.7 What level of court or other third-party supervision is there of the process(es)?

The Bahrain High Civil Court oversees all bankruptcy proceedings under the Bankruptcy Law, including reorganisation and liquidation. It approves proceedings, supervises trustees, orders interim measures, ratifies plans, and can convert reorganisation to liquidation. Court-appointed roles include the bankruptcy trustee, reorganisation trustee, and creditors’ committee.

Under the CBBFIL, court supervision is significant in administration and liquidation. The administrator and liquidator need court approval for significant actions. The CBB oversees the external administrator and has the power to intervene in liquidations. The liquidator must report progress to the court and the CBB, and creditors can challenge decisions in court.

4.1 What is the applicable law that provides for clawback and/or antecedent transaction claims?

Clawback provisions appear at Articles 72 to 77 of the Bankruptcy Law and Articles 140, 148, 158 and 159 of the CBBFIL.

4.2 What are the relevant “look-back” periods for claims?

The authors’ view is that Article 76 intends to prescribe a “look-back” period of one year for “insiders of the debtor” and six months otherwise.

Under the CBBFIL, the timeframe is either two years from the date the licensee was placed under administration or liquidation, or six months if the licensee was placed under liquidation without prior administration.

4.3 Who can pursue the claims?

Under the Bankruptcy Law, the trustee can pursue an annulment claim. If the trustee refuses, an interested party can ask the court to allow the creditors’ committee or a creditor to submit the claim on behalf of the trustee.

Under the CBBFIL, either the administrator or the liquidator can pursue a clawback claim.

4.4 What remedies are available and how do they operate in practice?

Transactions and obligations may be annulled or declared void, essentially putting the bankruptcy/liquidation estate in the position that it would have been in had the transaction not occurred.

A counterparty acting in good faith when entering into a transaction that is later annulled/voided will be entitled to compensation.

4.5 What defences are available?

Defences may include rebuttals of the grounds on which transactions may be nullified, i.e. that the transaction was in good faith, or it was not intended to defraud or otherwise prejudice creditors, or it was not in preference to one or more creditors over all of the others.

4.6 Is there a general right of action in respect of transactions defrauding creditors or Actio Pauliana claims?

The rights of action in respect of transactions defrauding creditors are set out above. No other such specific rights exist under either the CBBFIL or the Bankruptcy Law.

General rights of action exist to creditors/other interested parties under the Bahrain Civil Code (Legislative Decree No. 19 of 2001) (“Civil Code”), for example, liability for harmful acts under Article 158, however, as insolvency proceedings will usually attract a moratorium or stay of other proceedings, if such action is proposed it should be structured so as to benefit the bankruptcy/liquidation estate in order to have the best chance of circumventing the stay.

4.7 Who can pursue the claims?

The bankruptcy/liquidation trustee or administrator/liquidator can pursue the claims, as the case may be. Creditors/other interested parties may also be able to claim, subject to any moratorium/stay of proceedings.

4.8 What remedies are available and how do they operate in practice?

As above, the remedies will generally be annulment/voiding of transactions; creditor/interested party claims could also include restitution and/or damages.

4.9 What defences are available?

As above, defences may include rebuttals of the grounds on which transactions may be nullified, i.e. that the transaction was in good faith, or it was not intended to defraud or otherwise prejudice creditors.

5.1 What are the duties of directors and managers?

The key duties of directors and managers typically include:

• Acting within the powers conferred upon them by the company’s articles of association, as well as relevant laws and regulations.
• Exercising independent judgement.
• Exercising reasonable skill, care, and diligence.
• Avoiding conflict of interest. They must disclose any potential or actual conflicts to the board.
• Disclosing any personal interest in proposed transactions and arrangements to the other directors.
• An implied duty of promoting the success of the company, taking into account the interests of employees, shareholders, and other stakeholders.

5.2 What claims can be brought against directors and managers arising from breaches of those duties?

The company can bring a claim against directors and managers for breach of contract or breach of duty. Directors and managers may incur liability if they have acted in bad faith which resulted in the company being insolvent.

5.3 Who can pursue the claims?

Under Article 185 of the Commercial Companies Law (Legislative Decree No. 21 of 2001) (“Commercial Companies Law”), directors and managers of a company are liable to the company, shareholders and third parties for wrongful actions. A civil claim for loss and damage caused by an insolvent company’s directors or managers may also be available to affected parties under, for example, Article 158 of the Civil Code.

Additionally, Article 187(b) of the Commercial Companies Law allows a shareholder to sue the Board of Directors if the company neglects to initiate a claim that could harm the shareholder’s interests pursuant to the conditions set out therein.

5.4 Do directors have, at any time, a strict obligation to file for insolvency and, if so, when does that arise?

The Bankruptcy Law does not impose any express requirement on directors or managers to file for insolvency. There may be a risk of wrongful trading if the directors or managers continue to trade insolvently (please see Question 5.5, below).

Article 58 of the CBBFIL requires licensees, and by extension their directors, to notify the CBB immediately of any matter that may affect the licensees’ financial position, and the CBB would then consider whether to place a licensee into an insolvency process.

5.5 Can directors and managers be found liable for the increase in sums owed to creditors after a company becomes insolvent?

As explained at Question 5.3 above, directors and managers of a company are liable to the company, shareholders and third parties for wrongful actions and general civil claims for loss and damage may also be available. Directors and managers can, therefore, be found liable for the increase in sums owed to creditors after a company becomes insolvent. In addition, both the Bankruptcy Law and the CBBFIL impose criminal liability upon directors and managers who are liable through their wrongful actions for an increase in liabilities following the commencement of insolvency procedures.

5.6 In what other circumstances can directors and managers be found liable directly to creditors of the company?

See Question 5.5, above.

6.1 What information can be obtained by office holders in respect of a debtor’s property, information and affairs?

Powers of the trustee are set out at Article 44 of the Bankruptcy Law. These include:

• Access to premises and records: trustees have the authority to access the debtor’s commercial premises, books, correspondence, and other documents or data.
• Meetings and administrative bodies: trustees are entitled to participate in meetings of the debtor’s administrative bodies and must be notified in advance.
• Financial transactions and agreements: trustees can obtain information on any financial transaction, agreement, or matter related to the debtor’s financial status or business, including bank account details, notwithstanding confidentiality provisions.
• Legal actions and demands: trustees have the right to submit demands to the court for various protective measures, including the stay of cases and annulment of certain transactions.

6.2 How is that information obtained in practice?

Information is obtained by corresponding with the relevant parties, relying on the liquidator’s powers or via a court process.

6.3 Can the court assist in obtaining that information and how does that work in practice?

The court has the authority to direct parties or relevant authorities to disclose the necessary information during the proceedings.

7.1 Is the UNCITRAL Model Law on Cross-Border Insolvency adopted?

Chapter 5 of the Bankruptcy Law is based on the UNCITRAL Model Law on Cross-Border Insolvency.

7.2 Is it possible to recognise office holders from other jurisdictions?

Recognition of a foreign office holder is arguably implied, pursuant to recognition of a ‘foreign proceeding’, pursuant to section III of the Bankruptcy Law.

7.3 What is the process and what are the conditions for recognition?

The conditions for recognition are prescribed by Article 172 of the Bankruptcy Law, which include that the ‘foreign proceeding’ and the ‘foreign representative’ must be considered by the court to be as such in accordance with the defined terms prescribed by Article 160 and that the application must be accompanied by the documents identified at Article 172(b).

Recognition should be decided quickly and can be modified or terminated if the original grounds for recognition were absent or have ceased to exist, as per Articles 172, 173, and 175.

7.4 What information can be obtained by office holders in respect of a debtor’s property, information and affairs?

The foreign office holder can obtain similar information about the debtor’s property, information and affairs as a court-recognised office holder. Specifically, Articles 178(4) and (5) of the Bankruptcy Law provide that the court may grant relief including, “providing for the examination of witnesses, the taking of evidence or the delivery of information concerning the debtor’s assets, affairs, rights, obligations or liabilities” and, “requiring any person who possesses information or documents in connection with the assets of the debtor, his affairs, rights, or obligations, to provide the court with said information or documents.”

7.5 What steps can a foreign office holder take to recover assets belonging to the debtor?

Upon recognition of a foreign proceeding, the court may grant relief to protect the debtor’s assets or creditors’ interests, as requested by the foreign representative. This relief can include suspending asset transactions, examining witnesses, or obtaining financial information about the debtor. The court may also allow the foreign representative or another appointed person to manage or sell the debtor’s assets within Bahrain, extend existing relief, or provide other legal relief.

When a foreign proceeding is recognised, the foreign representative can ask the court to authorise the distribution of the debtor’s assets in Bahrain. This is contingent on the court ensuring that the rights of local creditors are adequately protected.

7.6 Is a foreign office holder able to bring clawback claims or fraudulent transaction claims?

Upon recognition of a foreign proceeding, a foreign office holder is entrusted with the administration and realisation of a debtor’s assets and will, therefore, have the power to bring proceedings to protect or recover assets that should fall within the debtor’s bankruptcy estate. Article 180(a) provides: “[u]pon recognition of Foreign Proceedings, the Foreign Representative shall have the capacity to apply for annulment or non-enforcement of acts detrimental to the creditors, as available to the Bankruptcy Trustee under the provisions of this Law.”

In Bahrain, bankruptcy trustees must be registered on the experts’ roll, meet certain qualifications, and have relevant experience. Ethical conduct is crucial, with rules requiring neutrality, independence, and avoidance of conflicts of interest. The court oversees these standards and can dismiss trustees for non-compliance, ensuring the integrity of the insolvency process and protecting all parties involved.

8.1 Can a foreign office holder take appointments?

The Bankruptcy Law requires bankruptcy trustees to be registered on the experts’ roll as a reorganisation trustee or liquidation trustee (Article 33(e)(3)), implying that foreign office holders must meet these registration requirements to take appointments.

8.2 What are the conditions for becoming an office holder?

To become a bankruptcy trustee, the following conditions must be met:

• No conflict of interest. The individual must not be a debtor’s ‘insider’ or have had a professional or financial relationship with the debtor within the two years prior to the bankruptcy proceedings.
• Registration. The individual must be registered on the experts roll as a reorganisation trustee or liquidation trustee.
• Notification. The court must notify the bankruptcy trustee of their appointment within three days of the decision.

These conditions ensure impartiality, expertise, and the integrity of the insolvency process (Article 33(e)).

8.3 What are the main rules of professional conduct?

The professional conduct rules for bankruptcy trustees in Bahrain are detailed in Chapter 1, section 3 of the Bankruptcy Law, ensuring integrity and efficiency in bankruptcy proceedings, and include that trustees must act honourably, faithfully, and diligently in the best interests of the bankruptcy estate and must meet conditions such as legal capacity, relevant qualifications, a clean criminal record, and not holding certain public offices.