Restructuring Procedures Under the New Kuwaiti Bankruptcy Law No. 71 of 2020

Dr. Fahad Al-Shammari, Attorney at Law

Associate Professor of Commercial Law, Kuwait University

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Bankruptcy laws around the world have evolved in their approach to addressing the financial distress of debtors, whether individuals or companies. This evolution aims to rescue businesses in general through "corporate rescue," taking into account the debtor's good faith and striving to help them recover from their hardship rather than liquidating their businesses. A successful economy requires giving debtors facing financial difficulties a genuine opportunity and a glimmer of hope to resume their business activities through restructuring. This allows them to fulfill their intended role: contributing to economic growth within the community.

In keeping with this evolution; The Kuwaiti legislature enacted the new bankruptcy law with a new and progressive philosophy, adopting a set of legal and economic theories that focus on restructuring the business of a debtor whose financial position is precarious, rather than simply facilitating the liquidation of their commercial activity. The Kuwaiti legislature reached a point of conviction regarding the necessity of a new legislative shift governing bankruptcy and restructuring processes. This shift aims to serve the economic transformation that Kuwait is currently undergoing, by differentiating between struggling businesses that possess the financial capacity and resources to continue operating, and those that are financially distressed, lack the resources to continue, and are considered hopeless, destined for bankruptcy.

The problem with the new bankruptcy law lies in the fact that the restructuring mechanism under this law is subject to numerous lengthy procedures and restrictions that may hinder ensuring a fair opportunity for the financially distressed debtor to restructure in a way that considers the interests of both the debtor and creditors. To begin with, examining the application process to the bankruptcy court under the new Kuwaiti bankruptcy law, we find that Article 20, which addresses the conditions for submitting applications to initiate preventive settlement and restructuring proceedings, stipulates that the debtor must submit several pieces of information. The most important of these are a report containing the debtor's cash flow projections and profit and loss forecasts for the year following the application, a detailed statement of the debtor's assets and the approximate value of each asset at the date of application, a statement of any guarantees or third-party rights associated with those assets, and a statement of whether the debtor—for whom the preventive settlement or restructuring application is being submitted—will require financing during the period from the date of the decision to initiate restructuring proceedings.

A drawback of this system is that the debtor may not be able to provide this information until the bankruptcy court rules on the restructuring request. For example, how can the debtor be certain of the exact amount of financing needed to approve the restructuring plan, the total estimated value of the financing required during this period, its purposes, duration, guarantees, and its impact on the restructuring plan and the rights of secured creditors, especially since the list of creditors is not finalized when the restructuring procedure is initiated?

The problem in the new Kuwaiti bankruptcy law is compounded even after the restructuring process begins, specifically regarding the timeframe within which the debtor must submit the restructuring plan. Article 117 of the new Kuwaiti bankruptcy law stipulates that the debtor must submit the restructuring plan within three months of the approval of the restructuring request. This period may be extended for a similar duration upon the debtor's request, or for more than six months if approved by the majority stipulated by law.

One of the most significant legal issues under the new Kuwaiti bankruptcy law is the limited authority it grants the bankruptcy judge to approve a restructuring plan if creditors reject it. The new law stipulates that the debtor must submit a request to the bankruptcy judge seeking approval of the rejected plan. This means the judge cannot automatically approve a restructuring plan that has been rejected by creditors. This weakens the primary objective of restructuring, which is to give the debtor a genuine opportunity to restructure their business. The debtor may refrain from requesting approval after the creditors reject the plan for fear of further creditor resistance during its implementation.

To circumvent this problem, a rule known as "Cram Down" emerged in the United States, allowing the bankruptcy court to approve a restructuring plan despite creditor objections. This rule is justified by the argument that it primarily aims to prevent creditors from being obstinate or arbitrary in approving the restructuring plan. This is because the court's authority to approve the plan is not absolute but rather restricted by specific conditions and controls. The most important of these is that the debtor must successfully demonstrate the efficiency of the submitted plan in light of the debt list, and prove that the submitted plan is fair and equitable to all creditors, without any discrimination between creditors, especially those with priority rights, unless there is a justifiable reason for such discrimination.

In a parallel context, the new Kuwaiti bankruptcy law has restricted the debtor's ability to undertake mixed pre-pack restructuring processes and negotiate with major creditors. The mechanism for initiating restructuring requests under this law will be a significant obstacle to starting the restructuring process. This is evidenced by the fact that the first paragraph of Article 14 of this law stipulates that any creditor or a group of creditors numbering no fewer than three may submit a request to initiate restructuring proceedings.