Bankruptcy and Insolvency Law in Kuwait: Restructuring and Liquidation

Kuwait modernized its insolvency regime with the Financial Stability and Bankruptcy Law No. 71 of 2020, replacing the outdated bankruptcy provisions in the Commercial Code. The new law introduces restructuring mechanisms, protective moratoriums, and streamlined liquidation procedures aligned with international best practices. In this guide, Attorney Meshari Alenezi explains bankruptcy and insolvency law in Kuwait.

Legal Framework

The modern Kuwaiti insolvency system operates under:

• Law No. 71 of 2020 (Financial Stability and Bankruptcy Law) — the primary statute governing commercial insolvency, effective from 2021.
• Executive Regulations — detailed procedural rules supplementing the law.
• Commercial Code (Law No. 68 of 1980) — residual provisions where the new law is silent.
• Companies Law No. 1 of 2016 — dissolution and winding-up provisions for companies.

Who Can File for Bankruptcy?

Eligible Debtors

The law applies to:

• Merchants (tajir) — individuals or entities engaged in commercial activity.
• Commercial companies — all forms: shareholding (KSC), limited liability (WLL), partnerships, and sole proprietorships.
• Licensed professionals — lawyers, engineers, doctors practicing through a commercial vehicle.

Filing Parties

• The debtor — voluntary filing when unable to pay debts as they fall due.
• A creditor — involuntary filing when the debtor defaults on a mature, undisputed debt.
• The Central Bank of Kuwait — for banks and financial institutions (special regime).
• The court — on its own initiative in exceptional circumstances.

Preventive Composition (Sulh Waqa’i)

A debtor-in-possession restructuring mechanism, similar to Chapter 11 in the United States:

Eligibility

• The debtor must not have already ceased payments — this is a pre-insolvency tool.
• The debtor files a petition with the commercial court, accompanied by a proposed composition plan.

Moratorium

• Upon filing, the court may grant a protective moratorium — a freeze on all enforcement actions against the debtor.
• Duration: initially up to 3 months, extendable.
• During the moratorium, the debtor continues operating its business under court supervision.

Composition Plan

• The debtor proposes a plan to creditors — typically involving debt reduction, rescheduling, or asset sales.
• Creditors vote on the plan: approval requires a majority in number representing at least two-thirds of the total debt value.
• If approved and ratified by the court, the plan binds all unsecured creditors — including dissenting ones.
• Secured creditors are not bound unless they participate in the vote.

Bankruptcy Liquidation (Iflas)

When restructuring is not viable, the court declares the debtor bankrupt:

Declaration

• The court issues a bankruptcy judgment, appointing a bankruptcy trustee (amin al-taflis).
• The debtor is stripped of the right to manage or dispose of their assets.
• All enforcement actions merge into the collective bankruptcy proceeding.

Claims Process

• Creditors must file their claims with the trustee within the court-specified deadline (typically 30 days from the publication of the bankruptcy judgment).
• The trustee verifies claims, resolves disputes, and prepares a schedule of admitted claims.
• Disputed claims are referred to the bankruptcy judge for decision.

Priority of Claims

Claims are paid in the following order:

1. Super-priority claims — court costs and trustee fees.
2. Employee claims — unpaid wages and end-of-service benefits (privileged up to a statutory limit).
3. Secured claims — paid from the proceeds of the specific collateral.
4. Government claims — taxes and social security contributions.
5. Unsecured claims — paid pro rata from remaining assets.

Discharge

• After liquidation and distribution, the debtor may apply for discharge (radd al-i’tibar) — rehabilitation that restores their commercial capacity.
• Discharge requires that all creditors have been paid in full, or that the debtor has made reasonable efforts and obtained creditor approval.
• Without discharge, the bankrupt person cannot serve as a company director or obtain new commercial licenses.

Criminal Aspects of Bankruptcy

Kuwaiti law criminalizes certain conduct related to insolvency:

Fraudulent Bankruptcy

• Concealing, destroying, or falsifying accounting records.
• Transferring assets to defraud creditors.
• Acknowledging fictitious debts.
• Penalty: imprisonment up to 5 years.

Negligent Bankruptcy

• Excessive personal spending disproportionate to income.
• Speculative transactions without commercial justification.
• Failure to maintain adequate accounting records.
• Penalty: imprisonment up to 2 years.

Cross-Border Insolvency

Kuwait has not adopted the UNCITRAL Model Law on Cross-Border Insolvency. Foreign insolvency proceedings are not automatically recognized. However:

• Foreign bankruptcy judgments can be enforced through the exequatur process, subject to reciprocity and public order requirements.
• A foreign trustee can apply for recognition to protect assets located in Kuwait.
• In practice, coordination between Kuwaiti and foreign proceedings is handled on a case-by-case basis.

Frequently Asked Questions

Can a company continue operating during bankruptcy proceedings?

During preventive composition (restructuring), yes — the debtor continues operating under court supervision. During bankruptcy liquidation, generally no — the trustee manages the estate. However, the court may authorize continued operations temporarily if it preserves asset value (e.g., completing an ongoing project).

What happens to employees when a company goes bankrupt?

Employee claims for unpaid wages and end-of-service benefits enjoy priority in the distribution waterfall. Employees are paid before unsecured creditors. Employment contracts are not automatically terminated by bankruptcy — the trustee decides whether to continue or terminate them, subject to labor law protections.

Can personal guarantors be affected by a company’s bankruptcy?

Yes. Personal guarantees survive the company’s bankruptcy. Creditors can pursue personal guarantors for the full guaranteed amount, regardless of how much they receive from the bankruptcy estate. Guarantors should seek independent legal advice before guaranteeing company debts.

How long does bankruptcy take in Kuwait?

Preventive composition: 6–18 months from filing to plan confirmation. Bankruptcy liquidation: 1–3 years for straightforward cases, longer for complex estates. The timeline depends on asset complexity, number of creditors, and whether disputes arise during claims verification. For consultation on insolvency and commercial law, book an appointment with Attorney Meshari Alenezi’s office or call 22204490.

Conclusion

Kuwait’s modern bankruptcy law offers viable restructuring options for troubled businesses while protecting creditor rights through an orderly liquidation process. Early legal advice — before cessation of payments — opens more options and better outcomes. For consultation on bankruptcy, debt restructuring, and commercial disputes, book an appointment with Attorney Meshari Alenezi’s office or call 22204490.

Disclaimer: This article provides general legal information and does not substitute for professional legal advice tailored to your specific situation.