30/09/2026
Options for Dealing with Corporate Distress under the Kuwaiti Legal System
An Analytical and Critical Study of the Transformation from Classical Practices to the Judicial Framework of the New Bankruptcy Law No. (71 of 2020)
Introduction: Study Issue:
- The financial distress of companies in the State of Kuwait has historically constituted a complex legal and economic challenge. For many decades, the legislative framework confined distressed merchants to the preventive composition procedures against bankruptcy set out in Book Four of the Commercial Law No. (68 of 1980). In practice, this framework was characterized by legislative rigidity and limited practical application. Following the repercussions of the 2008 global financial crisis, the Financial Stability Enhancement Law No. (2 of 2009) was enacted as an exceptional legislative measure aimed at mitigating the economic impact of the crisis. However, the scope of this law was limited to financially solvent companies and banks, leaving a broad segment of distressed enterprises without an effective legal remedy. Against this background, the present study highlights the fundamental transformation introduced by Bankruptcy Law No. (71 of 2020) in the procedural framework governing financial distress. The law redefined financial distress from being perceived as a stigma or an indication of misconduct into an economic condition requiring legal intervention aimed at rescue, restructuring, and the preservation of economic stability.
First Research: Deficiencies of the Traditional Legal Framework (The Financial Stability Law and Book Four of the Commercial Law)
First Requirement: The Rigidity of the Commercial Law Provisions (Liquidation-Oriented Bankruptcy):
- Book Four of the Commercial Law was characterized by a liquidation-oriented approach, whereby bankruptcy procedures primarily aimed at removing the debtor from the market and restricting him from managing the business. This approach inevitably resulted in the destruction of the economic value of the enterprise. On the other hand, the preventive composition system required the submission of settlement proposals providing for the repayment of no less than fifty percent (50%) of the debt, a condition that most distressed debtors were unable to meet.
Second Requirement: The Elitist Nature of the Financial Stability Law:
- Despite introducing advanced concepts such as restructuring, the Financial Stability Law No. (2 of 2009) adopted “financial solvency” as a prerequisite for protection. As a result, companies whose capital had actually deteriorated fell outside the scope of such protection. Moreover, the reliance of the procedures on the approval of the supervisory authorities, particularly the Central Bank of Kuwait (CBK), gave the process an administrative character rather than a judicial one.
Second Research: The Innovative Philosophy of Bankruptcy Law No. (71 of 2020):
First Requirement: The Shift from the Principle of “Restraining the Hand” to the System of Debtor-in-Possession / Supervised Management:
- This represents one of the modern principles of bankruptcy law (notably Chapter 11 of the American system ”Debtor in-Possession”), which was adopted by Kuwaiti legislation under Law No. (71 of 2020). It departs from the traditional concept of “restraining the debtor’s hand” from managing his assets upon being declared bankrupt, and instead adopts a new philosophy based on the continuity of the economic enterprise. Under this approach, the debtor retains, in principle, the powers of management and conducts ordinary business operations within the limits of normal administrative activity. This means that the debtor—whether an individual or a company’s board of directors—remains in control of its assets and continues its day-to-day commercial operations, despite the initiation of bankruptcy and restructuring proceedings. Such proceedings take place under the supervision of the bankruptcy judge and with the assistance of the bankruptcy trustee, in line with the debtor-in-possession system. The advantage of this approach is particularly evident in providing the debtor with an opportunity to correct his financial position under the direct supervision of the restructuring trustee and the bankruptcy judge. This creates a balance between preserving the value of the assets as security for creditors and benefiting from the debtor’s experience in managing his business to achieve the best possible outcome from restructuring. This principle constitutes a central pillar of this research, as the rigid traditional rule of “restraining the debtor’s hand” has been replaced under the new law. Under the former rule, the merchant was deprived of management authority once the bankruptcy judgment was issued, with control transferred to the trustee. Kuwaiti legislation has therefore made a significant development by adopting the concept of the “debtor-in-possession.” This principle allows distressed enterprises to remain under the management of their original operators, who possess the technical and operational expertise required for the business. Its importance is further reflected in preserving the “going concern value” of the enterprise, preventing the disruption of existing contracts, and maintaining the confidence of suppliers and customers.
- Under Articles (98) and (99) of the new law, the debtor exercises his management and decision-making powers within the limits of what serves the best interest of his day-to-day operations. Supervision by the trustee is limited to extraordinary actions that may affect creditors’ rights, thereby creating a balance between the debtor’s freedom in management and the protection of creditors’ funds.
Second Requirement: Preventive Settlement as a Proactive Option:
- The law introduces the mechanism of “preventive settlement” as a proactive option aimed at preventing the debtor from reaching a state of severe financial distress. This mechanism reflects the confidence of Kuwaiti legislation in the debtor’s ability to rehabilitate his enterprise. It is characterized by granting the debtor a high degree of freedom to manage his business and continue its operations without being removed from office or having his powers restricted. This proactive option preserves the initiative in the hands of the debtor, allowing him to negotiate freely with creditors away from the pressures of compulsory enforcement. It also transforms distress procedures from a contentious process into a cooperative framework aimed at restoring the economic viability of the enterprise, while benefiting from the debtor’s managerial experience as an asset to the company. Accordingly, it is initially a non-judicial procedure designed to reach an agreement between the debtor and his creditors. Its main advantages lie in speed and efficiency, as well as in maintaining the confidentiality of the company’s credit status and preventing the deterioration of its market value or listed shares upon disclosure of financial distress.
- Confidentiality and speed constitute key pillars distinguishing Bankruptcy Law No. (71 of 2020) from the previous classical framework, and they form the principal justification for the effectiveness of preventive settlement as a business-oriented solution. In the commercial context, the announcement of distress may be more damaging than the distress itself.
First: The Principle of Confidentiality:
- The law adopts confidentiality as a key principle governing bankruptcy and preventive settlement proceedings, with the objective of limiting the adverse commercial and financial consequences that may arise from the disclosure of a debtor’s financial distress. Under the repealed Commercial Law (Chapter Four), the mere filing of a bankruptcy petition resulted in the publicity of the relevant proceedings, which frequently gave rise to a state of credit panic, prompting suppliers to suspend dealings and financial institutions to freeze the debtor’s accounts. The new law addresses these concerns through the following mechanism:
1- Confidentiality in the Consideration of Bankruptcy Management Proceedings: The law provides that applications for the commencement of preventive settlement proceedings shall be examined on a confidential basis. This approach is intended to provide the debtor with an opportunity to negotiate and reach arrangements with creditors without adversely affecting the debtor’s commercial reputation, undermining market confidence, or negatively impacting the market value of the enterprise or its listed shares on the stock exchange..
2- Announcement of the Application at a Later Stage: Unlike bankruptcy proceedings, which were announced immediately, an application for preventive settlement is only declared or announced once the debtor reaches a serious settlement proposal. This approach is intended to protect the debtor’s legal position during the negotiation period.
3- Preservation of Commercial Confidentiality: During the restructuring process, the trustee reviews the company’s records. However, the law emphasizes that such information shall remain confidential in order to avoid any disclosure of professional secrets or operational plans to competitors.
Second: The Principle of Speed:
The law adopts speed as a fundamental principle governing financial distress proceedings, on the basis that financial distress constitutes a condition that may rapidly spread throughout the enterprise, and any delay in treatment may ultimately lead to its economic collapse. Accordingly, the new law imposes strict timeframes that were not recognized under the general procedural rules, through the following mechanism:
1- Strict Time Limits: The law establishes short and mandatory periods for the issuance of decisions relating to settlement applications in order to address the financial crisis before it escalates beyond control. This approach is intended to avoid delays associated with traditional judicial procedures. In this regard, the law requires the Bankruptcy Department to examine the bankruptcy application and submit its report to the bankruptcy judge within a period not exceeding twenty-one (21) days from the date of filing the application. The judge is likewise required to issue a decision accepting or rejecting the application within five (5) business days from the date of receiving the report. These shortened periods, when compared to ordinary judicial timeframes, are intended to address financial distress at an early stage and prevent the disclosure of the debtor’s financial difficulties to the market, thereby achieving the balance of “speed, confidentiality, and continuity of the enterprise.”
2- Bankruptcy Supervision System: The Bankruptcy Department is considered a key structural innovation under Law No. (71 of 2020) as it transforms financial distress proceedings from a judicial dispute into a specialized technical mechanism for handling insolvency cases. It functions in a manner akin to a crisis management center, headed by the bankruptcy judge and comprising an accounts controller as well as financial and legal experts in its composition. This system is particularly effective in granting the debtor prompt and confidential procedural protection, whereby the debtor remains in possession and continues to manage the enterprise, while also benefiting from a technical framework for assessing the application and submitting reports within standard time limits, namely (21) days. This approach contributes to preventing the deterioration of the enterprise’s assets, safeguarding its investment value, and reinforcing the role of the judiciary as a guardian of the economy rather than merely a liquidator of debts.
3- Preventing Prolongation of the Dispute Period: The strict time limits constitute one of the key safeguards that limit the suspension of the appeals, thereby ensuring that summary enforcement remains the governing standard for various decisions. This mechanism is designed to prevent debtors from obstructing rescue proceedings through the filing of frivolous or malicious appeals.
- The added value introduced by Kuwaiti legislation in the context of preventive settlement is primarily reflected in the creation of a secure framework for negotiations. The law surrounds settlement applications with a strict regime of confidentiality designed to prevent the loss of confidence in distressed companies before it is too late. At the same time, it replaces open-ended procedural timelines with a strict timetable, treating time as a fundamental element in preserving asset value. The prompt approval of restructuring plans serves to reduce operational losses and prevent the erosion of capital. Accordingly, the court’s role has evolved from that of a passive “silent supervisor” to an active participant ensuring that financial distress is resolved before it escalates into complete collapse.
Third Requirement: Procedural Pillars Recently Introduced to Address Financial Distress:
Firstly- Legal Protection (Suspension of Enforcement Measures): Upon the filing of an application for preventive settlement or restructuring, the court grants the debtor a “stay of enforcement” period, which may extend, in certain cases, up to three renewable months. This period is designed to protect the company’s assets from attachment or forced sale, thereby providing an appropriate environment for negotiations with creditors.
Secondly- Priority Financing: The new law addresses the issue of liquidity shortages during financial distress. Whereas, under customary practice, lenders would typically refrain from extending credit to distressed debtors, the current framework allows the court to grant “priority status” to new financing. This mechanism is intended to encourage banks to inject fresh liquidity into the business rescue process, by treating such financing as preferential debt that ranks ahead of ordinary claims in the distribution process.
Fourth Requirement: Assessment of the Legislative Response to Contemporary Needs:
- An analysis of the provisions of Law No. (71 of 2020) demonstrates its responsiveness to the requirements of modern economic crises, through the following mechanisms:
1- Abolition of Imprisonment: The law transforms the status of bankruptcy from a presumed criminal act into a commercial matter (except in cases of fraud), thereby encouraging merchants to proactively disclose their financial difficulties.
2- Judicial Specialization: The law establishes a Bankruptcy Department headed by a judge of the rank of counselor and composed of financial experts, ensuring that decisions are aligned with accounting and financial realities rather than being confined to rigid legal formalism.
3- Flexibility in the Restructuring Plan: The law introduces flexible restructuring mechanisms, including the conversion of debts into equity shares and the extension of repayment periods for durations of up to ten years.
Third Research: Liability of Managers and Members of the Board of Directors under the Bankruptcy Law:
First Requirement: The Relationship between Financial Distress and Personal Liability:
- The occurrence of financial distress within a company is no longer regarded as an absolute safeguard protecting managers and board members from liability. Rather, the new Bankruptcy Law establishes the principle that failure to seek timely legal protection measures—such as preventive settlement proceedings—once indications of financial risk become apparent, may constitute managerial negligence giving rise to legal accountability.
- The Causal Relationship: The law further equips managers with protective mechanisms, such as settlement and restructuring procedures, to address financial distress. Accordingly, where managers fail to utilize these mechanisms and such omission results in prejudice to creditors’ rights or further depletion of the company’s assets, liability may cease to rest solely with the company and instead extend to the managers personally.
Second Requirement: Actions Giving Rise to Liability (Misconduct – Omission – Fraud):
The Law expressly identifies a number of situations in which managers or members of the board of directors may incur personal liability and be held accountable through their private assets where their conduct is proven to have contributed to the company’s bankruptcy. Such cases include the following:
1- Concealment or Destruction of Records: Where managers intentionally conceal, falsify, or destroy the company’s records and documents in a manner that prevents the accurate determination of its true financial position.
2- Concluding Preferential Transactions: Liability may likewise arise where managers or board members engage in preferential dealings, such as favoring certain creditors over others or transferring and concealing company assets for the benefit of related parties prior to the commencement of bankruptcy proceedings.
3- Continuation of Business Activities Despite Certain Loss: Liability may also arise where managers or board members continue to engage in commercial activities, conclude new transactions, or impose additional financial obligations upon the company while knowing, or being reasonably expected to know, that the company is unable to satisfy its present and future debts and has effectively entered a state of actual bankruptcy.
- The Bankruptcy Law establishes the principle of joint, several, and personal liability for managers where it is proven that they continued “trading while insolvent,” namely by engaging in commercial transactions and incurring new obligations despite their awareness of the company’s financial distress and inability to meet its obligations. Legal jurisprudence regards such conduct as a breach of the duties of honesty and due care, since management is expected to cease such activities promptly and resort to the rescue mechanisms provided under the law. Accordingly, proof of trading during insolvency entitles creditors and the bankruptcy court to seek recovery of any deficiency in the company’s assets from the managers’ personal assets.
Third Requirement: Disqualification and Criminal Liability:
- Liability under the Bankruptcy Law is not confined to financial compensation alone, but may also extend to additional legal consequences, including the following:
• Disqualification from Management: The law authorizes the court to prohibit a defaulting manager from assuming managerial or directorial positions in other companies for specified periods, resulting in the suspension of certain civil and commercial rights.
• Joint and Several Liabilities: Where the company’s assets are insufficient to satisfy at least 20% of its debts, the court may order managers and members of the board of directors to pay all or part of the company’s outstanding debts from their personal assets, provided that their fault or misconduct is established.
- Accordingly, the philosophy underlying Law No. (71 of 2020) is not limited to granting companies a second opportunity through restructuring procedures. Rather, the law adopts a framework of continuous oversight over the conduct and performance of managers. The protection afforded to a business entity is therefore conditional upon the good faith and proper conduct of those responsible for its management. In this context, managerial liability serves as a deterrent mechanism intended to prevent the misuse of bankruptcy procedures as a means of concealing assets, transferring funds, or evading obligations. Instead, such procedures are designed to function as a legitimate and serious avenue for financial rehabilitation, subject to civil and personal accountability.
Conclusion of the Study:
- At the conclusion of this research, it may be observed that Kuwaiti legislation has undergone a significant transition from the rigidity of the former Commercial Law (formerly Book Four, now repealed) and the limited scope of the Financial Stability Law toward the broader and more comprehensive framework established under Bankruptcy Law No. (71 of 2020). The amendments introduced by this law were not merely procedural or formal in nature; rather, they constituted a substantive legislative transformation aimed at addressing and remedying financial crises within the State of Kuwait. The law has successfully sought to achieve a balanced approach between safeguarding creditors’ rights to recover their debts and preserving the continuity of companies as productive economic entities, while simultaneously maintaining the accountability of managers for the manner in which such entities are administered.
Key Results Achieved by the Study:
1- Separating Financial Distress from Criminalization: The law has succeeded in removing the characterization of bankruptcy as a presumed criminal act and has instead reframed it as a rehabilitative process. Under the new framework, the debtor is granted access to progressive rescue mechanisms beginning with preventive settlement procedures and extending to restructuring measures, while liquidation remains available only as a final and exceptional remedy.
2- Effectiveness of the Adopted Mechanisms: Concepts introduced by the law, such as the “distressed debtor” and “priority financing,” have proven to constitute essential mechanisms for preventing the collapse of companies during periods of financial crisis, as they provide both legal protection and the liquidity necessary to sustain business operations.
3- Confidentiality and Expediency as Economic Considerations: In recognition of the importance of time and the confidentiality of credit information, the legislation has positioned the Kuwaiti commercial judiciary as an active participant in corporate rescue processes rather than limiting its role to that of compulsory enforcement.
4- Liability Based on Early Initiative: The liability of managers has become closely linked to the extent of their prompt and responsible use of the legal mechanisms provided under the law. Consequently, trading while insolvent is no longer viewed merely as a commercial risk, but rather as a serious fault giving rise to personal legal liability enforceable against the managers’ private assets.
Finally:
- The new Bankruptcy Law fills a long-standing legislative gap, shifting the focus from theoretical regulation to practical implementation. Its effectiveness now depends on the extent to which companies are able to utilize the available mechanisms as genuine tools for survival, thereby ensuring business continuity and sustainability amid fluctuations in both local and international markets.
Al-Tuwaijri Legal Researches & Studies Team
