Bankruptcy is a legal regime aimed at organising the liquidation of a merchant's assets when they cease paying their commercial debts and distributing the proceeds fairly among creditors. The Kuwaiti Commercial Code regulates bankruptcy and preventive composition.
Merchants only: the bankruptcy regime applies to merchants — non-merchants are subject to civil insolvency rules.
Contents
1) The Concept of Bankruptcy
- Definition: a legal status attaching to a merchant who ceases paying their commercial debts as they fall due.
- Purpose: protecting creditors by treating them equally — and giving the debtor an opportunity to settle their affairs.
- Criterion: cessation of payment (not mere temporary inability) is the test for bankruptcy.
- Scope: covers all the merchant's debts — not limited to any single debt.
Commercial Code: Part IV of the Kuwaiti Commercial Code governs bankruptcy and preventive composition — supplemented by the Procedural Code for procedural aspects.
2) Conditions for Declaration
- Merchant status: the debtor must be a merchant — whether an individual or a commercial company.
- Cessation of payment: actual and serious cessation of payment of a commercial debt that is due, ascertained, and undisputed.
- Commercial debt: the debt must arise from a commercial transaction — not a civil one.
- Court judgment: bankruptcy is declared only by court judgment — it does not occur by operation of law.
Who may petition? The merchant themselves, any creditor, the public prosecution, or the court of its own motion.
3) Declaration Procedures
- Filing: the petition is filed with the Court of First Instance (Commercial Division).
- Date of cessation: the court determines the date of cessation of payment — which may precede the judgment.
- Bankruptcy judge: the court appoints a supervising judge for the estate.
- Trustee: a trustee is appointed to manage the bankrupt's assets and represent creditors.
- Publication: the bankruptcy judgment is published and recorded in the Commercial Register.
4) Effects of Bankruptcy
On the debtor
- The bankrupt is divested of management and disposal of their assets.
- All debts fall due immediately.
- Disqualification from standing for or voting in elections.
- Name entered in the bankruptcy register.
On creditors
- All individual actions and proceedings against the bankrupt are stayed.
- Creditors must submit their claims to the trustee for verification.
- Equality among ordinary (unsecured) creditors.
- Preferential and secured creditors retain their priority.
5) Preventive Composition
- Purpose: enabling a struggling merchant to settle debts and avoid a bankruptcy declaration.
- Conditions: the merchant must apply before cessation of payment or within 15 days of it.
- Proposal: the merchant proposes a plan to repay debts — in full or in part — over a specified period.
- Vote: creditors vote on the composition — approval requires a majority by number and value.
- Court approval: the court ratifies the composition, which then binds all creditors.
Annulment: if the merchant breaches the composition terms, any creditor may apply to annul it and declare bankruptcy. See contracts and obligations.
6) Liquidation and Distribution
- Inventory: the trustee inventories the bankrupt's assets and values them.
- Sale: the assets are sold at public auction with the supervising judge's approval.
- Ranking: proceeds are distributed by creditor rank — preferential first, then ordinary creditors equally.
- Closure: the estate is closed after distribution — or for insufficiency of assets.
- Rehabilitation: the merchant may apply for rehabilitation after paying all debts in full.
7) Bankruptcy Crimes
Fraudulent bankruptcy
- Concealing or smuggling assets.
- Acknowledging fictitious debts.
- Destroying commercial books.
- Penalty: imprisonment with hard labour.
Negligent bankruptcy
- Excessive spending or gambling.
- Failure to keep regular commercial books.
- Selling below value to delay bankruptcy.
- Penalty: imprisonment up to two years.
Conviction effect: a conviction for fraudulent bankruptcy bars rehabilitation and disqualifies the merchant from trading. See financial and commercial crimes.
8) Practical Guidance
For the struggling merchant
- Apply for preventive composition before cessation of payment.
- Do not dispose of assets after cessation — such dispositions are voidable.
- Keep your commercial books regular and up to date.
- Consult a lawyer immediately to assess your options.
For creditors
- Submit your claim to the trustee on time.
- Challenge doubtful claims.
- Follow the estate proceedings regularly.
- Assert your preferential or secured right if any.
Facing commercial bankruptcy or need representation in an insolvency case? Contact Attorney Meshari Obaid Al-Enezi — Yumnaak Law Firm.
