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Bahrain’s new bankruptcy law, introduced on Wednesday, is a significant boost for the Arabian Gulf's smallest economy, as it will help lure foreign investment and support the growing community of small businesses in the kingdom.
This law will bolster Bahrain's "drive for diversification, and in particular nurturing the start-up and SME market and increasing its footprint in the fintech space,” said Rad El Treki, head of corporate structuring, Bahrain, at law firm Al Tamimi & Company.
Bahrain's bankruptcy law is based on Chapter 11 insolvency legislation in the US, which provides companies in financial difficulty with an opportunity to restructure under court supervision, Bahrain Economic Development Board, the country’s inward investment agency, said in a statement.
“It will introduce measures to allow company reorganisation, where the management is allowed to remain in place and continue business operations during the administration of a case, similar to the Chapter 11 process in the US,” said Khalid Al Rumaihi, chief executive of Bahrain EDB.
Governments in the Arabian Gulf have begun implementing modern bankruptcy legislation in the wake of a three-year oil price slump which has crippled some businesses and made bank financing scarcer, particularly for SMEs.
The UAE's bankruptcy law took effect at the end of 2016, while Saudi Arabia enacted its legislation this summer.
One of the intended outcomes of Bahrain's banktruptcy law the promotion of good governance and investor confidence, said Buthaina Amin, director of legal affairs at Bahrain EDB.
"With a forward looking restructuring mechanism, we are looking at the likelihood of a decrease in the possibilities of liquidation," she told The National.
“Ultimately, this should foster greater access to credit, which is vital to all entrepreneurs, start-ups, and SMEs looking at launching and growing their businesses. With positive reforms that promote increased transparency and provide for restructuring options, the economy would expect to get a boost as a result of debtor and investor confidence – further encouraging innovation.”
Bahrain has seen its foreign investment levels increase dramatically over the last year and wants to continue ramping up inward investment by refreshing corporate legislation and strengthening its business environment.
Bahrain EDB reported a record $810 million of foreign direct investment during the first nine months of the year, compared to $733m in the whole of 2017. However, the smallest economy in the GCC remains fiscally weak after it was hit hard by the slowdown in the regional economy since 2014 and external borrowings soared.
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Bahrain signed this week a financial support package from its neighbours the UAE, Saudi Arabia and Kuwait, which is expected to ensure fiscal stability of the country’s financial institutions. In 2011, the GCC agreed a $20 billion aid package for Bahrain and Oman to support their economies over a 10-year period following the global financial crisis.
The country's new bankruptcy law was part of a package of legal reforms announced on Wednesday intended to strengthen the regulatory climate for current and prospective investors in Bahrain, and shore up the economy as a result.
Bahrain is introducing a personal data protection law intended to govern the processing of data for commercial use, a competition law to prevent the formation of monopolies, and new health insurance legislation.
“The reforms demonstrate that Bahrain continues to create a regulatory environment that is in line with international standards and best practices, to remove stigmas and deterrents, and provide more reassurance to investors and companies operating in and looking to invest in the kingdom,” Mr El Treki said.