Bankruptcy is a judicial method for the collective execution of the moneys of a debtor merchant who has ceased to pay his debts. The purpose of bankruptcy is to liquidate and sell the debtor’s money in order to distribute its proceeds to the creditors on the basis of the apportionment of administrators and deprivation of the debtor of the management or disposition of his assets throughout the period of bankruptcy.
The bankruptcy system thus enhances the guarantee of transactions in commercial markets by providing legal protection to creditors and sanctions parties that have not secured their debts. Thus, bankruptcy is intended to treat insolvent merchants in a harsher manner than it does to those who may opt for liquidation.
The bankruptcy system has two major objectives:
Firstly, to protect a creditor(s) from a bankrupted debtor whose assets are not sufficient to meet the amount of the debt(s).
Secondly, to protect creditors themselves from each other. In fact, the bankruptcy situation could create a struggle amongst the creditors as each may attempt to collect their debts separately and rapidly to maximize their debt repayment from the debtor. To avoid the prejudice of such a conflict, the bankruptcy system fairly distributes the debtor’s funds according to a collective procedure in which all creditors are included.
The Qatari legislator has regulated bankruptcy in Articles 606 to 846 of the Commercial Code No. 27 of 2006, which accounts for about one-third of the number of articles of the Commercial Code, reflecting the importance of this subject in the legislation.
Article 609 of the Commercial Code states that:
Any creditor for a current due dispute free commercial debt may apply for his trading debtor to be declared bankrupt, even if it is guaranteed, if he fails to pay the debt at maturity.
Any creditor for a deferred commercial debt shall be entitled to apply for his trading debtor to be declared bankrupt if such trader has no known domicile in Qatar, flees, or closes down his premises, proceeds to liquidate himself or takes action harmful to his creditors, provided that the creditor shall provide proof that the debtor has failed to pay his current commercial debt.
Any creditor for a due civil debt may apply for his trading debtor to be declared bankrupt if he produces proof that the debtor has failed to pay his current commercial debts.
A trader may not be declared bankrupt for failure to pay criminal fines or taxes or fees of any kind.
In order to be declared bankrupted, three conditions must be met according to Article 607 of the Commercial Code; (1) the debtor must be a merchant, (2) who stopped the payment of his debts, and (3) subsequently a court decision must be issued. It is worth noting that the status of ‘merchant’ must be evident before the recorded date of discontinuation of the debt repayment.
The corner stone of these conditions is proving the discontinuation of payment whereby two arguments can be set forth: the first is that the discontinuation is purely due to non-payment regardless of the debtor’s financial strength. Contrary to this, the second argument, is that the debtor must be subject to real financial crisis which affects the debtor’s credit and threatens the creditors’ rights.
Discontinuation of payment does not necessarily have to encompass all the debts of a merchant. A merchant could be declared bankrupt if he stops the payment of only one creditor as long as the non-payment reflects serious financial crisis. Therefore, determining bankruptcy is not limited to the amount of the unpaid debts, but rather, whether an outstanding debt reflects the collapse of the financial status of the debtor and evidences a potential threat to the rights of the creditors.
If a creditor initiates bankruptcy proceedings, the burden of proof of financial crisis is upon the plaintiff to prove the evident risk of discontinuation of payment. The proof should also cover the existence of a debt. The plaintiff must also provide adequate evidence that his debtor enjoyed the status of merchant when he stopped paying his debts. Moreover, the discontinuation of payment should continue until the date of the declaration of the bankruptcy judgment.
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