Bankruptcy In Qatar
March 16, 2020
* This article was published in the MENA Business Law Review #04/2019.By:
Dr. Zain Al Abdin Sharar, Senior Legal Counsel
Qatar International Court Dispute Resolution Centre
Michael Earley, Senior Associate
Sultan Al Abdulla & Partners
Two distinct commercial jurisdictions exist in Qatar, each of which has its own legislation relating to bankruptcy. In the mainland jurisdiction (“Qatar”) the provisions of Law No. 27/2006 (the “Commercial Code”) govern bankruptcy. In the Qatar Financial Centre (QFC), which is a separate “onshore” commercial jurisdiction, bankruptcy is governed by the QFC Insolvency Regulations 2005 (the “QFC Regulations”). Accordingly, in order to understand bankruptcy in Qatar, the subject must be considered in the context of both jurisdictions.
1. The State of Qatar
The State of Qatar is a civil law jurisdiction; however, it applies Islamic Sharia law to aspects of family. Generally, a major part of the civil and commercial codes of law are drawn from the Egyptian civil and commercial laws, which are derived from the French civil and commercial codes. The French civil and commercial codes are the basis of law for many Arab Countries, such as Egypt, Jordan, Iraq and Syria. Although Qatar is a civil law jurisdiction, its legislation relating to bankruptcy also adopts numerous principles established by common law and western systems. Historically, Qatar has seen few bankruptcies, although the number of bankruptcies before the local courts has increased in recent years. Given the stigma associated with bankruptcy in many cases the parties to a potential dispute made out-of-court arrangements to settle financial matters. Accordingly, the bankruptcy system in Qatar remains relatively untried.
Qatar does not have a specific law governing bankruptcy, but rather addresses bankruptcy in numerous articles (606–846) of the Commercial Code. According to article 606 of the Commercial Code, in order for individuals to be declared bankrupt:
(i) they must be merchants,Bankruptcy may only be declared through a court judgment and there are no specialist courts that preside over bankruptcy proceedings. The process may be initiated by either the merchant, a creditor, or the court. According to article 611 of the Commercial Code, an application by a merchant to be declared bankrupt must be by way of a report submitted to the court, indicating the grounds for failure to pay. The report must be accompanied by the following documents:
(ii) whose financial affairs are in jeopardy or who are experiencing financial difficulties; and (iii) who have stopped paying their debts.
a. the merchant’s commercial books; b. a copy of the latest balance sheet, and a copy of the profit and loss account; c. a statement of personal expenses for the two years previous to submission of the application or the period of engagement in business if less than two years; d. a detailed statement of the property and movables owned by the merchant and heir approximate value on the date of the failure to pay; e. a statement of the names and domiciles of the creditors and debtors, the amount of their rights or debts and the securities guaranteeing them; f. a statement of the payment demands made against the merchant during the two years previous to submission of the application.
A creditor may also initiate the process by filing a case before the Court of First Instance. According to article 609 of the Commercial Code:
“Any creditor for a currently due and undisputed 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 currently 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.”
Once filed the case will be treated in the same way as any other lawsuit. The court itself also may ex proprio motu declare a merchant bankrupt. In each instance the court will appoint a receiver to administer the bankruptcy.
B. Effects of Bankruptcy
Individuals who have been adjudged bankrupt may not vote, hold positions in the Shura or Central Municipal Councils or the Chamber of Commerce, nor may they be managers, directors, or members of the management board of companies. Furthermore, such individuals will also be prohibited from engaging in commercial activities, including export and import business or brokerage. Significantly, the receiver may prohibit individuals who are adjudged bankrupt from leaving the country.
The Commercial Code also addresses the issue of suspect payments prior to the adjudication of bankruptcy. According to article 620, the bankruptcy judgment issued by the court may designate a provisional date on which payments to creditors ceased; otherwise the relevant date will be the date of the judgment. The provisional date may not exceed a period of two years prior to the date of the bankruptcy judgment. Certain types of transactions conducted by the debtor during this period (i.e., from the date the payments ceased but prior to the adjudication of bankruptcy) may be annulled or clawed back.
The bankruptcy of corporate entities is addressed in Law No. 11/2015 (the “Commercial Companies Law”). According to the Commercial Companies Law, a company may be dissolved and subsequently liquidated for a variety of reasons, including its inability to pay its debts as they come due. The decision to dissolve a company varies depending on its structure but dissolution may be effected voluntarily (e.g., by agreement of the shareholders) or involuntarily (e.g., by court order). At dissolution, the company goes into liquidation, but its legal personality remains. In either case a liquidator is selected by the shareholders (voluntary liquidation) or by the court (involuntary liquidation). The voluntary liquidation process is determined by the Articles of Association, or as agreed between the shareholders/partners. If no such provision exists in the Articles, then the liquidation proceeds in accordance with article 307 of the Commercial Companies Law. According to article 307, the partners or the General Assembly of shareholders will appoint one or more liquidators by a simple majority. If the liquidation is by court order, or if the partners/shareholders are unable to agree the appointment and process for liquidation, then the court will determine the liquidation process and appoint the liquidator.
2. The QFC
The QFC is an “onshore” jurisdiction, meaning that while it has a separate set of commercial and corporate rules, companies and businesses established there are permitted to conduct business outside of the QFC and within the State pursuant to the QFC rules and regulations. Insolvency in the QFC is governed by the QFC Regulations, and much of the content found therein reflects common law insolvency principles from England. The QFC Regulations address administration, winding down, liquidation, and dissolution among other things. Administration aims to save the company as a going concern by restructuring and paying off its debts; if successful, the company continues to exist and do business. Liquidation, on the other hand, seeks to sell off the assets of the company prior to winding it down or dissolving it. Administration may be initiated——and an administrator appointed——by an order of the QFC Court (“Qatar International Court” or “QIC”), by a secured creditor, or by the company itself (or its directors). Any application for an administration order from the QIC must be accompanied by a witness statement stating the applicant’s belief that the company is, or is likely to become, unable to pay its debts and that putting the company into administration will either
(i) rescue the company as a going concern; (ii) achieve a better result for the company’s creditors as a whole than if the company had simply been wound down; or (iii)realising property in order to make a distribution to one or more secured creditors.Once the application is submitted, there is a hearing before the QIC pursuant to which it can either:
• grant or dismiss the application, • adjourn the hearing, or • make an interim order.The QIC may also decide to treat the application as a winding-up petition. According to article 26 of the QFC Regulations during the period of:
(i) making the application for an administrative order, (ii) giving notice of an intention to appoint an administrator, and (iii)on the appointment of the administrator,
However, there are instances in which an administrator may determine that liquidation or dissolution (or both) is a more appropriate means of repaying creditors. Pursuant to article 49 of the QFC Regulations, if an administrator thinks that through a liquidation, the total amount which each secured creditor is likely to receive has been paid to them or has been set aside for them, and that a distribution will be made to unsecured creditors of the company, then the administrator may put forward to the creditors a resolution for the voluntary winding-up of the company.
Alternatively, if the administrator thinks that the company has no further assets capable of realisation and no property which might permit a distribution to its creditors, and further that the dissolution of the company will not be adverse to the interests of the creditors, then the administrator may send a notice to that effect to the QFC Companies Registration Office.
If a company elects to wind up, there are two options: a voluntary winding-up (by resolution) or an involuntary winding-up (usually by order of the QIC). A company may elect voluntary winding-up:
(i) in accordance with its articles of association; (ii) if the company resolves that it should wind up; or (iii)if the company resolves that it cannot,by reason of its liabilities, continue its business and should wind up.If it resolves to wind up, then the company must cease carrying on business except where such business is beneficial to the winding-up. Furthermore, any share transfers not sanctioned by the liquidator will be void.
Conversely, an order for compulsory winding-up may be issued by the QIC if:
(i) the company resolves that the QIC should wind-up the company; (ii) the company is unable to pay its debts; (iii)the company does not commence business within a year of its incorporation or suspends business for a whole year; or (iv) the QFC Authority makes an application to wind up the company and the QIC agrees.
A few bankruptcy cases were brought to the Qatar International Court (also known as “the Civil and Commercial Court of QFC” since its establishment). The most famous case was the Silver Leaf case. In this case, the Qatar Financial Centre Authority (QFCA) applied for a winding up order against the company on the grounds that it was unable to meet its objectives and liabilities. The court has found that the inability of Silver Leaf to pay its debts formed an independent basis for a winding up order. The Court ordered the compulsory winding up of the company pursuant to articles 77(4) and 80 of the Insolvency Regulations.
The two jurisdictions deal very differently with bankruptcy. The QFC tends to be a more transparent jurisdiction with relevant case law readily available to the public. Furthermore, for many foreigners conducting business in Qatar, the QFC offers a more familiar business environment and adopts many common law principles regarding not only bankruptcy but also security and security registration. That being said, there are also ways to take security in the State—for example, through share pledges—that do not require a separate court order to enforce.