Kuwait is finalising what will be the Gulf's first insolvency legislation designed to help failed businesses recover from financial difficulties rather than be shutdown, leaving creditors out of pocket.
The draft law would allow companies at the brink of financial collapse to seek court protection and business rehabilitation, instead of liquidation, DLA Piper regional managing partner Abdul Aziz Al Yaqout, who has been working on the legislation, told a local daily.
The company's assets would be preserved to allow it to continue trading and potentially recover losses owed to creditors.
The process of business rehabilitation, common in the West, saved General Motors following the global financial crisis.
"Now GM is a healthy business and investors at the time got their money back," Al Yaqout said.
“In many people’s minds, insolvency means the end – death. But there’s an alternative to liquidation. The alternative is to continue the business with the focus on trying to preserve the wealth in the interest of the company's creditors and its shareholders.
“My hope is that this legislation will help change the prevailing mind-set that it is shameful to go bankrupt and that people understand that, like the cycle of life, businesses are started, they can thrive or may die."
"So it's quite exciting. I think the new legislation will help boost Kuwait's economy; a strong insolvency law is a cornerstone of a strong economy.”
The lack of insolvency protection for businesses, especially for entrepreneurs, has often been cited as a deterrent to establishing or growing a business that require hefty loans.
The UAE also is writing an insolvency law that is believed to be designed to allow businesses to rehabilitated under court protection.
Al Yaqout said once the new legislation was implemented in Kuwait and the UAE it was likely other GCC states would follow.
“It will clearly be a beacon to the others,” he said.
However, the legislative changes also would require reform of the judiciary and government bureaucracy.
"The law will only be as good as the infrastructure that we build it upon. It's essential that we have a reform of the judiciary in so far as we set up specialised insolvency courts in Kuwait with specially trained judges,” Al Yaquout said.
“The presiding judges need to understand what they are ruling on and it's a highly specialised type of law.
“We also need to have the proper government bureaucracy that is business focused. This is the problem that we face right now. It’s a daily pain to do business in Kuwait because of the very, very difficult and cumbersome bureaucratic system that we have. That has to change.”
The insolvency legislation is one of a number of new business laws being written in Kuwait in one of the most significant legislative overhauls in the GCC.
Complementing laws being prepared include reforming the manner and ease of establishing mortgages over movable objects, such as machinery. This reform is intended to reduce the risk of lending to small businesses to increase access to funding by small and medium sized entities.
That is expected to open up access to finance for thousands of companies, boosting investment and the economy.
Al Yaqout said the mortgage legislation would be “a game changer”.
The government also is finalising changes to the public salaries scheme, which would better define pay scales and key performance indicators.
"If we pass laws like these we'll have radically changed the legislative environment," Al Yaqout said.
He expects them to be in place before the next summer, despite previous years of tensions between the Emir-appointed government ministers and the elected members of the National Assembly.
“There’s a lot of cooperation at the moment between the government and the National Assembly” Al Yaqout said.
“The National Assembly knows very well that the country needs a good, strong insolvency law – it’s in the interests of the country.”