76883 April 2013 - Number 93 KUWAIT: FOSTERING SUSTAINABLE INVESTMENT THROUGH MODERN COMMERCIAL LAW SYSTEMS William Mako, Riz Mokal, Iulia Cojocaru, and business in Kuwait (versus an average of 1.7 Gordon W. Johnson1 years among OECD countries) and that creditors could expect to recover only 32 Transformation requires a significant expansion of percent of their claims (versus OECD average our private sector, financial sector modernization of 71 percent). The formal insolvency system and a robust and attractive investment climate has been used infrequently, and then oriented reinforced by a world-class legal and regulatory more toward liquidation than toward rehabilitation. Insolvency is governed by infrastructure. Kuwait‟s Commercial Law, which derives from – H.E. Anas Al-Salah, Minister of Commerce & an Egyptian code dating to the 1940s – designed to serve a simpler economy. Modes Industry2 for taking a security interest in movable property are outdated, and there is no registry Introduction: The Government of Kuwait for security interests in movable assets. (GOK) is now moving decisively to reform its Although the consumer credit bureau appears insolvency and creditor/debtor regime (ICR). to function well, credit providers have limited The Government‟s reform agenda flows from a access to commercial credit information. review of the country‟s ICR framework (ICR ROSC) conducted by the World Bank at the GOK motivations: The GOK‟s effort to Government‟s request and presented in May establish a modern insolvency and creditor 2012 to representatives of the financial, rights system is driven by several enterprise, and state sector stakeholders. considerations: Starting point: Stakeholders recognize that First, consistent with its traditional strengths, Kuwait‟s ICR system had fallen behind that Kuwait is seeking to transform itself into a required for a modern economy. For instance, regional financial and trading center, as the World Bank‟s Doing Business 2013 ratings expressed in the Amiri Vision 2030 and the ranked Kuwait at 92nd (out of 185 economies) in GOK‟s most-recent five-year development plan. terms of its efficiency in resolving an insolvent Credit is the bedrock for a nation‟s financial business. Doing Business 2013 estimates that it sector and for modern capital markets. would take 4.2 years to resolve an insolvent Without reasonable protections and information, however, creditors would be 1 William Mako and Iulia Cojocaru work in the Finance and reluctant to extend credit to any but the safest Private Sector Development Unit of the Middle East and borrowers (e.g., auto loans, home mortgages). North Africa Region (MNSF1) while Riz Mokal works in the Private Sector Legal Unit (LEGPS) of the World Bank. As noted by Minister Al-Saleh, “access to Gordon Johnson, consultant, led the project to develop the finance requires that credit providers assure World Bank‟s Principles for Effective Insolvency and themselves that the risks of default can be Creditor Rights Systems (ICR Principles). This Quick Note effectively managed, which requires effective was cleared by Simon C. Bell, Sector Manager MNSF1 and Bassam Ramadan, Country Manager, Kuwait, The World and functional registries, credit information Bank. 2“Kuwait Needs to Foster Sustainable Development,� Arab Times, 29 May 2012 systems and efficient enforcement and following the 1997 East Asia financial crisis, are resolution procedures.�3 recognized by the Financial Stability Board as essential to the strength of a country‟s financial Second, many of the difficulties afflicting the architecture. country‟s investment company sector, which started surfacing in 2008, still await The ICR ROSC, which benchmarked Kuwait‟s fundamental resolution. For Kuwait‟s laws and practices against the Bank‟s ICR investment companies to serve as reliable Principles, identified reform priorities in the investment vehicles for domestic investors and following areas: (i) rehabilitation and to help finance the Five-Year Development liquidation law; (ii) out-of-court workouts; (iii) Plan, it will be important for many to secured transactions law; (iv) registration of implement restructuring plans that establish movable collateral; (v) commercial credit sound asset bases, capital adequacy, and information; and (vi) strengthening of Kuwait‟s counterpart reliability. commercial court. Kuwait‟s reform program is addressing these priority reform needs. Third, development of small and medium enterprises (SMEs) is essential to help the GOK Rehabilitation and liquidation law: Although meet its goals of “diversifying the sources of country approaches vary, effective insolvency income and encourage[ing] young people to systems should seek to accomplish several work in the private sector, in order to reduce goals, including maintaining a careful balance the burden of the public sector.� Strong and between liquidation and reorganization; efficient insolvency mechanisms and providing efficiently for both the liquidation of creditor/debtor frameworks are important to nonviable distressed businesses and the support a flourishing SME sector. The existence reorganization of those which remain viable; of strong creditor rights, reliable credit providing for equitable treatment of similarly- information, and a dependable collateral situated creditors, whether domestic or foreign; registry provide greater comfort to banks preventing premature dismemberment of a considering whether or not to lend to SMEs. If debtor‟s assets by individual creditors an SME becomes insolvent, it is important to independently enforcing judgments; providing have an efficient exit mechanism that transparency for information and risk- distributes the SME‟s remaining assets and allocation among interested parties; allows the individual entrepreneur to make a recognizing existing creditor rights and fresh start and return to commercially- respecting the priority of claims through a productive activity as soon as possible. Lack of predictable and established process; and an efficient exit mechanism stifles establishing a framework for cross-border entrepreneurship, which is essential to a insolvencies. dynamic modern economy. The consensus among stakeholders is that an International standards: The GOK‟s reform effective insolvency regime would benefit the agenda aspires to world-class standards, Kuwait economy. Any new law for Kuwait balancing international norms with solutions would need to specify the court‟s role and rooted in Kuwait‟s unique local customs. powers, especially in less familiar areas (e.g., Globally-accepted standards for evaluating business viability assessments). such commercial law systems were designed to assist countries in strengthening legal 4 ICR Principles measure effectiveness of commercial law mechanisms widely understood as frameworks governing credit protection (security and fundamental to credit and investment registry systems), credit risk management (credit information, wrongful trading, resolution of non-performing loans, and decisions and commercial relationships. The corporate workout regimes), and credit recovery (individual World Bank‟s ICR Principles4, developed execution, collective insolvency enforcement mechanisms, and institutional capacity). Since their introduction in 2001, formal and informal assessments using the ICR Principles have been carried out in over 50 countries, and provide 3 Arab Times, 29 May 2012. legislators recognizable benchmarks for reforms that meet international business and commercial expectations. April 2013 · Number 93· 2 For effective implementation, it will be Secured transactions law: An overall objective important for passage of a new for the GOK‟s formulation of a new secured rehabilitation/restructuring law to be transactions legal framework is to improve accompanied by special training programs – SME access to reasonably-priced credit. To including for court personnel, lawyers and achieve this, consultations with stakeholders in other insolvency professionals, and Kuwait have highlighted the need for a number government officials. of reforms, including the need to reduce uncertainty about the creation (e.g., Out-of-court workouts: Following the U.K.‟s documentation, notarization) of security successful experience over the years with interests; dissemination of and access to voluntary “London approach� workouts of information on previously-registered security distressed companies under the eye of the interests; and timely and predictable financial supervisor, out-of-court workout enforcement. arrangements were implemented in several East Asian jurisdictions during the late 1990s Movables collateral registry: Enterprises with and in Turkey during the early 2000s. growth potential, particularly SMEs, may not have sufficient real estate or other immovable As noted in the ICR Principles, “An informal assets to offer as collateral in order to raise the workout process may work better if it enables necessary funding, and an efficient system for creditors and debtors to use informal registration of movable collateral (e.g., vehicles, techniques, such as voluntary negotiation or receivables, inventory, intellectual property) mediation or informal dispute resolution. could plug this important gap. In general, there Where the informal process relies on a formal should be efficient, transparent, and cost- reorganization, the formal proceeding should effective means of providing notice of the be able to quickly process the informal pre- possible existence of security interests in a negotiated agreement [as through „pre- borrower‟s movable property. packaged‟ reorganization].� Timely resolution of inter-creditor differences will also be A registration system should be easily important. Within the Kuwait context, the goals accessible and inexpensive with respect to include facilitating a more-rapid recovery recording requirements and registry searches, among investment companies; expediting and secure. Registries should be integrated and resolution of banks‟ non-performing loans to established nationally with filings made on the promote a return to normalized lending and basis of the business‟s name, ideally in a credit access; enhancing credit risk centralized location. Special registries have management through the introduction of been found to be beneficial in the case of certain reliable recovery mechanisms; and preserving kinds of assets, such as aircraft, vehicles, and viable enterprises. certain types of intellectual property (e.g., trademarks, copyrights). The GOK adopted a Financial Stability Law in 2009 to stabilize the financial system and Commercial credit register: Kuwait has promote recovery for investment companies. experience with the collection, dissemination, Only one case has been completed under this and use of credit information. There is a law, with another pending. For a case involving private consumer credit bureau that provides one major investment company, a necessary information on 31 percent of adults – versus an second restructuring in late 2011 was average of 67 percent for OECD countries. 5 The completed under U.K. court supervision. These big gap is in reporting of commercial credit experiences illustrate the need, for instance, for history, and work is underway to address this. greater creditor involvement in the process, The Central Bank of Kuwait operates a system realistic valuations, and flexibility in the that collects information on commercial loans development and implementation of from various sources, mainly to support restructuring plans. banking supervision, and consideration is being 5 World Bank, Doing Business 2013. April 2013 · Number 93· 3 given to enabling better use of this information process. Throughout, the GOK has also by stakeholders. General principles to guide welcomed inputs from financial and other this effort consider information accuracy, private sector stakeholders. For example, timeliness, and retention; system security and approximately 100 public officials and private reliability; support for data-subject and sector professionals attended the May 2012 consumer rights; and facilitation for cross- workshop to review key findings and border data flows (if adequate safeguards are in recommendations from the World Bank‟s ICR place). ROSC. Commercial courts: Kuwait‟s court system is Reform of such fundamental and long-standing characterized by independence, impartiality, commercial laws is never easy. But Kuwait has made and a high degree of integrity. However, a good start toward modernizing its insolvency and consultation with stakeholders suggests that creditor/debtor system to support the Vision 2030 better outcomes would result from greater goals of transforming Kuwait into a regional specialization among judges; improvement of financial center, resolve remaining distress among professional incentives, including tenure and investment companies, and encourage growth of the establishment of a specific career pathway to SME sector by facilitating SME access to finance. becoming a commercial judge; and establishment of intensive start-up training and Contact MNA K&L: annual continuing education in insolvency law Gerard A. Byam, Director, Strategy and Operations. and related topics. MENA Region, The World Bank Consultations: The GOK has established a Regional Quick Notes Team: broad-based process to facilitate ICR reform. Omer Karasapan, and Roby Fields While these reforms are being driven by the Tel #: (202) 473 8177 Minister of Commerce and Industry, a The MNA Quick Notes are intended to summarize February 2013 Council of Ministers decision lessons learned from MNA and other Bank Knowledge established an intra-governmental steering and Learning activities. The Notes do not necessarily committee (including the Ministries of Finance reflect the views of the World Bank, its board or its and Justice, the Central Bank, and the member countries. Legislative Department) to guide the reform April 2013 · Number 93· 4