A comparative analysis of Insolvency regimes in the State of Qatar: Introducing Cross Border Insolvency rules for the Local Regime.

 

 

 

 

 

 

 

Paper proposal:

A comparative analysis of Insolvency regimes in the State of Qatar: Introducing Cross Border Insolvency rules for the Local Regime.

 

Done by:

Ali

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Abstract

There are currently two insolvency regimes differently and independently operating in the State of Qatar.  The so-called ‘Local Insolvency Regime’ applies broadly at the level of the State of Qatar and has its roots in Egyptian and French Civil and Commercial Code provisions for bankruptcy whereas the ‘Qatar Financial Centre (“QFC”) Insolvency Regime’ applies for selected corporates and branches operating within the jurisdiction of the QFC and is mainly based on common law. The former has a larger perimeter of application but is limited, most importantly and which is a key subject of this thesis, in terms of modern, complex and sometimes cross-border insolvency situations requiring bespoke solutions. The latter being driven by common law, has the advantage of flexibility and possibility of reference to market practice of other common law jurisdictions for guidance.

Companies are bound to either the Local or QFC Insolvency Regime by virtue of their circumstances. That is, if a company is set up under the jurisdiction of the Ministry of Trade and Economy in accordance with Commercial Law No. 27 of 2006, then the insolvency of that company will be solely governed by the Local Insolvency Regime. On the other hand, if the company is set up under the jurisdiction of the QFC in accordance with the Insolvency Regulations 2005, then the insolvency of that company will be solely governed by the QFC Insolvency Regime. Neither companies undergoing financial difficulty, creditors nor governmental bodies have the liberty of adapting the two regimes to suit their circumstances.

The Commercial Law No. 27 of 2006, which governs the Local Insolvency Regime framework, was drafted some time ago and is sometimes difficult to interpret from a legal perspective. It is silent, that is neither addressing nor providing guidance, on the legal or practical issues that may arise in cross-border proceedings (or indeed any others), for example the cross-border transfer of assets under administration. To this end, it is worth noting that the State of Qatar is not party to any international insolvency or restructuring treaty, and the insolvency rules embodied in the Commercial Law are silent on whether assets could be transferred from a Qatari administration to a foreign administration.

Another example is how the Local Insolvency Regime currently does not provide guidance to local courts as to how they should act in cross-border insolvencies, whether such proceedings should be brought before them, or rather before foreign courts which then request co-operation from the Qatari courts. To this end, the State of Qatar has not adopted the UNCITRAL Model Law on Cross-Border Insolvency and there are no provisions in the Qatar law for recognition of insolvency proceedings commenced in other jurisdictions or for co-operation with the courts of other jurisdictions.  Whilst the Qatar courts may recognise a foreign judgment of insolvency on a reciprocal basis, such recognition would be subject to a number of conditions, including compliance with public policy in Qatar, both parties having obtained adequate representation and the judgment being obtained from a jurisdiction that enforces Qatar judicial rulings.[1] Moreover as a result of the relative silence and unclear law, in practice Qatar courts tend to assert their jurisdiction over any matter involving Qatar parties and are unlikely to recognise the appointment of foreign insolvency officials or proceedings without consideration of the issues independently under Qatari law.

For the above reasons and several others to be explored in this thesis, the Local Insolvency Regime needs to be extensively updated particularly in relation to cross-border insolvency proceedings in order to keep in line with best current international practice. It also has to be updated to reflect the rapid pace of development of the international markets, legal structures and increasingly complex financial products.

The aim of this thesis is :

  • to evaluate the existing insolvency rules of the Local Insolvency Regime by comparing them to the QFC Insolvency Regime and to consider what legal reforms might be desirable to improve the effectiveness and modernity of insolvency proceedings, particularly in regards to cross-border proceedings. This will have a positive impact on the insolvency proceedings and strengthen the country’s business community. This will also create a regulatory environment that is in line with international standards and best practices, to remove stigmas and deterrents, and provide more reassurance to foreign investors and companies operating in and looking to invest in Qatar.

2) to compare the separate legal application of the two insolvency regimes in Qatar in relation to cross border insolvency, using the UNCITRAL Model Law as a benchmark. While the QFC Insolvency Regime may not provide the best examples of better practices in every circumstance, the QFC Insolvency Regime provides a significantly more comprehensive framework than the Local Insolvency Regime, including from a cross-border perspective.

Based on the analysis and comparison of the findings, this thesis will then make a considered recommendation as to whether to adopt the UNCITRAL Model Law or even to introduce a completely new law on cross border insolvency in line with the approach taken by the QFC Insolvency Regime.

Ultimately, the purpose of this thesis is to formulate a number of recommendations for the Qatari authorities with respect to insolvency reform. The thesis will urge the Qatari authorities to review the current Commercial Law particularly the Local Insolvency Regime provisions. Therefore, the focus of the paper is onerous on the Commercial Law particularly the insolvency provisions. The thesis will not discuss the specific challenges arising in connection with the QFC Insolvency Regime.

 

Background Analysis

Following the recent global financial crisis, many countries have and continue to reevaluate the adequacy of their insolvency regimes,[2] and have started reforming their credit environments by improving their insolvency regimes.[3] Effective insolvency regimes contribute to reducing the adverse effects of high private debt on economic activity by freeing up resources caught in unproductive activities.[4]

In Qatar, there are two concurrent insolvency regimes because Qatar has two quite different legal jurisdictions or ‘regimes’: the civil law[5] framework of the State of Qatar (‘the local regime’) and the common law framework of the Qatar Financial Centre (‘the QFC regime’).[6] A major part of the Civil and Commercial Codes of law comprising the local regime are drawn from the Egyptian Civil and Commercial Laws, which themselves are derived from the French Civil and Commercial Codes.[7] Indeed the French Civil and Commercial Codes have become the basis for the law in many Arab Countries, such as Egypt, Jordan, Iraq and Syria.[8] In contrast, the QFC regime is an ‘onshore’ jurisdiction, with companies and businesses established thereunder being able to conduct business outside the QFC with Qatari State entities under QFC-applicable laws and regulations (although State criminal laws continue to apply).[9]

When businesses fall into financial difficulty, the local regime and the QFC regime deal with insolvency issues in different ways, under the Commercial Law No. 27 of 2006 (’the Local Insolvency Regime’)[10] and the Qatar Financial Centre (‘QFC’) Insolvency Regulations 2005 applicable to corporate bodies and branches registered in the QFC (’the QFC Insolvency Regime’)[11] respectively.

The Local Regime

The Qatari legislator has codified and regulated bankruptcy by way of Articles 606 to 846 of the Commercial Law No. 27 of 2006. Those articles apply to so-called traders, which by definition are any persons or entities that are required to hold commercial records.[12] Article 606 defines bankruptcy to be the situation whereby a trader has difficulty in his financial affairs and ceases to pay his commercial debts.[13] Creditors with verified debts against the trader as well as the department for public prosecution are able to file for bankruptcy of a trader, and a court may declare the bankruptcy of a trader of its own initiative.[14]

The bankruptcy rules provide a single gateway into insolvency proceedings, with the primary focus being liquidation of the debtor. However, the bankruptcy rules also offer two potential settlement mechanisms, both attainable only through court. The first is a pre-bankruptcy compromise procedure, which can be requested by a sufficiently solvent trader who has not yet been declared bankrupt[15]; the second is a post–bankruptcy compromise procedure, which is available to a trader who has been declared bankrupt.

Once a bankruptcy judgment has been entered, a general moratorium arises and creditors may no longer file individual claims against the bankruptcy estate to recover amounts owed to them by the debtor.[16] Any proceedings commenced prior to the declaration of bankruptcy will be suspended. Secured creditors may enforce their security notwithstanding the moratorium.[17] However, out-of-court realisation of assets is explicitly prohibited under Qatari Commercial Law. As a general rule enforcement of security must take place through a court supervised mandatory sale process.[18]

However, many provisions of the law including those excerpts summarized above are largely untested as there has yet to be a major corporate insolvency in Qatar. There is no reliable back-catalogue of comprehensive precedents. This causes understandable concern for financial institutions and lenders in general.[19] How confident can they be in the validity and value of their security if the borrower or security provider becomes bankrupt?

Based on the analysis and findings of my thesis, I will make the proposition that a new Qatari insolvency law should be introduced in order to embrace a new approach to business failure and insolvency. The existing approach is centered on liquidation of assets and payment of debts; moreover, there is little to no legal or practical viability for using bankruptcy proceedings to restructure and revive an insolvent business. Insolvency proceedings can therefore be seen as execution proceedings involving the totality of the assets of the bankrupt company (as opposed to ordinary execution proceedings involving limited assets only) which could even be considered to hinder the ability to purchase the insolvent business as a whole. A new and modern approach should be introduced to focus on enabling the efficient restructuring of viable enterprises in financial difficulty. This could be done by providing a formal structure for reorganization of viable businesses facing financial difficulties.

One of the main objectives of my thesis is to identify issues that may arise in cross-border insolvency situations, namely the difficulties associated with the realisation of an overseas asset. The present framework of the Commercial Law does not offer an effective means for reorganisation of the debtor’s business and its survival as a going concern. The existing abovementioned compromise procedures expressly provide for the ability of a debtor and creditors to agree an extension in repayment terms and/or to reduce the level of debt. However, the law does not restrict the creditors from agreeing to other settlement terms with the debtor.

Qatar has not adopted the Model Law on Cross Border Insolvency of the United Nations Commission on Trade Law (‘the UNCITRAL Model Law’), whose purpose is to allow for judicial recognition of foreign insolvency processes. Therefore, it does not apply to either the local insolvency regime or the QFC insolvency regime.

The current insolvency rules of the local regime preclude a Qatari court from co-operating with foreign courts in terms of insolvency matters.   It is therefore unable to seek the co-operation of foreign courts in those countries which have implemented the UNCITRAL Model Law, such as Australia and the US[20] unless a reciprocal agreement exists.[21]

Furthermore, in light of the increasingly international nature of insolvency, commercial necessity has encouraged Qatari courts to provide and receive assistance to and from other national courts under a concept known as comity of law.[22] This means that territorial integrity does not prevent a court in one jurisdiction from giving assistance to a court in another jurisdiction in respect of assets located, or persons resident within its territory.[23] Indeed, there are certain countries, for example England & Wales, in which the national courts have an inherent jurisdiction to assist foreign office holders.[24] Consequently, they may remit assets located in their own jurisdiction to assist a Qatari bankruptcy administrator. However, if the courts in the location of the asset are unwilling or unable to offer assistance, the bankruptcy administrator may have to initiate concurrent proceedings in Qatar.

Although there is no recognition of foreign proceedings in the local regime in Qatar, there are also no provisions restricting the power of the bankruptcy administrator to look beyond Qatar to the bankrupt trader’s assets abroad provided that the other country has a reciprocal arrangement. Nothing in the local regime distinguishes between external and internal assets. It therefore follows that the insolvency administrator will be permitted to take action it deems necessary to seize the bankrupt trader’s foreign assets to boost the bankrupt trader’s estate for distribution to the creditors in the Qatari proceedings. The ease with which this action is taken is likely to depend upon the jurisdiction of the assets. However, as stated earlier, the Local Insolvency regime remains largely untested, therefore it is difficult to say with any certainty how effectively the administration of the bankruptcy process would handle any cross-border aspects.

The QFC Regime

The QFC, established in 2005, is a separate legal jurisdiction from the State of Qatar and is similar to the Dubai International Financial Centre (‘DIFC’).[25] The QFC can create its own legal and regulatory framework for all civil and commercial matters. The QFC Authority (‘QFCA’) develops laws and regulations applicable to the operation of the QFC and these laws are generally based on common, rather than civil, law. The QFCA has implemented its own bankruptcy regime through its Insolvency Regulations 2005. As outlined above, the QFC Insolvency Regime is based on common law principles and is consequently similar to insolvency legislation in England and Wales and other common law jurisdictions.[26] It offers a more comprehensive regime than the Local Insolvency Regime and, because it is more closely modelled on the insolvency law of England and Wales and other common law jurisdictions, there is a possibility that one could look to case law in these jurisdictions for further guidance as to its application in Qatar.[27]

The QFC Insolvency Regime has a wider scope in relation to bankruptcy than the Local Insolvency Regime as it recognises non-QFC bankruptcy proceedings, including foreign proceedings. In contrast, the Local Insolvency Regime is restricted as explained above. Provisions of the Insolvency Regulations state that the QFC tribunal must co-operate to the maximum extent possible with foreign courts of non-QFC representatives (i.e. a person or body authorised in a non-QFC proceeding) and may be willing to entrust distribution of all or part of the bankrupt trader’s assets located in the QFC to the non-QFC representative, provided it is satisfied that the interests of the creditors in the QFC are adequately protected.

In terms of seizing assets in different jurisdictions, the QFC Insolvency Regime gives the insolvency administrator, supervisor or liquidator wide authority to act outside of the QFC on behalf of a proceeding under the QFC Insolvency Regime. Thus, the insolvency administrator is able to take any action deemed appropriate to recover assets in other jurisdictions to realise their value for the benefit of the creditors in the QFC proceedings.

The QFC Insolvency Regime is a more substantial piece of legislation than the Local Insolvency Regime. It offers more certainty to lenders and security holders in terms of the cross border aspects of the bankruptcy procedure. The case law of the jurisdictions upon which it is based also gives guidance as to the application of its principles in practice.[28]

The proposed thesis will undertake a comparative analysis between the Local Insolvency Regime and the QFC Insolvency Regime, using the UNCITRAL Model Law as a benchmark, with the aim of reforming the former and the bankruptcy provisions embodied in the Commercial Code No. 27 of 2006.

No research has yet been performed to explore the best way to reform the Local Insolvency Regime and associated bankruptcy provisions embodied in the Commercial Code No. 27 of 2006 or, more specifically, how to best provide for cross border insolvency situations or international rules.

 

Research Objectives

The specific objectives of this research are the following:

  1. To critically examine the legal framework for bankruptcy in the local and identify areas of best practice and deficiencies in both regimes.
  2. To compare the scope and effectiveness of bankruptcy rules in the Local Insolvency Regime against the UNCITRAL Model Law (the relevant benchmark selected for this thesis).
  3. To evaluate the effectiveness of the current administration of bankruptcy rules and regulations in terms of cross-border insolvency cases.
  4. To identify which aspects, if any, of the UNCITRAL Model Law could usefully be adopted by the State as a solution to the deficiencies identified in the Local Insolvency Regime.

 

 

Research Methodology

This paper will use a qualitative comparative analysis by employing a variety of methods and sources to address the research objectives. While it is a case-study on the legal regimes under which bankruptcy rules currently apply, that is the Local Regime and the QFC Regime, it will use qualitative content analysis to not only compare the two regimes in the State of Qatar, but also to examine case law specifically in the Local Insolvency Regime and the QFC Insolvency regime. The research will also involve a comparative study of law and secondary sources. In addition, data and content will be collected by qualitative interviews with insolvency administrators and Judges, who have dealt with insolvency cases.

 

 

 

 

 

 

 

Bibliography

 

  • Iwan J. Azis and Hyun Song Shin, Global Shock, Risks, and Asian Financial Reform (1st ed, 2014), 468.

 

  • Gerard McCormack et el, European Insolvency Law: Reform and Harmonization(1st edition, 2017), 57.

 

  • Jean-Charles Bricongne et el, Macroeconomic relevance of insolvency frameworks in a high-debt context: An EU Perspective (2016), Gerard McCormack, Andrew Keay, Sarah Brown, European Insolvency Law: Reform and Harmonization.Publisher?

 

  • Sharar, Zain and Al Khulaifi, Mohammed, ‘The Courts in Qatar Financial Centre and Dubai International Financial Centre: A Comparative Analysis’ (August 30, 2016). Volume 46, Part 2 of 2016, p 533 Hong Kong Law Journal . Available at SSRN: https://ssrn.com/abstract=2846978

 

  • Sharar, Zain, Does Qatar Need to Reform Its Arbitration Law and to Adopt the UNCITRAL Model Law for Arbitration? A Comparative Analysis (October 23, 2013). The Legal & Judicial Journal-Ministry of Justice-State of Qatar , Vol. 2, 2011 p. 292 Available at SSRN: https://ssrn.com/abstract=2344139

 

 

 

  • Cross Border Insolvency Concerning Countries outside the UK. Para 42.9 https://www.insolvencydirect.bis.gov.uk/technicalmanual/Ch37-48/chapter42/part%201/PART%201.htm

 

 

Cases

 

 

  • Qatar Financial Centre Authority vs Silver Leaf Capital Partners LLC.

 

  • Al Mal Bank (In Liquidation) v Kashif Mehmood Chaudhry-

 

 

 

Legislation

 

  • Qatar Financial Centre Law No. 7 of 2005

 

  • Commercial Law No 27. of 2006

 

  • Qatar Financial Centre (QFC) Insolvency Regulations 2005

 

 

 

[1] Commercial Law No 27 of 2006, Art 380. Article 380 provides that “a foreign judgment shall be recognized provided that:

  1. Qatari courts do not have exclusive jurisdiction over the concerned

subject matter and the foreign court had international jurisdiction pursuant to

the country of origin’s lex fori.

  1. The parties were duly summoned and represented.
  2. The judgment is enforceable in the country of origin.
  3. The judgment does not conflict with a prior judgment of a Qatari

court on the same subject matter and it does not infringe the Qatari public policy”.

[2] Iwan J. Azis and Hyun Song Shin, Global Shock, Risks, and Asian Financial Reform (1st ed, 2014), 468.

[3] Gerard McCormacket et el, European Insolvency Law: Reform and Harmonization(1st edition, 2017), 57.

[4] Jean-Charles Bricongne et el, Macroeconomic relevance of insolvency frameworks in a high-debt context: An Eu Perspective (2016), Gerard McCormack, Andrew Keay, Sarah Brown, European Insolvency Law: Reform and Harmonization

[5] Sharar, Zain, Does Qatar Need to Reform Its Arbitration Law and to Adopt the UNCITRAL Model Law for Arbitration? A Comparative Analysis (October 23, 2013). The Legal & Judicial Journal-Ministry of Justice-State of Qatar , Vol. 2, 2011 p. 292 Available at SSRN: https://ssrn.com/abstract=2344139

[6] Sharar, Zain and Al Khulaifi, Mohammed, the Courts in Qatar Financial Centre and Dubai International Financial Centre: A Comparative Analysis (August 30, 2016). Volume 46, Part 2 of 2016, p 533 Hong Kong Law Journal . Available at SSRN: https://ssrn.com/abstract=2846978

[7] Ibid

[8] Sharar, above n 5, 534.

[9] Ibid

[10] Commercial Law No 27 of 2006

[11] Qatar Financial Centre (QFC) Insolvency Regulations 2005

[12] Commercial Law No 27 of 2006, Art 21

[13] Commercial Law No 27 of 2006, Art 606

[14] Commercial Law No 27 of 2006, Art 608

[15] Commercial Law No 27 of 2006, Art 611

[16] Commercial Law No 27 of 2006, Art 647

[17] Ibid.

[18] Ibid.

[19] Roger Phillips and Jo Rolls, ‘An Overview of the Qatari Insolvency System’, Focus: Asia & Middle East. P 6 https://www.insol.org/_files/Dubai%202016/FinalFolder/MENA/Overview%20of%20the%20Qatari%20Insolvency%20System%20-%20INSOL%20World%20Q1%202016.pdf

[20] UNCITRAL Model Law on Cross-Border Insolvency (1997) Legislation based on the Model Law has been adopted in 44 States in a total of 46 jurisdictions please see http://www.uncitral.org/uncitral/en/uncitral_texts/insolvency/1997Model_status.html

[21] The State of Qatar is party to a number of multilateral conventions on the recognition and enforcement of foreign judgments, including the Riyadh Convention on the Judicial Cooperation between the States of the Arab League 1983 (entered into without reservations),  and the Gulf Cooperation Council (GCC) Convention for the Execution of Judgments, Delegations and Judicial Notifications of 1996 (entered into without reservations). In addition, reciprocity is – for example – established between Qatar and Germany and the US

[22] Justice Joseph Fok, ‘Comity in multi-jurisdictional disputes’, Asia Pacific Judicial Colloquium 2017. 15. https://www.hkcfa.hk/filemanager/engagement/en/upload/50/JC%202017%20Comity.pdf

[23] Ibid.

[24] Cross Border Insolvency Concerning Countries outside the UK. Para 42.9 https://www.insolvencydirect.bis.gov.uk/technicalmanual/Ch37-48/chapter42/part%201/PART%201.htm

[25] Sharar, above n 5, 534.

[26] In the Civil and Commercial Court of Qatar Financial Centre in the case of Qatar Financial Centre Authority and Silver Leaf Capital Partners LLC involving application for a winding up order. The Court highlighted that where there was a requirement to interpret the QFC Regulations, it should be recognized that they derive ‘from concepts that formed part of the law of England and other common law countries’ and that the principles developed in those countries provided ‘useful guides to the interpretation of the QFC legislation’.

[27] Ibid.

[28] Qatar Financial Centre Authority vs Silver Leaf Capital Partners LLC. See also Guardian Wealth Management Qatar LLC (in Liquidation); Guardian Wealth Management Qatar LLC (In Liquidation)QFC_TITLE0102016QFC Case No. ; 010/2016; Al Mal Bank (In Liquidation) v Kashif Mehmood Chaudhry-3QFC_TITLE0012013QFC Case No. 001/2013-3; Al Mal Bank (In Liquidation) v Kashif Mehmood Chaudhry-2QFC_TITLE0012013QFC Case No. 001/2013-2

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