Query:
A SME entity is having difficulties in getting their bank facility renewed /increased without
further personal guarantee from directors. Due to last 2 years financial losses, it is
struggling to manage its cashflows and evaluating various strategic options including
seeking advise on insolvency under bahrain insolvency law, possible renegotiations with
bankers, cost cut etc. XYZ has just been appointed as advisor to assist on this. Discuss in
detail and advise its CEO?
Answer:
Based on the information provided, here is my analysis and advice for the CEO of the
SME entity:
Situation Analysis and Strategic Options for SME in Financial Distress
1. Introduction
The SME entity is facing significant financial challenges, including:
º Difficulties in getting bank facilities renewed or increased without additional personal
guarantees from directors
º Financial losses over the past 2 years leading to cash flow struggles
º Potential insolvency concerns
This situation requires careful consideration of various strategic options to address the
financial distress and ensure business continuity.
2. Relevant Legal and Regulatory Framework
Under Bahrain’s Insolvency Law:
Insolvency Law Bahrain, Article 1, page 2
º The law aims to consolidate and amend laws relating to reorganization and
insolvency resolution of corporate persons in a time-bound manner.
º It seeks to maximize the value of assets, promote entrepreneurship, balance
stakeholder interests, and establish an Insolvency and Bankruptcy Fund.
Insolvency Law Bahrain, Article 6, page 4
º A debtor may file for bankruptcy proceedings if:
1. They fail to pay debts within 30 days of the due date or will be unable to pay on
future maturity dates
2. The value of financial liabilities exceeds the value of assets
Insolvency Law Bahrain, Article 147, page 51
º The court may convert liquidation proceedings to reorganization if it’s in the best
interest of the bankruptcy estate.
º This is possible if there’s a reasonable chance the reorganization plan will be
accepted or if reorganization will maximize asset value.
3. Detailed Explanations and Strategic Options
3.1 Renegotiation with Bankers
Insolvency Law Bahrain, Article 16, page 8
º The law allows for interim measures prior to commencing bankruptcy proceedings,
which may include:
º Stay of proceedings
º Temporary restrictions on management
º Appointment of a temporary trustee
Considering this, the SME should:
1. Initiate proactive discussions with banks to renegotiate terms.
2. Present a detailed turnaround plan showcasing future viability.
3. Offer alternative forms of security or guarantees if possible.
4. Consider requesting temporary forbearance or a standstill agreement.
3.2 Cost Cutting Measures
1. Conduct a thorough review of all operational expenses.
2. Identify non-core activities that can be outsourced or eliminated.
3. Negotiate with suppliers for better terms or discounts.
4. Consider temporary salary reductions or deferred compensation for management.
5. Evaluate premises and consider downsizing or relocating to reduce rent costs.
3.3 Exploring Insolvency Options
Insolvency Law Bahrain, Article 18, page 8
º The law provides for two main insolvency processes:
1. Reorganization Proceedings
2. Liquidation Proceedings
3.3.1 Reorganization Proceedings
This option allows the company to continue operations while restructuring its debts:
1. File for reorganization proceedings with the court.
2. Develop a comprehensive reorganization plan.
3. Negotiate with creditors to accept the plan.
4. If approved, implement the plan under court supervision.
Benefits:
º Allows business continuity
º Provides protection from creditor actions
º Opportunity to restructure debts and operations
3.3.2 Liquidation Proceedings
If reorganization is not feasible:
1. File for liquidation proceedings.
2. Court appoints a liquidator to manage the process.
3. Assets are sold and proceeds distributed to creditors.
This should be considered as a last resort if other options fail.
3.4 Seeking New Investment or Strategic Partnerships
1. Identify potential investors or strategic partners who could inject capital or provide
synergies.
2. Prepare a compelling investment proposal highlighting turnaround potential.
3. Consider offering equity stakes in exchange for debt reduction or new capital.
4. Used Cases/Interpretations & Disclosures
Case Study: Bahrain Middle East Bank B.S.C. (Suspended)
BMB-Annual-Report-2019-546786 Bahrain Middle East Bank B.S.C. (Suspended), page 11
The bank faced similar financial distress and took the following actions:
º Called for an Extraordinary General Meeting to decide on continuity or voluntary
liquidation.
º Focused on managing remaining liquidity and recovery efforts.
º Worked on restructuring options to cut operational costs and continue operations.
º Negotiated with related parties for restructuring while considering legal options.
Case Study: Financial Restructuring by National Bank of Bahrain
NBB_AR2021_En, page 64
NBB supported the restructuring of a major manufacturing company:
º The company filed for protection under bankruptcy and reorganization law.
º A restructuring plan was approved after negotiations between the court,
court-appointed trustee, and creditors’ committee.
º The approved plan helped preserve employment for over 600 employees, majority
being Bahraini nationals.
This case demonstrates the potential benefits of using the legal framework for restructuring
to achieve a positive outcome for both the company and its employees.
5. Summary
Given the SME’s current financial situation, a multi-faceted approach is recommended:
1. Immediately engage with banks to renegotiate terms and seek forbearance.
2. Implement aggressive cost-cutting measures to improve cash flow.
3. Explore the option of filing for reorganization proceedings under Bahrain’s Insolvency
Law, which can provide protection and allow for debt restructuring.
4. Simultaneously seek new investment or strategic partnerships to inject capital.
5. Prepare a detailed turnaround plan to present to creditors and potential investors.
6. Consider liquidation only as a last resort if all other options fail.
The CEO should prioritize swift action while carefully considering the legal implications of
each option. Engaging legal and financial advisors with expertise in corporate restructuring
is crucial to navigate this complex situation effectively.
6. Attribution
The information provided in this response is based on the Reorganization and Bankruptcy
Law promulgated by Legislative Decree No. 22 of 2018 as issued by the Kingdom of
Bahrain. The specific sections referenced are Articles 1, 6, 16, 18, and 147. For complete
and authoritative guidance, please refer to the full Reorganization and Bankruptcy Law
available through the official Bahrain legal resources.
Insolvency Review
