Articles

Implication of negotiable instruments under kuwaiti law

Wed, 17 Jun 2009 07:45:30 -0400

A negotiable instrument is a document in writing that represents an unconditional or unrestricted promise to pay a certain amount of money, specified on it, upon the demand of its owner.

The rapidness of commercial transaction which demanded flexibility in business paid way for the introduction of alternative means of money transactions. Moreover, traders would often prefer future payments than immediate payment where he can avail the benefit of a well thought out structure of payments at a previously determined date.

The main advantage of the negotiable instruments is that it can be transferred from one person to another, through procedures which are easy and swift. These modes of transaction would reduce the use of money and thus minimizes the amount of money circulated in the market. Moreover, unlike ordinary contract documents the formal requirements of a contract like offer, acceptance or consideration are not generally applicable to negotiable instruments. Therefore, the right of the owner to demand payment is not subject to set-off or counter claim, and is not based on the validity of the underlying contract giving rise to the debt. Moreover, these do not impose any obligation or responsibility on the part of the owner or a condition, in order to claim the amount specified on it.

Cheques or promissory notes are often referred as "commercial papers or bills of exchange" because of its flexibility to use it on a future date. A bill of exchange is a written order by the drawer to the "drawee" (a person ordered in a document to make payment) to pay money to the payee. The major difference between the check and the bill of exchange is that the cheque is payable upon reading it while the bill of exchange is payable at a certain point in time in the future. The check will become payable upon reading it while the payment consideration in the bill of exchange is postponed till the maturity date. Moreover, punishment is prescribed for issuing a cheque without balance but there is no punishment for issuing a bill of exchange without a payment consideration because bill of exchange is often used as a mode of credit while the cheque would always be treated as a mode of payment.

Though Kuwaiti law does not provide any clear definition for 'cheque' the Jurisprudence (Fiqh) defines it as "a written order or a note for a particular purpose by means of which a person order the 'drawee' to make payment (in most cases the 'drawee' would be one of the banks itself' and the Kuwaiti law specifies that the drawee shall be a bank). The right of execution of a cheque is linked to the possession of the document itself i.e., a person can write "pay to the order of" on the back of a check and turn it over to someone else. By handing over a cheque he is actually guarantying payment. The intention of the party at the time of delivery of the cheque, is not a valid defense and the liability shall ensue from the date of delivery of the cheque. The responsibility of the "Drawer" (a person who signs or is identified in a cheque as a person ordering payment) shall be released from his liability only when the beneficiary receives payment. The validity period of a cheque or promissory note shall as per the prevailing system of a country and Kuwaiti law does not prescribe any time limitation and therefore the cheque would be treated as valid indefinitely for an undetermined period. Post dated cheques would often serve the purpose of a promissory note, in Kuwait.

Promissory note is a document through which the borrower promises the lender that he will pay back the money according to the terms mentioned therein or in other words it is a written promise to pay a certain sum of money, at a future time, unconditionally. But it is not a mere acknowledgement of the debt. A promissory note payable to order or bearer becomes authenticated by endorsement, and the holder may bring suit on it in his own name. Although a simple contract, a sufficient consideration is implied from the nature of this instrument.

Most of the rules applicable to bills of exchange affect promissory notes, as well. Per Kuwaiti law a particular form is required for these instruments. The Commercial law of Kuwait prescribes some prerequisite for the Promissory note and therefore the deed shall not be treated as promissory note if it does not comply with those provisions. There are two vital criteria which determines the validity of a note; first, that it be not payable at all events, not dependent on any contingency or payable out of any particular fund. And, secondly, it is mandatory that it should be used for the payment of money only.

An example for another widely used negotiable instrument is the bill of lading. A bill of lading does not carry the name of the parties but only the carrier's name. A contract in a bill of lading can be transferred to the consignee, when he receives the document. An implied contract can also be established between the carrier and the consignee when the later claims the goods at the destination. Contracts can also be established between the carrier and consignee through an "agency clause "or "third party" clause.

Punishment for dishonor of cheques

Article 523 of the Kuwaiti law states that, the drawee shall bear the detriment resulting from the payment of a cheque in which the signature of the 'Payee' is forged, or if the data on it is misrepresented, provided the fault cannot be attributed to the drawer. The drawer shall be considered, particularly, at fault, if he does not exert due and diligent care in safekeeping the cheque book, which is handed over to him from the bank. The Decree of Law no. 15 for the year 1978 (which supersedes Article 237 of Kuwaiti Penal Code) stipulates punishment of imprisonment, for a period not exceeding five years and with a fine not exceeding five hundred dinars or each of either punishment, for a person who, with bad intention, commits any of the following acts:

if he issues a check that has no current and cashable payment consideration.
If he withdraws from his account, after issuing the check, all or some of the money in the account, in such a way that the remaining amount is not sufficient for the value thereof.
If the drawer gives instructions to the drawee not to cash the check.
If he intentionally prepares the check or signs it in such a way that prevents the check from being cashed.

Though cheque resembles other commercial papers like bills of exchange, or promissory notes, it is unparallel to other negotiable instruments because it effectively meets all the objectives of money transaction. Due to the reason that check plays a predominant role in the economic system of a country Kuwait has developed a well thought out system of law to counter any related crime.

Kuwaiti Joint liability Company and Limited Liability Company - A comparative study.

Tue, 23 Jun 2009 10:51:20 -0400

Due to ever increasing commercial requirements people formed companies and in order to regulate them, new laws came into existence. Even prior to the advent of Islam dealings in the form of companies existed among the Arab community and during the dawn of Islam, companies were categorized as companies of consent, proprietorship, companies based on contracts, capital companies and partnerships.

Article 4 of Law No 15 of 1960 defines the joint liability company as a company incorporated by and among two or more persons under a specific name, to perform activities of commercial nature, where the parties are jointly liable for the company's liabilities. On the other hand, a limited Liability company is a company consisting of a maximum of thirty members and a minimum of two, each liable to only his share in the capital (If the spouse is a partner then the minimum number of partners shall be three). If the quorum is not filled within a period of one month from the date of commencement of business the company shall be treated as liquidated and the existing partner would be expected to settle all dues ensued therein from his personal assets.

Both in a Joint Liability Company and Limited Liability Company the Articles of Incorporation plays a pivotal role in the determination of the rights and liabilities of the partners. The Articles of Incorporation override any other agreement signed on or before its incorporation. The main advantage of the Articles of Association is that the rights of all the parties would be protected equally and impartially. The AOI of the Joint liability Company shall be drafted in the official deed and encompasses information including, the name of the company (or trade name), headquarters of the company, partner's name (of which one of them shall definitely be a Kuwaiti citizen), manager's name (who may also act as the signatory but need not be partner), objective, capital, equity contribution, profit/loss computation., term and such other information as is required. The AOI of the Limited Liability Company shall include, the company name (with the phrase 'limited liability Company'), location details, partner's name, capital contribution and precise description about each partner's share, conditions for waiver of rights, names of managing partner and board of directors, objective, term, profit/loss allocation., term etc.

Major differences between Limited Liability Company and Joint Liability Company

Limited Liability Company is more popular among local business men and is often referred as WLL Company. Most of the requisites of a joint liability company are applicable to limited liability Company, as well. However, there are certain areas of disparity which makes it a better choice when compared to the joint liability Company. The Limited Liability Company is a hybrid business entity that combines the characteristics of a partnership and a corporation. It allows the members to actively participate in the management and control but provides limited liability. The purpose of the W.L.L Company is to limit one's exposure to an investment or "risk". In theory, the exposure is limited to the investment or involvement.

The WLL Company is not allowed to enter into areas like banking, insurance or other investment sector. The name of the limited Liability company shall be in accordance to the nature of business it conducts and the name of the partners can also be used along. One of the partners of both the WLL and Joint Liability Company must be a Kuwaiti citizen holding a share equivalent to or more than 51%.

The debts, obligations of a limited liability company whether arising through contracts or otherwise are debts of the company and the partners/managers are not personally liable for any such debt or obligation. The liability of a partner in the limited Liability company is limited to the shares which he holds and hence the Company would not be liable to settle his personal debts.

However, in a joint liability company if the company is bankrupt all the partners become bankrupt and would be requested to settle the company's dues from their personal assets, in proportion to the share allocation. The partner shall be responsible for any and all liabilities incurred during the continuance of company's business and he will not be released from his liability if it arises during the period while he was partner of the company. Nevertheless, the (personal) creditors of the 'partner in debt' may settle their dues from partner's profit share though it is prohibited to claim their right from the capital of the company, irrespective of whether it is the said partner's share. The law requires that the name of the Joint Liability Company should be compatible with the existing structure of the company. If the foreign partner agrees to use his name in the company's title then he shall be deemed liable to any third party who conducts business with the company, relying on his (company) name or goodwill. The Share contribution may be in the form of assets, landed property, money or talent. However, it is mandatory that the profit/loss distribution should be included in the Articles of Association, in such a way as to avoid any kind of confusion on a later stage. It is also to be noted that if the AOA favors one of the partners relieving him from all liabilities or if it denies profit to a partner then the company can be dissolved, at the request of the partner, who bears the entire burden of loss. In such an event the loss shall be calculated based on the profit allocation of each party. It is also provided that the objective of the parties should be clear in the Articles of Association which means that the parties shall enter into agreement on good faith and mutual understanding so as to avoid any false claim.

In a joint liability company the partner may not assign his right to any other person without the consent of all the partners of the company or through majority vote unless there is such a provision in the Articles of Association. However, in a WLL company each partner can transfer his rights to his legal heirs, provided the number of heirs shall not exceed the prescribed limit.

To summarize this topic, it can be said that though the WLL Company claims many advantages over the Joint Liability Company, the latter is treated as more trustworthy and reliable seeing that the goodwill of the parties play a vital role in its incorporation.

An overview of privatisation in kuwait economy

Tue, 23 Jun 2009 10:56:22 -0400

Privatization means the transfer of ownership or management of a project/industry from the government to the private sector for increasing competition among companies which in turn would brings forth capital flow to the market, by generating additional foreign investments and job opportunities. In Kuwait, significant changes are happening in the economic and political scenario which would indicate a shift to a strategy that, as opposed to trying to protect economy from the rest of the world, aims to take advantage of opportunities offered by participating in the international trade.

However, if the privatization is to be beneficial for the country the laws should elucidate the guarantees and incentives for investment in the country; should define the structural frame work and shall simplify the procedures for establishing new projects. A comprehensive legislative and organizational framework supporting the privatization process through the amendment of existing laws and promulgation of new laws would be necessary. Proper laws for stock trading and taxation are essential for encouraging these kinds of investments. The laws should be revised to create a free market guaranteeing equality and fair play; counteracting monopoly and hoarding. The laws governing privatization is vital for the development and sustenance of the country because privatization deals with the government property.

Privatization strategy of Kuwait

Among important initiatives for privatization, the government has revamped the commercial laws and there is a proper controlling authority for this purpose, the Kuwait Investment Authority (KIA), takes care of the players in the market. In 1992, the KIA implemented a three-phase privatization program that aims to reconstruct the economy and minimize the dependence on oil income.

The legislature's role

Choosing the most appropriate mode of privatization for each project relative to the operating conditions and requirements of the concerned sector is the major role of the legislature. There may be proper schemes from the government to attract both local and foreign investors. Preservation of the rights of all parties i.e., the investor, the government, the consumer and the working class is the responsibility of the legislature. The legislature should take care of the investor who is the active player in the deal because without him there would not be any new venture. New and existing laws should be helpful in maintaining the investor's enthusiasm so that he will continue doing similar business. To a certain extent the government interference should also be curtailed or minimized so that the interference will not turn out to be tyrannical. Moreover, the laws should simplify the process of establishing and registering companies. While laying the groundwork for similar projects, enacting legislation to license private investments in the telecommunications and electricity sector, transparency and integrity should be kept in pace with the international standards. The customers should not be ignored and the interests of the laborers or the working class should be protected. Any law which denounces the rights of the consumers should be avoided or else the country would face the problems of monopoly and adverse quality standards.

Methods of Privatization

There are two different but effective laws for privatization; one method is to issue a single code encompassing all privatization measures and the second method is to draft different laws for different projects; In order to instigate the privatization process and to strengthen the capabilities of the government to successfully execute the privatization program, an institutional framework and its mechanisms have been formulated by Kuwait adapting the following methods;

Sale of Government Shares.

Sale of government shareholding through Kuwait securities Market in cases of joint stock companies or in such other manner that ensures the maximum possible revenue to the government.

General tendering:

Among the tenders submitted the most suitable bid would be selected in relation to standards specified for this purpose. Special tender committees are formed if required based on the nature of the project. Law No. 37 of 1964 (modified by Law Nos. 13 and 31 of 1970 and 1977, respectively) concerning Public Tenders (the "Tenders Law") provides that any procurement made by the Kuwait Government, with a value in excess of KD 5,000, must be conducted through the Central Tenders Committee procedures in order to ensure competitive pricing.

Management Contracts:

The terms of the contract shall govern the relationship between the parties and only those companies proficient in a particular area of business would be given a chance to propose. Under this mode the public facilities would be managed by the private sector for specific period of time. Normally, this will be for a short term which may or may not be renewable.

Lease arrangement:

In this kind of arrangement, the government would lease public facilities to the private sector for a certain period of time for a price agreed amongst the parties. The private investors would run the whole project by themselves without any governmental interference and the rent would be paid to the government per the terms agreed in the lease deed. This is generally applicable for projects which were initially owned by the government and hence there are certain specific rules which are to be complied with.

Cooperation with the government:

The government may cooperate with certain prominent players in the market to generate more revenue and generally the income allotment would be based on capital contribution of each party. In rare cases, the government may sell part or all of its property to an investor and authorize him to use it. However, the government should be convinced of the intentions and interests of the players.

Though one cannot deny the fact that there are certain economic activity which needs special skill and technical know-how which cannot always be found in the public sector there is also the threat that the private sector would be more interested in the profit than the well being of the society. The government while seeking more financial gains through economic and social development should not sacrifice the well being of its people and an institutional framework for privatization should always be in place.

To be precise, privatization in Kuwait involves both the reduction of the government's stake in some existing public sector companies, or creating new opportunities for the private sector to invest in strategic industries previously supported by government funding. The aim is not privatization which strikes out government intervention or its role in the economic activity but to coordinate with the private sector which is more capable to run the project which at the end make the market active and generate more job opportunities.

Unfair competition and the implication of competition law of kuwait

Tue, 23 Jun 2009 10:59:45 -0400

Competition will undermine the development of a society as it would lead to hoarding which is intermittent when viewed from the buyer's and seller's perspective. The requirement is actually felt by many countries when they progress from a developing to a developed nation. Therefore many developed countries have very effective competition law which provides appropriate rules and regulation to ensure free trade and to prevent unfair practices. Though the harmful effects cannot be curtailed altogether, it can at least be controlled through the proper application of effective laws. If laws can forbid the bad effects of monopoly then at least a certain amount of the unduly generated profit can be distributed to the sufferer as compensation.

There is a moral responsibility for each and every one to do or abstain from doing anything which curtails the interests of the other and the Kuwaiti law classifies this under civil and criminal responsibility. This responsibility may be created through an agreement entered into between the parties, which can be termed as a contractual responsibility or an "Omissive responsibility". The omissive responsibility would include the responsibility for personal act (error, damage and causal relation), and omissive responsibility for others' acts.

Unfair competition would lead to punishment under both civil and criminal law. In civil law, a private party (e.g., a corporation or individual person) files the lawsuit and becomes the plaintiff. In criminal law, the litigation is always filed by the government, who is called the prosecution. When the damage is done towards the society as a whole then it would become a crime.

One of the most fundamental distinctions between civil and criminal law is in the notion of punishment. In criminal law punishments are punitive in nature. In contrast, a defendant in civil litigation is never incarcerated and never executed and the so-called punitive damages are never awarded in a civil case, under contract law. In general, a losing defendant in civil litigation only reimburses the plaintiff for losses caused by the defendant's behavior.

Commercial law of Kuwait

Monopoly would be the result of uncontrolled competition and the Commercial law Number 68 of 1980 deals with illegal competition, in Kuwait. The law does not allow gain without a reason that is, illicit gain and amounts of money received through unlawful gain.

The law specifies that if the commercial title is used by anyone other than its owner or if the owner uses it in a manner violating the law, the concerned parties may request the prohibition of use thereof and may request the omission thereof if it is enrolled in the commercial register. They may recourse for compensation if it be justified. These provisions shall also be applicable in the use of the trade marks and commercial information as stated herein. Per the law a merchant may not seek fraud and deceit to sell out his goods and may not publish false data which may cause detriment to another competitive merchant, otherwise he shall be liable to indemnification.

The merchant may not publish discrepant matters relating to the origin or the description of the commodities or relevant to the importance of his commercial business. He may neither in contrast to reality announce that he acquired a grade, a certificate or a price, nor seek any other way including deceit to take away the clients of another competitive merchant, otherwise he shall be liable to indemnification. Moreover, the merchant may not induce the workers or employees of another merchant to assist him in taking away the clients of another merchant, or leave the service of other merchant and join his service to understand the secrets of his business. These acts shall be considered illegal which necessitates indemnification. If the merchant gives a previous employee or worker a discrepant certificate concerning good conduct and this certificate mislead another merchant of good faith and incurred detriment to him, the latter is entitled to adequate compensation as the case may be and according to the circumstances.

Any illegal competition is prohibited, where the illegal competition is performed by a merchant who violates the existing usage or rules of the commercial transactions in the State of Kuwait or divert clients of a competitive merchant or harm his interests or if there is retardation of liberty of commerce by retraining or sidestepping competition in the field of commodities production or distribution or services within the State. The commercial information about a product should be true in all sense. The illegal competitive acts in particular are;

The frank or explicit agreement for the limitation of sale price of commodities or services to others.
The retardation of the entrance of a competitor in the marker without a legal reason.
The offense of tarnishing another merchant's reputation or depreciate the value of his commodity.
Any action in this respect causes disorder in the market to harm a merchant or other merchants.

Forbidding a person to win a chance is also not allowed under Kuwaiti law. The right to recourse on infringement of the competition law cannot be assigned or transferred to another person. However, if the person dies after initiation of the case then the successors or legal heirs shall be entitled to compensation.

Awareness among the public is very crucial because the law gives freedom to anyone to inform the authorities about any of the prohibited agreement or practice according to the regulation of the law

The rule of imprisonment of the debtor

Tue, 23 Jun 2009 11:04:31 -0400

Under Kuwaiti law non payment of debt is not a crime and hence there is no prescribed mode of punishment under the Kuwaiti code. However, this does not mean that the debtor would be set free of all his liabilities towards the creditor. If the creditor chooses to pursue the matter he can seek extra judicial assistance and can imprison the debtor for a term not exceeding six months. But how a person interprets the procedure and applies it to his own situation would give it value because the court of law has relatively no role in this matter.

The procedure

The creditor should submit a written submission before the Expert department and if the head of the expert department decides to grant the plea the debtor would be imprisoned. The maximum term of imprisonment is six months. However, the term shall be determined based on the discretion of the officer and normally a period of one month imprisonment would only be awarded. If the debt is not paid fully during this initial term the debtor can be jailed any number of times until the period of six months is elapsed; unless he proves that he is financially incapable of repaying debt. On the other hand, irrespective of the completion of his term (6 months) in the prison the debtor would be asked to pay the debt without any deductions as he is sentenced to prison as an outcome of a less punitive and more due process oriented measure.

The shortfall of the system

Good regulatory practice necessitates the intervention of the court where the procedures would revolve around formal but precise rules. Voluntary compliance, which is less wed to rules, stressing responsiveness and forbearance and preferring tools involving self-regulation, persuasion and negotiation may not always be effective in an issue like debt collection.

However, under the present system the rights of both the debtor and the creditor are limited by certain restrictions, which are mentioned hereunder;

The provision which is based on rule of natural justice forbids imprisonment if the debtor is not in a position to repay his debt The burden of proof is vested on the creditor who should prove that the debtor is financially sound or is willfully neglecting the repayment. In actual practice, imprisonment is more or less used as a test to confirm whether the debtor is financially sound or not.
The debtor should be offered an unvarying system where he can enforce his rights, as well. The debtor should be given the right to be heard and the right to present his perspectives fully and completely before a competent judge. For instance, if the non payment is due to the reason that the debtor's assets or money is confiscated or blocked for a certain period of time he should be given a chance to repay it on an extended date. However, under the present system, more often, the debtor would at once be imprisoned if a complaint is lodged against him
The imprisonment based solely on the decision of an officer, where it is set as a coercive measure than a disciplinary measure may not be always fair or reasonable. Favoritism, foul pay, misjudgment etc can also play its role.
If the debtor is above the age of sixty five years or if he is the single guardian of children below the age of 15 or if he arranges a guarantor/guarantee he cannot be put in prison irrespective of whether he is capable of paying the debt or not. Unlike any other civil or criminal wrong, here old age is treated as criteria for punishment. But recent studies find that a change in the age composition of the workforce is a global phenomena and the number of business people or working class of 65 years and older is about twice that of those 40 to 49 years old.

To conclude, I would suggest that, this sort of arrangement has many hitches as the notch of irrationality is attached to it. Each system has its own distinct advantages and disadvantages, and the choice between them should be pragmatic (what works?) rather than ideological. When the decision is made by the head of the expert department to imprison a person, based on the request of the creditor, the authority to decide on the subject is vested on a single person, with no judicial process or procedure. This system could be more finely tailored if the issue is settled through the court of law rather than the execution department, where it would be given a broader repertoire based on facts, evidences and circumstances of a case. The judgment based on submission/tallying of evidences would rather be prudent than leaving it open before an officer. In the turbulent corporate world it is important to anticipate, recognize, and understand the legal situation beforehand; hence I recommend that judicial intervention is mandatory.

Kuwaiti law on Merger of Companies

Tue, 23 Jun 2009 11:07:59 -0400

When two or more companies are combined together to achieve greater efficiencies of sale, productivity and profit it is termed as 'merger'. This is achieved through the elimination of replica of identity, structure, equipment, staff etc and the reallocation of capital assets to increase sales and profits in the enlarged company. Part VII of the Company law of Kuwait elaborates on how a merger is possible in Kuwait and it classifies merger as 'Acquisition' or 'Combination', as per the terms mentioned therein.

Acquisition

In acquisition, a company can buy another company with cash, stock or a combination of the two. Another possibility, which is common in smaller deals, is for one company to acquire all the assets of another company. The absorbed Company becomes merely a shell and will eventually liquidate. In other words, a company or more may merge into another company and so the legal personality of the absorbed company disappears and its assets and liabilities move to the acquirer company, which maintains its artificial personality.

The procedures for merger by acquisition shall be as follows;

The merged company shall issue a resolution confirming its liquidation.
The assets of the merged company shall be evaluated in accordance to the provisions of the law and the resolution to this effect would be executed.
A resolution for the increase of the share capital shall be made in accordance to the merged company's assets.
The increased share capital shall be distributed among the shareholders in proportion to the allocation of shares.
If three years elapse from the date of incorporation of the merging company the shares shall be circulated soon after the issuance of the shares.

Combination

By the term 'Combination' it would mean that two or more companies merge based on an agreement whereby the merger would be on equal terms that the legal personality of both of them would disappear and their assets and liabilities would be transferred to a new company. The resolution of the merger shall be agreed by means of an agreement entered into by and amongst the parties desiring to merge in accordance to the provisions of the company policies and the Articles of Incorporation. The merger shall not be considered as final unless the approval in conformity with the structure of the newly formed company is obtained. For example, banks, financial institutions and investment companies require the approval of the Central Bank before the implementation of the resolution for the merger. Additionally, a resolution of the Ministry of Commerce & Industry shall also be issued to determine the method of evaluation of the merging company's assets, the procedure, conditions and terms of merger.

Merger by means of combination shall be achieved by means of the following procedures;

Each of the merged companies shall issue a resolution about the liquidation.
The new company shall be formed in accordance to the provisions of law. However, if the newly formed company is a joint stock company, the reports of experts concerning the proportion and allocation of shares shall be considered without the need to present the matter before the Incorporation Assembly.
The shares shall be allocated to each merged company in accordance to its capital contribution in the newly formed company.

Transparency of the merger

Merger must be announced in two dailies, official gazette and shall be enrolled in the commercial register. The resolution of the merger shall not be implemented except after three months from the date of proclamation by enrollment in the commercial register and the creditors of the merged companies shall have the right to object the merger through a registered letter, properly delivered to the company. The merger shall be ceased unless the objection is abandoned by the creditor, a final judgment from the competent court is obtained or if the company pays the debt if it falls due or arranges a guarantee for fulfillment thereof if it is deferred; if no objection is filed within the stipulated time frame the merge shall take place and the newly formed company shall acquire all the rights and liabilities of the merged companies.

Even if a company is on the verge of liquidation it can merge with another company and it is not necessary that the merger should be between two companies carrying out business of similar nature or constituted under the same legal frame work i.e., even a WLL company can merge with a Kuwait Share Holding Company.

Merger & Competition laws

Commercial law Number 68 of 1980 deals with illegal competition which does not allow illicit gain or unlawful gain. The Kuwaiti Law obligates the companies which aim to acquire assets or to establish mergers to promptly notify the body entrusted with the protection of competition. Hence, when the share reaches the rate that leads to the domination of the market it should be notified to the authorized body and the said body shall always strive to strike a balance between the advantages and disadvantages arising from the merger.

Merger does not necessitate the need to change the partner's positions in the newly formed company and in this era of economic recession around the globe there is a great chance for financial institutions to merge, thereby enhancing their profits and competition.

Levy of Interest – The Economic Rationale and Implications under Civil and commercial Laws of Kuwait

Tue, 23 Jun 2009 11:14:30 -0400

The loan is a contract binding the lender to pay the borrower an amount of money or any other tangible thing, provided that a similar thing in kind, description or amount is returned. Interest can be defined as the payment of a certain amount of money for using the borrowed money for a specified time.

Payment of interest is common among western countries and in countries which were under the colonial rule. Due to the influence of the capitalist system under the colonial rule and due to the impact of the interest-based institutions Kuwait also followed a similar system. This influence is apparent in the drafting of its Commercial laws which accepts that interest can be charged at simple rates.

Sharia law prohibits payment of interest. The word "Riba", in Arabic language, literally means an "increment' or addition". In Islam the term "riba" has a special meaning. Riba is an unfair augmentation of money. If the money advanced as loan, which is paid in kind or to redress a financial crisis is asked to be returned along with a payment above the amount of loan, as a condition imposed by the lender or voluntarily by the borrower can be termed as "riba". Riba defined in this way is called in "Fiqh riba al-duyun" (debt usury).The Prophet in his 'hadith' warned that "riba" is more sinful than committing adultery over and over or again and again.

The state of Kuwait has assigned a special place for the civil law system and is properly drafted to avoid any discrepancies. The civil law is considered as the prevailing law of the country without prejudice to the fact that in commercial issues the commercial law would only be applicable without any interference from the civil law. Kuwait gives predominance to investment legislations with the aim of regularization of the foreign investment in the country and the state is entrusted with the authority to supervise and control while facilitating and encouraging the investment activity. It is mainly due to serious economic dependence on the Western world, during the 19^th and 20^th century, the system of payment of interest is introduced to an Islamic country like Kuwait. The commercial law of Kuwait allows payment of interest while Civil law prohibits it. The following paragraphs give an explanation on how this is possible without nullifying the contradictory provisions.

The civil law of Kuwait forbids the payment of interest. This is based on the principle that interest on consumption loans is definitely "usury", but that on loans taken to finance trade or development is not. Article 547 clearly says that lending shall be without interest and any agreement to the contrary shall be invalid without infringement of the loan contract itself and any benefit stipulated in this respect shall be treated as interest. Invalidating the clause demanding interest in a civil contract is mandatory as it would otherwise adversely affect the organizational structure of the country itself and therefore the government is entrusted with the right to voluntarily take up such issues.

The commercial Code of Kuwait indicates that the creditor has the right to charge an interest on commercial loans, unless otherwise agreed and if the rate is not mentioned in the contract the applicable rate would be 7%, subject to restrictions. The Commercial code makes clear cut differentiation on commercial and consumption loans and classify that a loan shall be treated as commercial loan if its purpose is to spend the borrowed amount for commercial purpose, which can be proved based on the agreement entered into at the time of payment or based on how the borrowed money is spent. Again, the borrower should be a merchant or a person doing business of commercial nature.

Commercial law is applicable not only for loan but for late payment, as well. It can be in any form, whether paid as commission, service charge or supply of any kind. If the debtor disagrees to repay the money and if he is postponing the payment without a valid reason then the court can impose a 'complimentary' compensation for non payment of loan on the agreed date along with the agreed interest i.e., if there is delay in repayment, the creditor is entitled to a compensation for delay, a legal interest or agreed upon interest and it is not necessary that he should prove that the delay incurred detriment to him. However, it is mandatory that when there is delay in payment the lender should send an appropriate notice stating that there is delay in payment. On failure to furnish such a notice his negligence to do so would be treated as acceptance of late payment.

There is something called "Darura" (necessity) rule in Shariah law which restricts payment of interest if the debtor is in poor economic situation. However, the civil law of Kuwait does not make any such distinctions and disallows payment of interest for all kinds of consumption loans. However, the Commercial Code of Kuwait has some influence of the "Darura" rule and gives a much more elaborate explanation on this. It clearly stipulates that if the debtor is in dire need of money or if he is ignorant or is not in a position to assess his risk, the lender should not levy any kind of interest for such transactions. If this is not complied with then there are provisions for imprisonment and/or penalty of Thousand Rupees (Seventy Five Dinars - calculated as per the old money calculation system).

The law also specifies that even in the promissory note the interest should be stipulated or else when the payment accrues an interest as per the then prevailing rate would become payable. The Commercial law is silent when it comes to future sales but civil law prohibits it therefore it is a general practice not to impose interest on future sales. Conversely, I hold the view that if the law is silent then it should be interpreted affirmatively i.e., right to demand interest for future payments should be conferred. Interest rate more or less equalizes the disparity in the inflationary rates. Therefore, under sky rocketing inflationary conditions, interest payments may be considered as compensation for the loss in real value of money, and not 'riba'. Moreover, it is to be noted that the economic system prevailing in the county does not support finance on loss and profit sharing basis and therefore it is indispensable for the business people to seek out finance on interest basis.

UPDATES

The Kuwait Income Tax Decree No 3 of 1955 set up the structure for levying tax on all foreign companies carrying trade or business in Kuwait and the Kuwait Income Tax decree No. 23 of 1961 levy tax on foreign companies operating in the offshore neutral Zone. Apart from this there are Ministerial orders in the form of resolutions and there are unwritten practices and precedents set by the tax department which administers the law.

The Kuwait National Assembly passed a law on 26 December 2007 that amends several provisions of Income Tax Decree No. 3 of 1955 (Decree). The Kuwait Government has implemented the new tax law which substantially cuts taxes on foreign companies working within the territory. The new tax legislation would be available to the public only after its publication in the official gazette and is expected to be released by August 2008.

Per the amendment foreign companies working within the territory shall only pay a flat rate of 15% of the profit generated within the territory rather than a variable tax which reached up to 55%. Moreover, profit earned by foreign companies from trading in Kuwaiti shares, whether directly or through investment portfolios or funds, is not to be taxed, and intends to keep out from taxation the profits of Kuwaiti agents earned on trading foreign goods for their own account. Neither the old tax law nor the new amendment subjects foreign individuals to income taxes. Only foreign body corporate with an independent juristic personality is subject to taxation. The tax is levied on all foreign companies doing business in the State of Kuwait, except those wholly-owned by GCC nationals. However, GCC companies with foreign shareholding shall be taxable in accordance with the foreign share. In the Kuwaiti companies where there are non-Kuwaiti shares, whether such share is contributed by a partner or by virtue of ownership rights, it will not be taxable, unless such rights are owned by a foreign partner. It is worth mentioning that revenues of Kuwaiti agents are not taxable as long as these revenues resulted from selling for their own interest.

Apart from a blanket tax rate structure, the new law also gives an elaborate explanation about the taxable income or in other words it explains what income is to be taxed.

Profits generated from any of the following activities are subject to the tax:

Profits realized from any contract that is partially or fully executed in the State of Kuwait.
Revenue from the sale of leasing, or from conceding a franchise to use or utilize any trademark, patent or copyright.
Commissions from commercial representation or intermediary agreements.
Commercial or industrial activities.
Profits realized from sale of assets.
General trading activities in property or goods, or the rights accrued therein, and the establishment of a Permanent office in Kuwait to carry out such activities.
Property lease.
Service provision.

Expenses associated with the income to be taxed may be deducted as follows:

Wages, salaries and end of service indemnity
Other taxes and fees
Depreciation, subject to the specifications of the implementing regulations
Donations to Kuwaiti charities, subject to limitations specified in the implementing regulations.
Head office expenses in accordance with the specifications of the implementing regulations.

The law also inflicts a limit on a company's ability to carry forward losses and the maximum limit is set as three years. It is to be noted that under the previous tax law, companies were able to carry losses forward for an unlimited period of time.