Banking Law and Critical-Function Continuity in Bank Resolution — Kuwait

Below is a detailed legal explanation of bank resolution, continuity of critical functions, and the relevant Kuwaiti case law, with particular reference to the Central Bank of Kuwait (CBK), Law No. 32 of 1968, and Bankruptcy Law No. 71 of 2020.

Important legal point: Kuwait's framework is not identical to the modern EU/UK “resolution” model. Historically, Kuwait relied heavily on CBK supervisory intervention, restrictions, temporary control/management, deletion from the banking register and liquidation. The 2020 Bankruptcy Law now provides a more modern restructuring/insolvency framework and expressly allows the CBK to establish special procedures for banks.

1. Meaning of bank resolution

Bank resolution is the process by which a financially failing or likely-to-fail bank is dealt with in an orderly manner so that:

1. essential banking services continue;
2. depositors and other customers are protected;
3. financial stability is preserved;
4. disruption to payment and credit systems is minimized;
5. losses are allocated according to law;
6. the bank can be restructured, transferred, rehabilitated or ultimately liquidated.

The key distinction is between ordinary insolvency/liquidation and bank resolution.

Ordinary corporate insolvency generally focuses on maximizing recovery for creditors. Bank resolution has an additional public-interest objective: preventing the failure of essential banking functions from causing systemic disruption.

That distinction is particularly important for Kuwait because the CBK has statutory powers that allow intervention before a bank reaches formal bankruptcy.

2. Principal Kuwaiti legislation

The principal legal instruments are:

A. Law No. 32 of 1968

The basic statute is Law No. 32 of 1968 Concerning Currency, the Central Bank of Kuwait and the Regulation of Banking Business, as amended.

The official CBK text confirms that this law remains the principal statutory foundation for banking supervision and intervention.

B. Bankruptcy Law No. 71 of 2020

The modern insolvency framework is Law No. 71 of 2020 issuing the Bankruptcy Law, together with its executive regulations.

Importantly, Article 2 permits the CBK to establish rules for preventive settlement, restructuring and bankruptcy of banks that differ from the ordinary Bankruptcy Law where the special nature of banking requires it.

C. CBK regulatory instructions

The CBK also regulates liquidity, solvency, risk management, business continuity, capital adequacy and other prudential matters through instructions and regulations. The CBK expressly states that its supervisory functions include prudential regulation, inspection, corrective measures and bringing the Kuwaiti framework into line with international supervisory standards.

3. CBK's role in bank resolution

The CBK is the central institution in the Kuwaiti framework.

The statute gives the CBK extensive preventive and supervisory powers.

Article 71 — supervisory instructions

Article 71 permits the CBK to issue instructions to banks necessary to ensure the sound conduct of banking business and to achieve credit and monetary policy objectives.

This is important because resolution does not begin only after insolvency.

The regulatory process can begin much earlier through:

• capital requirements;
• liquidity requirements;
• restrictions on particular activities;
• corrective measures;
• supervisory intervention;
• temporary control.

4. Article 72 — liquidity and solvency

Article 72 is particularly important.

The CBK Board may establish rules requiring banks to maintain appropriate relationships between:

• own funds and liabilities;
• liquid assets and demand/term liabilities;
• own funds and guarantees/acceptances.

The purpose is expressly to ensure liquidity and solvency.

Thus, the Kuwaiti system is designed to identify financial weakness before the bank becomes irreversibly insolvent.

5. Article 63 — when a bank can be removed from the register

Article 63 provides several grounds for deleting a bank from the Register of Banks.

These include:

• the bank's own request;
• failure to commence business;
• bankruptcy;
• merger;
• cessation of operations;
• endangered liquidity or solvency;
• violation of the CBK Law.

The decision is issued by the Minister of Finance upon the proposal of the CBK Board.

This is significant because bank failure is not treated merely as an ordinary commercial liquidation.

The banking licence/register status itself is part of the resolution architecture.

6. Article 64 — the most important intervention provision

Article 64 is arguably the central provision for understanding traditional Kuwaiti bank resolution.

Before proposing deletion of a bank whose liquidity or solvency is endangered, the CBK Board may:

1. Restrict banking operations

The CBK may prohibit particular operations or impose limits on the bank's business.

2. Appoint a temporary controller

A temporary controller may be appointed to supervise the bank's activities.

3. Take over management

The CBK may itself manage the bank for a specified period and then determine whether:

• the bank can continue independently; or
• it should be removed from the banking register and liquidated.

4. Seek a judicial stay

Where necessary in the interests of depositors, the CBK may ask the court to prohibit measures against the bank and stay lawsuits against it, for up to one year.

These powers are expressly set out in Article 64.

7. Why Article 64 is important for "critical-function continuity"

Article 64 does not use the modern expression “critical functions” in the same way as the Financial Stability Board's resolution standards.

Nevertheless, its logic is closely related.

Suppose a bank performs functions such as:

• accepting deposits;
• processing payments;
• maintaining current accounts;
• providing payroll services;
• providing corporate credit;
• operating clearing/payment interfaces;
• providing trade-finance services.

Immediately closing such a bank could cause substantial disruption.

Article 64 therefore allows the CBK to intervene and manage the bank before liquidation.

The legal objective is consequently not simply:

“close an insolvent bank.”

It is closer to:

stabilize the institution, protect depositors and determine whether banking operations can continue without causing broader financial disruption.

8. Article 65 — liquidation

If the bank is ultimately deleted from the Register of Banks, Article 65 provides that it must be liquidated.

The CBK Board determines the rules governing liquidation of outstanding transactions existing at the time of deletion.

This produces a basic Kuwaiti resolution sequence:

Financial deterioration

↓

CBK supervision/corrective intervention

↓

Restrictions / temporary controller / CBK management

↓

Attempt to preserve viable banking operations

↓

Decision whether bank can survive

↓

Deletion from Register

↓

Liquidation if continuation is not viable

9. Critical functions — what exactly are they?

The concept of a critical function comes principally from modern international resolution standards.

A critical function is generally an activity whose interruption could seriously affect:

• the real economy;
• financial stability;
• customers;
• payment systems;
• other financial institutions.

Examples in banking include:

The critical-function concept is therefore concerned with continuity of service, not necessarily preservation of the failing bank itself.

That distinction is crucial.

10. Continuity does not necessarily mean saving the bank

A bank may fail while its critical functions continue.

For example:

Bank A fails

but its:

• deposits,
• payment accounts,
• selected loans,
• payment infrastructure,
• employees,
• technology,

could be transferred to another institution.

The shareholders of Bank A may therefore lose their investment while customers continue receiving essential services.

This is one of the fundamental principles of modern resolution.

The international resolution approach recognizes that designation of a function as critical does not automatically mean that every liability associated with that function is protected.

11. Kuwait's Bankruptcy Law 71/2020

The 2020 Bankruptcy Law is particularly important because it moves Kuwait toward a more modern restructuring system.

Article 2 allows the CBK, within its regulatory jurisdiction, to establish special rules concerning:

• preventive settlement;
• restructuring;
• declaration of bankruptcy

for banks and other regulated financial entities, taking into account their special nature.

This is extremely important for bank resolution because banking insolvency cannot always be handled in exactly the same way as ordinary corporate insolvency.

12. Article 3 — protection of the regulatory authority

Article 3 also gives the CBK an important procedural role.

For Kuwaiti banks and entities supervised by the CBK, an application concerning preventive settlement, restructuring or bankruptcy is subject to notification of the CBK before proceedings can be commenced in the ordinary manner.

The legislation therefore recognizes that bank insolvency has regulatory consequences beyond the relationship between debtor and creditor.

13. CBK Decision No. 88-455/2021

A particularly useful development is CBK Decision No. 88-455 of 2021.

The decision applies to:

• local banks;
• finance companies;
• exchange companies;
• other entities supervised by the CBK.

It establishes minimum indebtedness thresholds for those entities seeking preventive settlement, restructuring or bankruptcy proceedings.

For local banks, the threshold specified in the decision was KD 10 million.

This demonstrates how the general Bankruptcy Law is supplemented by sector-specific CBK rules.

14. Business continuity and operational resilience

Critical-function continuity also depends on operational resilience.

The Kuwaiti regulatory framework contains business-continuity requirements addressing matters such as:

• business continuity plans;
• disaster recovery;
• recovery time objectives;
• recovery point objectives;
• alternative recovery sites;
• backup systems;
• restoration testing;
• crisis scenarios;
• communications;
• annual continuity and disaster-recovery testing.

The CBK's published cybersecurity baseline, for example, expressly requires regulated entities to define recovery objectives for critical systems and functions and maintain alternative recovery arrangements.

This is directly relevant to resolution.

A bank cannot realistically maintain a critical function during resolution if its technology, data, payment systems or operational personnel cannot continue operating.

15. The legal relationship between resolution and continuity

It is useful to think of the relationship as follows:

Stage 1 — Prevention

CBK monitors:

• capital;
• liquidity;
• risk;
• governance;
• compliance.

Stage 2 — Early intervention

CBK can:

• restrict activities;
• impose limits;
• appoint a controller;
• require corrective action.

Stage 3 — Stabilization

CBK may take over management under Article 64.

The objective is to determine whether the bank can continue.

Stage 4 — Resolution/restructuring

Under the Bankruptcy Law framework and CBK-specific rules, restructuring mechanisms may be used.

Stage 5 — Failure/liquidation

If the bank cannot continue, it can be deleted from the Register and liquidated.

The crucial principle is:

The institution may fail, but essential banking services should, where legally and economically possible, continue.

16. Kuwaiti case law

This area requires an important qualification.

There is not a large body of published Kuwaiti Supreme Court/ Court of Cassation jurisprudence directly addressing modern bank resolution and “critical functions” in the FSB/BRRD sense.

Kuwaiti case law is much richer concerning:

• CBK regulatory powers;
• banking contracts;
• interest-rate regulation;
• bankruptcy;
• the effect of bankruptcy on litigation;
• CBK-related statutory powers.

Therefore, the cases below are best understood as principles supporting the legal architecture of bank resolution, rather than as cases that directly apply a modern “critical functions” resolution plan.

Case 1 — Kuwait Court of Cassation, Appeal No. 623/2010

Judgment: 29 November 2011

This case concerned the effect of CBK rules under Articles 73 and 74 of Law No. 32/1968.

The Court recognized the statutory authority of the CBK Board to establish banking rules under the Central Bank Law.

Relevance to resolution

The case illustrates an important principle:

CBK regulatory rules are not merely voluntary banking guidelines.

Where the statute delegates regulatory authority to the CBK, banks must operate within the regulatory framework established under the law.

That supports the legitimacy of:

• prudential regulation;
• restrictions on banking activity;
• interest-rate controls;
• liquidity requirements;
• other supervisory measures.

17. Case 2 — Kuwait Court of Cassation, Appeal No. 1180/2009

Judgment: 24 May 2011

This case concerned CBK decisions fixing maximum interest rates on loans.

The Court considered the statutory authority of the CBK under Article 73 of Law No. 32/1968 and the effect of CBK decisions on continuing loan contracts.

Relevance

The case demonstrates the broader judicial recognition of the regulatory character of CBK decisions.

For bank resolution this matters because a resolution authority must be able to impose regulatory requirements that may affect existing banking relationships.

The Court's jurisprudence therefore provides support for the proposition that banking regulation in Kuwait is a strongly public-law regulated field rather than a purely private contractual relationship.

18. Case 3 — Kuwait Court of Cassation, Appeal No. 547/2005

Judgment: 19 November 2008

The Court dealt with the effect of bankruptcy on individual lawsuits.

The relevant principle concerned Article 597 of the Kuwaiti Commercial Code: after declaration of bankruptcy, individual actions by ordinary creditors and holders of general preferential rights are generally stayed.

Relevance to bank resolution

This principle is extremely important.

Resolution/insolvency legislation seeks to prevent a “race to the courthouse” in which individual creditors seize assets while other creditors remain unpaid.

A collective procedure permits:

• preservation of the estate;
• orderly creditor treatment;
• centralized administration;
• avoidance of asset dissipation.

This is conceptually consistent with the collective nature of bank resolution.

19. Case 4 — Kuwait Court of Cassation, Appeal No. 340/2007

Judgment: 24 April 2008

The Court stated that bankruptcy rules are matters of public order, because of their relationship to the functioning of credit, while the statutory system also seeks to protect creditors and bona fide debtors under judicial supervision.

Importance

This principle is highly relevant to bank failure.

Bank insolvency cannot be treated merely as a private contractual dispute.

It affects:

• creditors;
• depositors;
• financial markets;
• credit;
• potentially financial stability.

Thus, public-interest considerations justify special regulatory intervention.

20. Case 5 — Kuwait Court of Cassation, Appeal No. 693/2001

Judgment: 6 January 2003

This case involved the legislation dealing with restructuring/problematic banking and financial-sector indebtedness, particularly Law No. 41 of 1993 concerning the purchase of certain debts by the State.

Importance

Although this is not a modern bank-resolution case, it demonstrates that Kuwait has previously used special statutory intervention to address systemic banking and financial distress.

It is useful historical evidence when discussing the evolution of Kuwait's crisis-management framework.

21. What these cases collectively establish

The Kuwaiti jurisprudence supports several propositions:

Principle 1 — Banking is a heavily regulated activity

The CBK possesses statutory regulatory authority that can affect banking contracts and operations.

Principle 2 — CBK rules have legal significance

Courts recognize the statutory basis for CBK regulatory decisions.

Principle 3 — Insolvency is collective

Bankruptcy is not simply a series of individual creditor claims.

Principle 4 — Bankruptcy rules are connected to public order

The courts recognize the wider economic importance of bankruptcy law.

Principle 5 — Special treatment of financial distress is legitimate

Kuwait's legislation has historically provided special mechanisms for banking and financial-sector problems.

22. Critical functions and depositor protection

One of the most important issues in resolution is the relationship between critical functions and depositors.

Consider:

Bank X has KD 5 billion in deposits but becomes insolvent.

There are two separate questions:

Question A

Should Bank X's shareholders be protected?

Not necessarily.

Question B

Should customers lose access to essential payment/deposit services?

Not necessarily.

A resolution framework can separate these two questions.

For example, authorities could seek to maintain:

• current accounts;
• payment services;
• ATM access;
• salary payments;
• selected deposits;
• clearing and settlement.

Meanwhile, shareholders and certain creditors may bear losses.

That is the fundamental economic logic behind continuity-oriented resolution.

23. Why continuity is especially important for Kuwait

The banking system performs functions that extend beyond individual banks.

A bank may be interconnected with:

• CBK;
• other Kuwaiti banks;
• international correspondent banks;
• payment systems;
• corporations;
• government entities;
• households;
• financial markets.

Consequently, disorderly closure can create a contagion effect.

The IMF has previously identified the absence of a dedicated special bank-resolution regime as a weakness in Kuwait's financial-stability framework and recommended strengthening the crisis-management and resolution framework.

The IMF also noted that CBK already possessed significant powers to impose restrictions and remedial measures when banks experienced stress.

24. Comparison with modern international resolution principles

A useful academic comparison is:

This comparison is important because one should not describe Article 64 as if it were identical to the EU Bank Recovery and Resolution Directive (BRRD).

25. A practical resolution example

Suppose Kuwait Bank A experiences a severe liquidity crisis.

Step 1 — Supervisory intervention

CBK determines that liquidity/solvency is endangered.

It can impose restrictions under Article 64.

Step 2 — Temporary control

CBK appoints a temporary controller.

The bank's operations are examined.

Step 3 — Identify essential functions

The authorities identify:

• retail deposits;
• payment accounts;
• salary processing;
• ATM network;
• corporate payment services;
• trade finance.

Step 4 — Stabilize those functions

The bank's technology, staff, payment arrangements and liquidity are maintained to prevent operational collapse.

Step 5 — Determine viability

If Bank A can be rehabilitated, operations continue.

If not, a restructuring or insolvency process may be pursued under the applicable framework.

Step 6 — Protect continuity

Where possible, critical services are transferred or maintained while the non-viable institution is wound down.

Step 7 — Liquidation

If the bank is deleted from the Register, Article 65 requires liquidation.

26. Key legal issue: continuity versus creditor rights

There is inevitably a conflict between:

A. Continuity of critical functions

and

B. Individual creditor enforcement rights.

Kuwaiti bankruptcy jurisprudence recognizes the importance of collective insolvency proceedings and restrictions on individual creditor actions following bankruptcy.

The justification is straightforward:

If every creditor could immediately seize assets, the authorities could not preserve the bank's functioning.

Therefore:

Continuity requires a temporary degree of collective control over individual enforcement.

This is one reason why Article 64's ability to seek a judicial stay is particularly significant.

27. Judicial review and the CBK

The CBK's powers do not mean that its decisions are immune from judicial scrutiny.

The Bankruptcy Law expressly contemplates judicial challenges concerning regulatory decisions made by authorities in the special insolvency framework.

At the same time, Kuwaiti courts have historically recognized the statutory authority granted to the CBK.

Therefore, the legal balance is:

CBK regulatory discretion

statutory authority

judicial review

protection of depositors/creditors

28. Main legal challenges

Several issues remain important when analyzing Kuwaiti bank resolution academically.

1. Lack of a fully articulated modern resolution code

The traditional Law No. 32/1968 framework is heavily supervisory and liquidation-oriented.

2. Critical-function identification

The legislation does not provide the same detailed statutory methodology for identifying critical functions found in some jurisdictions.

3. Bail-in

A modern resolution framework normally needs clear rules concerning the write-down or conversion of liabilities.

4. Bridge institutions

Modern resolution often permits a failing bank's critical operations to be transferred temporarily to a bridge bank.

5. Cross-border resolution

International banks require cooperation among home and host regulators.

6. Creditor hierarchy

Resolution requires clear rules determining who bears losses and in what order.

7. Operational continuity

Technology, outsourcing, payment systems, data and service providers must remain functional during resolution.

29. Academic conclusion

The Kuwaiti system can be characterized as an evolving bank-resolution framework.

The traditional foundation is Law No. 32 of 1968, particularly Articles 63–65, under which the CBK can intervene when a bank's liquidity or solvency is endangered, restrict its activities, appoint a temporary controller, assume management and ultimately recommend deletion from the banking register and liquidation.

The Bankruptcy Law No. 71 of 2020 adds a modern restructuring dimension by expressly permitting the CBK to establish special rules for preventive settlement, restructuring and bankruptcy of banks.

The concept of critical-function continuity should therefore be understood as the bridge between traditional banking supervision and modern resolution policy:

The purpose of resolution is not necessarily to preserve the failed bank as a corporate entity; it is to preserve those banking functions whose interruption would harm depositors, the real economy or financial stability, while allowing losses to fall on shareholders and creditors according to the applicable legal framework.

Kuwaiti Court of Cassation jurisprudence supports the surrounding principles: CBK regulatory authority, the public-law character of banking regulation, collective treatment of insolvency, and the public-order character of bankruptcy rules.

Key authorities for a research paper

1. Kuwait Law No. 32 of 1968, especially Arts. 63–65, 71–72. 
2. Kuwait Bankruptcy Law No. 71 of 2020, especially Arts. 2–3. 
3. CBK Decision No. 88-455/2021 concerning commencement of bankruptcy/restructuring procedures for CBK-supervised entities. 
4. Kuwait Court of Cassation, Appeal No. 623/2010, judgment 29 November 2011. 
5. Kuwait Court of Cassation, Appeal No. 1180/2009, judgment 24 May 2011. 
6. Kuwait Court of Cassation, Appeal No. 547/2005, judgment 19 November 2008. 
7. Kuwait Court of Cassation, Appeal No. 340/2007, judgment 24 April 2008. 
8. Kuwait Court of Cassation, Appeal No. 693/2001, judgment 6 January 2003. 
9. IMF, Kuwait: Financial System Stability Assessment, discussing the development of Kuwait's bank-resolution and crisis-management framework. 

For a law dissertation, the strongest thesis is: Kuwait has a substantial early-intervention and insolvency framework, but the legal concept of critical-function continuity is more developed as a regulatory/resolution-policy objective than as a fully codified statutory resolution mechanism comparable to the EU BRRD or some newer Middle Eastern resolution regimes.