Insolvency
The lack of a modern fit-for-purpose insolvency regime has been a major bugbear for businesses, professional advisors and others doing business in Saudi Arabia. Some of the problems encountered include:
Disorderly collection of debts, resulting in some creditors being paid but others missing out entirely;
Little scope for workouts, potentially disadvantaging both creditors and debtors;
Reduced prospects of survival of a viable business that may simply be experiencing a temporary hurdle;
Lack of information on the financial well-being of a proposed counterparty;
Lawsuits resulting from a multiplicity of legal claims; and
Debtors attempting to defeat creditors’ claims by concealing assets or disposing of them prior to insolvency at less than fair value or for no value at all.
In 2016, following a policy paper issued in 2015, the Ministry of Commerce & Investment announced plans to issue a Bankruptcy Law and published a draft of the law. The new Bankruptcy Law was published in the Official Gazette in February 2018, and came into force in August 2018. The new law contains many of the features of a modern, Western-styled insolvency regime.
The new law generally applies to:
Individuals and corporations carrying on commercial, professional or for-profit businesses in Saudi Arabia; and
Non-Saudi investors who have assets in Saudi Arabia, or who carry on commercial, professional or for-profit business in Saudi Arabia through a licensed entity.
The new law establishes work out procedures intended to forestall the need for liquidation where a person is bankrupt or insolvent.
A debtor may apply to the court for preventative settlement, and request a suspension of claims. The court may order a temporary extension for up to 90 days, extendable to a total period not exceeding 180 days. During the period of suspension, and subject to limited exceptions, claims against the debtor, and enforcement procedures, are stayed.
This is a procedure aimed at facilitating a debtor coming to terms with its creditors regarding the financial restructuring of the debtor’s business under supervision of a financial restructuring officer appointed by the court. The financial restructuring officer supervises the debtor’s activity during the financial restructuring to ensure fairness of the procedure and its execution. The debtor will also need to obtain the officer’s approval before undertaking certain actions that may have an impact on his asset and liability position. The court and creditors whose claims represent two thirds of the value of debts in the same class must approve thefinancial proposal. Once the court approves the financial restructuring, it applies to all creditors.
Given the alternative forms of insolvency administration provided for by the new law, liquidation should be regarded as last resort. Liquidation will result in the assets of the bankrupt being sold and the proceeds distributed amongst the creditors under the management of a liquidation trustee. The liquidation trustee will liquidate the debtor’s assets, list debts, and distribute proceeds of liquidation between creditors according to their debt’s priority. Upon completion of liquidation, if there are no surplus assets, the liquidation trustee will take the necessary measures to wind up the company (if the debtor is a company). There are special arrangements for the liquidation of small debtors.Rights of set-off are regulated in order to maintain equity between creditors. An order of priority is set-out in the new law, with a ‘higher priority debt’ being paid before a ‘lower priority debt’. Transactions done with the intent to defraud creditors, conceal debtor’s assets, or harm creditors and stockholders may be set aside. The new law also contemplates the establishment of an official Bankruptcy Register, open for inspection.
