Saudi Arabia Issues Its First Developed Bankruptcy Law
Saudi Arabia finally adopted a modern bankruptcy law on Wednesday 14/02/2018G by virtue of a Royal Decree No. M/50 dated 28/05/1439H (corresponding to 14/02/2018G) (the “BL”). The BL is based on bankruptcy protection laws around the globe, and it replaces the existing outdated framework on bankruptcy which was embedded within the Commercial Court Law and the Bankruptcy Protective Settlement Law.
The BL provides a comprehensive framework governing bankruptcy and insolvency for individual and professional traders and local and foreign companies. A key feature of the BL is that it contemplates a special and simplified regime applicable to small businesses.
The BL is a very elaborate and detailed legislation, and there are numerous provisions of interest to creditors, lending institutions, real estate developers and many other players in the market.
This key development is in line with the Saudi Transformation Plan.
What it means for you
If you are doing business in Saudi Arabia or financing a business in Saudi Arabia, the following key points are to be noted:
Voluntary out-of-court liquidation is now conditional: Shareholders may only resolve on a voluntary liquidation if the assets are not sufficient to cover the debts and if the business is in distress. The directors shall become personally and jointly liable for the payments of any debts due by a company if a voluntary liquidation resolution is passed without observing these conditions.
Preventive composition: Preventive composition, a voluntary court-supervised arrangement, is designed to rescue businesses. Only debtors are entitled to opt for this rescue route. Preventive composition is now a clear pathway for debtors undergoing financial difficulties, in distress or bankrupt. While a moratorium on the termination of existing agreements is ordered if the preventive composition is approved, such moratorium does not apply to financing agreements and government procurement agreements. The court would only approve a preventive composition scheme if the business is viable.
Financial reorganization/restructuring: Another rescue route option has been introduced. It may be initiated by debtors, creditors or regulators when the debtor is undergoing financial disturbance, in distress or insolvent. The court-appointed trustee will revisit the contractual arrangements and may consider termination of the agreements that are not necessary for the continuation of business. Approving a financial restructuring plan by a court is also contingent on the viability of the business.
Bankruptcy by way of sale of assets: As a last resort, if the debtor is in distress or bankrupt, the debtor, the creditor or the regulator may demand the commencement of a liquidation process. The Bankruptcy Committee will set a monetary threshold for initiating this action. If the debtor’s assets are not sufficient to cover all the debts, the process turns into an administrative liquidation.
Definitions of “Bankrupt” and “Distressed”: Being “distressed” is defined as being in a state of cessation of payment and being “bankrupt” is defined as where the assets of the debtor are not sufficient to cover the debts. The implementing regulations are expected to provide further guidance on these definitions.
Coming into force: The BL will come into force upon publication of the implementing regulations, which should be issued no later than 180 days after the date of the BL’s publication.
Actions to take
You should keep a close watch for the enactment of the BL’s implementing regulations and the establishment of the Bankruptcy Committee. This committee is entrusted with key roles, including approving the list of trustees, setting the minimum thresholds for the commencement of certain proceedings and defining small businesses, among other things. Finally, seek legal advice where you have sufficient belief that your business or your debtor is undergoing financial difficulties, in distress or nearly bankrupt.