Saudi bankruptcy law takes effect

24 October 2018
The kingdom’s long-awaited bankruptcy legislation is expected to result in a drop in liquidations and a significant increase in both domestic and international investments

The National Transformation Programme 2020 and Vision 2030 have set the tone for radical changes in Saudi Arabia, with a clear plan to develop the investment environment and facilitate the operations of local and foreign businesses. Government officials have accordingly been revamping outdated laws and introducing new ones to address the evolving needs of the market. Among these is a new Bankruptcy Law, which offers alternative solutions and is expected to boost local and foreign investments in the kingdom.

The Bankruptcy Law was enacted in February this year, while its implementing regulations were agreed upon in September. Its main objective is to regulate three main aspects: the composition proceeding, financial reorganisation (or re-structuring) and liquidation procedures.

The new law will reduce the financial difficulties faced by bankrupt debtors, while protecting creditors’ rights

It will replace the law of settlement against bankruptcy (Issued pursuant to the Royal Decree No. M/16 dated 1 January 1996G), Chapter Ten of the Commercial Courts laws (Issued pursuant to the Royal Decree No 32 dated 1 June 1931G), and all provisions of any applied laws and regulations that are inconsistent with the Bankruptcy Law.

The new law will reduce the financial difficulties faced by bankrupt or distressed debtors by encouraging them to fulfil their obligations and reorganise their financials, while protecting creditors’ rights with reduced costs and a timeframe to complete the bankruptcy procedures. The newly introduced rights and benefits should also provide the necessary support to ensure the stability and business continuity of these companies. We can expect to see a drop in liquidations and a significant increase in both domestic and international investments as a result.

Who is concerned?

The Bankruptcy Law will be applied to any Saudi nationals practicing commercial, professional and/or profitable activities in the kingdom; Saudi-registered commercial and professional companies and any other businesses aiming to generate profits; and foreign investors owning assets or practicing commercial, professional and/or profitable activities in Saudi Arabia through a licensed entity or commercial establishment. The provisions of the Bankruptcy Law apply only to the foreign investor’s assets existing in Saudi.

Legislative provisions

Functionally, the provisions will effect bankruptcy proceedings in seven key areas:

  • Composition proceeding: Debtors will be able to request the opening of the composition proceedings in cases where: (i) they are likely to suffer from financial disorder which may lead to insolvency; or, (ii) they were classified as insolvent or bankrupt debtors (the Bankruptcy Beneficiaries).
  • Financial restructuring: Debtors may request the competent Saudi courts to restructure their financial positions only if they were classified as one of the Bankruptcy Beneficiaries.
  • Liquidation: Debtors, creditors or any other competent Saudi government authorities may request the relevant Saudi courts to open the liquidation procedures, noting that the concerned debtor(s) must be bankrupt or going through a financial distress.
  • Administrative liquidation: Administrative liquidation is the selling of the liquidation assets that are not expected to fulfil the expenses of the liquidation procedures. Debtors or the competent Saudi authorities may request the commencement of the administrative liquidation, provided that the concerned debtor must be distressed, bankrupt or their assets are not expected to cover the expenses of the relevant liquidation procedures.
  • Financing: Debtors are not permitted to secure guaranteed financing post the commencement of any bankruptcy procedures unless approved by the competent Saudi courts. The courts may accept financing requests if they were considered necessary to continue the operations of the debtors’ businesses or protecting the assets during the bankruptcy procedures.
  • Priority of debts: Remunerations and expenses for the appointed bankruptcy trustees, experts, and the cost of selling the assets will have priority over any other debts. In addition, the debts ranking shall be in accordance with the identified rankings in Chapter Twelve of the Bankruptcy Law and the related laws of secured debts.
  • Penalties: Parties violating the Bankruptcy Law could face various penalties, such as imprisonment not exceeding five years, a fine not exceeding SR5m ($1.3m), and prohibition from owning shares and managing the operations of any profitable businesses (directly or indirectly) in Saudi Arabia.

Broader investment environment

The Saudi Arabian market is currently one of the most active and profitable locations for investments in the Middle East. With the enactment of the Bankruptcy Law, officials are clearly aiming to support businesses to boost the growth of the investment market and to decrease the possibilities of liquidation and losing essential investors.

The government has also eased the licensing registrations in order to support new and existing businesses operating in Saudi. We have recently witnessed and assisted a significant number of foreign investments to enter the Saudi market and incorporate their business operations, and we expect these recent developments to help this trend continue.

About the authors

Alain SfeirAlain Sfeir (pictured) is a partner at Clyde & Co, while Shahd Makhafah is a junior associate. Both authors work in the firm’s corporate division and are based in Riyadh.

 

 

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