Bankruptcy and Insolvency Laws in Saudi Arabia: What Businesses Should Know

In recent years, Saudi Arabia has undertaken significant economic reforms to attract foreign investment and modernize its commercial landscape. A cornerstone of this modernization is the overhaul of the Kingdom’s approach to financial distress.

Gone is the era where debt collection was a purely punitive process. The introduction of the Saudi Arabian Bankruptcy Law marks a shift towards rehabilitation and transparency. This legislation provides a structured framework for managing insolvency, aiming to rescue viable businesses while ensuring fair treatment for creditors. Understanding these bankruptcy laws is essential for any entity operating within the Kingdom.

Key Features of the Bankruptcy Law

The current framework, which was introduced in 2018 and has since been expanded through implementing regulations, was designed to replace an outdated and fragmented system. Its primary purpose is to boost investor confidence by providing clear, predictable legal recourse for businesses facing financial difficulties.

Oversight Bodies

Two main entities manage the application of these insolvency laws:

• Commercial Courts: These courts have judicial oversight over bankruptcy proceedings, making critical rulings on applications, plan ratifications, and disputes.
• The Bankruptcy Commission: An independent administrative and financial body that manages the administrative aspects of the law. They maintain the bankruptcy register, license trustees and professionals, and manage specific procedures like administrative liquidation.

Main Procedures

The law introduces seven distinct procedures tailored to different financial situations. These include simplified versions for small and medium-sized enterprises (SMEs) to reduce costs and complexity. For larger entities, the framework focuses on three main pathways: settlement, restructuring, and liquidation.

Detailed Explanation of Procedures

Depending on the viability of the business and the extent of the debt, a company may enter one of the following key procedures.

Protective Settlement

This procedure is often described as a “debtor-in-possession” model. It is designed for debtors who are facing financial distress but are not yet severely insolvent. The key advantage here is control; the debtor remains in charge of their business operations without a court-appointed trustee taking over.

Under court supervision, the debtor negotiates a settlement plan with their creditors. If the creditors approve the plan and the court ratifies it, the agreement becomes binding. To facilitate this, the court may grant a temporary stay on legal claims against the debtor for up to 180 days, giving them breathing room to reorganize.

Financial Restructuring

This option applies when a debtor is already insolvent or unable to pay debts as they fall due. Unlike the protective settlement, this process involves a court-appointed “Officeholder” (or trustee).

The trustee supervises the management of the business and assists in drafting a restructuring proposal. This proposal must be voted on by creditors and ratified by the court. Similar to the protective settlement, an automatic stay on legal actions is imposed — typically for 180 days, with the possibility of extension — to prevent a rush of litigation while the plan is being formed.

Liquidation

If a business is deemed unviable or if restructuring attempts fail, the court will order liquidation. In this scenario, a trustee assumes full control of the debtor’s assets. Their goal is to sell these assets transparently to maximize value. The proceeds are then distributed to creditors according to a strict statutory hierarchy, ensuring fairness.

Administrative Liquidation

This is a unique feature of Saudi insolvency laws designed for efficiency. It is a simplified process managed directly by the Bankruptcy Commission rather than the commercial court. It is used when a debtor’s assets are so depleted that the proceeds from a sale are unlikely to cover the costs of a standard liquidation procedure.

Scope of Application

The law is broad in its reach, ensuring comprehensive coverage of the commercial sector.

Entities Covered

The legislation applies to:

• Commercial and professional entities registered in Saudi Arabia.
• Natural persons (individuals) engaged in commercial activities.
• Non-Saudi investors who possess assets or conduct commercial activities within the Kingdom.

Bankruptcy Register and Cross-Border Insolvency

To promote transparency, the law established a public online Bankruptcy Register. This allows interested parties to verify the status of potential partners or debtors. Furthermore, recent updates to the regulations have incorporated rules for cross-border insolvency, modeled after the UNCITRAL Model Law. This is a crucial development for international investors, as it provides a mechanism for recognizing foreign bankruptcy proceedings and coordinating assets across jurisdictions.

A Framework for Stability

The Saudi Arabian Bankruptcy Law represents a mature approach to financial distress, prioritizing economic stability and business rescue over liquidation whenever possible. By balancing the rights of creditors with the rehabilitation needs of debtors, these bankruptcy laws create a safer, more attractive environment for local and international businesses.

To stay compliant with your business in Saudi Arabia, contact the legal team at Khalaf Bandar for help.