Introduction

In the Saudi legal system, distressed persons (individuals involved in business and corporations) currently have a number of liquidation procedures (including protective settlement procedures, financial restructuring procedures, and liquidation procedures) that they can resort to in accordance with the Bankruptcy Law issued by Royal Decree (RD) no (M/50) on 28/05/1439H. (corresponding to 14/02/2018G.) and its implementing regulations enacted on 24/12/1439H. (corresponding to 04/09/2018G.) pursuant to the Council of Ministers Resolution no (622) (the “KSA Bankruptcy Law”).

This Law, which has officially entered into force from the date of issuing its related Implementing Regulations, plays a crucial role in promoting business confidence, enhancing the investment environment, and providing a mechanism for dealing with financially distressed companies. Below we provide an overview of the KSA Bankruptcy Law, highlighting the key procedures and implications for businesses and individuals.

Background and Objectives

The KSA Bankruptcy Law was enacted to address the challenges faced by financially distressed entities and to facilitate their restructuring or liquidation in an orderly manner. The KSA Bankruptcy Law aims to strike a balance between protecting the rights of debtors and creditors, fostering economic growth, and encouraging entrepreneurship.

Scope and Applicability

The KSA Bankruptcy Law applies to various types of entities, including individuals, commercial companies, and establishments (Saudi or Non-Saudi investors) practicing commercial or professional activities or any activity that aims to generate profits in the Kingdom. It also applies to regulated entities such as:

• Banking, financing, insurance, and exchange companies;
• Persons licensed to trade in securities;
• The Capital Market, and the financial settlement, clearing, and deposit companies;
• Credit rating companies;
• Credit information and records companies;
• Telecommunication, water, electricity, and gas companies;
• Companies exploring minerals and energy resources;
• Companies operating airports, railways, seaports and the like, as specified in the Implementing Regulations;
• Special purpose facilities; and
• Other persons specified in the Implementing Regulations.

For regulated entities, the relevant regulator’s consent is required before commencement.

The KSA Bankruptcy Law covers both voluntary and involuntary bankruptcy proceedings, providing a legal framework for restructuring debts, negotiating with creditors, and ensuring fair treatment of all parties involved.

While the KSA Bankruptcy Law applies to a wide range of entities, the scope of its jurisdiction is only with respect to investor assets located in the Kingdom.

Bankruptcy Procedures

1. Filing for Bankruptcy: The KSA Bankruptcy Law establishes a clear procedure for initiating bankruptcy proceedings, allowing debtors to file for bankruptcy with the competent court. The filing must include a comprehensive disclosure of the debtor’s financial position, assets, liabilities, and creditors.

2. Automatic Stay: Upon filing for bankruptcy, an automatic stay is imposed, prohibiting creditors from taking legal actions or enforcing their claims against the debtor. This provides the debtor with breathing space to devise a restructuring plan or explore alternative options.

   According to the RD no (M/89) dated 09/071441H. (corresponding to 03/03/2020G.) amending certain provisions of the KSA Bankruptcy Law, the registration of a petition for the initiation of a financial restructuring procedure or the initiation of such procedure shall result in a moratorium for a period of 180 days and the court may, on its own motion or the motion of the trustee or the debtor, extend such period by not more than 180 days. The moratorium period shall end upon the expiry of the period specified above, or before if the petition for initiation of the procedure is rejected, or upon confirmation of the proposal by the court, or the termination of the procedure prior to confirmation.​
   Previously, the registration of a petition for the initiation of a financial restructuring procedure or the initiation of such procedure shall result in a moratorium period which shall end upon the rejection of the petition for initiation of the procedure or upon confirmation of the proposal by the court, or the termination of the procedure.
   

3. Financial Restructuring: The KSA Bankruptcy Law encourages debtors to propose restructuring plans that aim to rehabilitate their business operations, repay creditors, and preserve jobs. The plan must be approved by the bankruptcy court and endorsed by a majority of the affected creditors. It should be noted that a debtor may not file an application for the commencement of a protective settlement procedure in the event the debtor has already been subject to such procedure or to a small debtors’ protective settlement procedure during the twelve months preceding the application to commence this procedure.
4. Liquidation: If restructuring is not feasible or the debtor fails to comply with the approved plan, the court may order the liquidation of the debtor’s assets. The KSA Bankruptcy Law establishes mechanisms for the orderly liquidation of assets, ensuring equitable distribution of proceeds among creditors.

Rights and Protections

The KSA Bankruptcy Law provides a range of rights and protections for debtors and creditors, including:

• The appointment of a bankruptcy trustee to oversee the proceedings and protect the interests of all parties involved.
• Mechanisms for creditor participation and voting on restructuring plans.
• Clear rules on priority of claims, ensuring that secured creditors are treated preferentially.
• Protection against fraudulent or preferential transfers made prior to bankruptcy.

Implications and Benefits

The introduction of a robust bankruptcy law in Saudi Arabia brings several benefits to the business environment, including:

• Enhanced investor confidence and reduced risk, as businesses can rely on a predictable legal framework for handling financial distress.
• Encouragement of entrepreneurship and innovation, as the fear of failure is mitigated by a structured bankruptcy process.
• Facilitation of debt restructuring, allowing viable businesses to overcome temporary financial difficulties and continue operations.
• Improved creditor protection, ensuring fair treatment and increased recovery rates in the event of bankruptcy.

Conclusion

The petition for the initiation of a bankruptcy procedure or a judicial depository for a debtor who is categorized as Regulated Entity shall not be registered without the issuance of a decision of approval by the Competent Authority. The later shall issue regulations necessary for the Regulated Entities under its supervision in line with the nature of these entities. Such regulations may include provisions that exempt these entities from being subject to certain provisions of the Law, or add additional provisions, obligations, or requirements to the provisions of the Law. This is why the CMA has recently published a draft amendments to the Capital Market Institutions Regulations (the Draft Amendments to the Capital Market Institutions Regulations_en.pdf (cma.org.sa)) to adjust certain provisions in line with the Law.

Overall, we believe that the Saudi Arabia’s bankruptcy law represents a significant step forward in the country’s legal landscape, providing a comprehensive framework for managing financial distress and promoting business resilience. By establishing clear procedures, rights, and protections, the law supports the recovery and restructuring of financially distressed entities, ultimately contributing to a vibrant and dynamic economy in the Kingdom.

Authors: Darwish ElSayed, Partner.

For further information, please contact Alex Saleh (alex.saleh@glaco.com) and Fadi Daher (fadi.daher@glaco.com).