Bankruptcy System in Saudi Commercial Law


What is the Saudi Bankruptcy System?

The Saudi Bankruptcy System is a legal framework that regulates bankruptcy proceedings in Saudi Arabia. It was implemented to improve the business environment and enhance confidence in the Saudi financial market. The system aims to provide fair solutions for distressed debts and help companies reorganize their finances or liquidate their assets in an orderly manner.

What are the Bankruptcy Procedures in the Saudi System?

The bankruptcy procedures in the Saudi system include several steps aimed at facilitating the handling of distressed debts and enabling companies to restructure their financial situations or effectively liquidate their assets. The main procedures include:

  • Preventive Settlement Preventive settlement is a procedure that allows a debtor facing financial difficulties threatening their continuity to negotiate with creditors to reschedule debts or modify debt terms. This step aims to prevent the company from entering into full bankruptcy and allows for the continuation of business operations.
  • Financial Reorganization Financial reorganization allows companies facing financial crises to organize their finances and manage them under judicial supervision. During this stage, the reorganization plan proposed by the company is implemented and approved by the creditors and the court.
  • Liquidation Liquidation is the process where the assets of the bankrupt company are sold to pay off debts. This step usually follows the failure of financial reorganization procedures or when creditors choose this route. Liquidation aims to dissolve the entire company and end its operations.
  • Administrative Liquidation Administrative liquidation is a special type of liquidation applied when the judge rules that the company should continue operations for a specified period under the management of a liquidator appointed by the judge. This procedure is usually carried out to maximize the value from the sale of the company’s assets.

These procedures provide a structured framework that helps effectively resolve financial crises and protects the rights of all involved parties.

Special Procedures for Small Debtors

The Saudi Bankruptcy System includes provisions for small debtors, offering them suitable opportunities to restructure their debts in a way that preserves their dignity and enhances their chances of continuing in the market. The procedures for small debtors are characterized by simplified processes and reduced associated costs. The specific procedures for small debtors include:

  • Preventive Settlement for Small Debtors The preventive settlement for small debtors allows them to negotiate with creditors to restructure debts without having to enter formal bankruptcy proceedings. This process aims to achieve a balance that allows the debtor to continue their business activities while ensuring that creditors recover part of their debts.
  • Financial Reorganization for Small Debtors This process involves reorganizing the financial affairs of small debtors under court supervision, allowing for effective reorganization of debts and business operations. This step helps create a sustainable financial recovery plan and avoids liquidation.
  • Liquidation for Small Debtors In cases where a sustainable solution cannot be reached through preventive settlement or reorganization, small debtors may undergo a liquidation process. This process involves selling assets to pay off debts and finalizing the business liquidation in an organized manner under legal supervision.

These special procedures for small debtors aim to provide mechanisms that protect individuals and small companies from heavy financial burdens and enhance their chances to re-enter the market more stably and effectively.

Advantages of Resorting to Bankruptcy Procedures

Resorting to bankruptcy procedures in the Saudi system is not just a mechanism for eliminating debts but can offer strategic benefits for companies facing financial difficulties. These advantages include preserving economic value and effective business restructuring. Most importantly, bankruptcy procedures provide the opportunity for recovery and future growth.

Ability to Halt Collapse

One of the fundamental benefits of bankruptcy procedures is the ability to halt a company’s financial collapse. By implementing preventive settlement or financial reorganization, companies can temporarily stop paying some or all of their debts, allowing them to reassess operations and assets without the continuous pressure from creditors. This preserves liquidity and prevents complete collapse.

Ensuring Continuation of Business Activities

Bankruptcy does not necessarily mean the end of business operations. Through procedures such as financial reorganization, companies experiencing financial crises can continue their operations under judicial supervision. This allows them to reorganize their business in a way that contributes to restoring stability and growth, preserving jobs, and contributing to the economy.

Positive Development and Economic Enhancement

Bankruptcy procedures can lead to positive development for companies and generally enhance the economy. By facilitating effective restructuring and liquidation, barriers for new investors are reduced, and innovation is encouraged. Additionally, improving the legal and financial infrastructure enhances the attractiveness of the Saudi market for foreign investments and contributes to the growth of the local economy.

Bankruptcy procedures in Saudi Arabia thus not only provide solutions for financial crises but also contribute to enhancing and supporting the commercial and economic environment sustainably.

For more information about the role of corporate lawyers in Riyadh in enhancing the business environment, read our comprehensive article available on the Eyad Reda Law Firm website.

Objectives of Following Bankruptcy Procedures

The objectives of implementing bankruptcy procedures in the Saudi Bankruptcy System are multifaceted, with the Saudi government aiming to balance the protection of debtors and the guarantee of creditors’ rights. The main goals include:

  • Protection of Debtors: Providing legal protection to debtors from hostile judicial actions while allowing them to restructure their businesses.
  • Guaranteeing Creditors’ Rights: Ensuring a fair and transparent process for creditors to recover their debts.
  • Enhancing Financial Stability: Maintaining financial and economic stability in the country through effective management of financial crises.
  • Supporting Economic Growth: Facilitating the restructuring or liquidation of companies in a way that supports economic growth and preserves jobs.

Comprehensiveness of the Saudi Bankruptcy System

The Saudi Bankruptcy System is characterized by its comprehensiveness and suitability for various types of companies and individuals, making it an effective system for managing financial risks. The comprehensiveness is evident in:

  • Covering All Legal Aspects: The system covers all legal aspects including preventive settlement, financial reorganization, and liquidation.
  • Considering All Categories: The system includes special protocols for small debtors, ensuring protection for small businesses and individuals.
  • Integration with International Systems: The system aligns with best international practices, enhancing confidence in the Saudi financial market.
  • Efficiency and Speed of Implementation: The procedures are designed to be effective and quick, ensuring minimized financial and operational damage to debtors and creditors.

Thus, the Saudi Bankruptcy System aims to enhance the country’s commercial and legal environment and provides robust tools for managing financial crises in a way that preserves the interests of all relevant parties.

Also, read about Company Voluntary Liquidation in Saudi Arabia and understand the complex legal processes associated with it in our comprehensive guide on the Eyad Reda Law Firm website.