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Insolvency procedures

Procedures
What are the main insolvency procedures applicable to companies in your jurisdiction?

  • Liquidation

Liquidation - The shareholders or a creditor of a company can apply to the Ministry of Commerce & Industry or the court (the Saudi Board of Grievances) to commence a liquidation. Insolvency is determined by reference to the company’s balance sheet and its books of account. If the company is found to be insolvent the Board of Grievances issues an order declaring the entity bankrupt and seizes the company’s assets with the intention of selling the assets and distributing the proceeds to creditors. From the date of the order, the company ceases to have the legal capacity to contract with third parties.

Moratorium
Can a company obtain a moratorium whilst it prepares a restructuring plan?

No.

Directors
To what extent do the directors of the company remain in control of its affairs during any of the above procedures?

Upon the commencement of liquidation, the directors cease to have control of the company’s affairs. The court will appoint a trustee to take possession of the company’s estate. The trustee decides which contracts the company performs, can assign contracts to third parties and terminate onerous contracts.

Timeline to commence liquidation
How quickly can a creditor generally commence the liquidation of an insolvent company, assuming an undisputed claim and no opposition from the company?

Two weeks.

Overseas proceedings
Do your courts recognise insolvency proceedings commenced in the courts of another jurisdiction?

If there is a treaty in place between Saudi Arabia and the relevant jurisdiction regarding the enforcement of foreign court judgments then it is possible to apply to the Saudi courts to have such insolvency proceedings recognised in Saudi Arabia.

Position of creditors

Forms of security
What are the main forms of security over movable and immovable property?

Security over moveable and immovable property is taken by pledge.

Preferential status
Which classes of creditor are given preferential status? Are any classes subordinated?

The fees and expenses of the liquidation and debts incurred in the course of the liquidation are preferred over all other debts.

Debts owed to employees rank after the fees and expenses of the liquidation but in preference to ordinary unsecured creditors.

Debts owed to certain creditors can be subordinated by contract provided that the contract does not diverge from the order of priority prescribed by law.

Treatment of foreign creditors
Are foreign creditors treated equally to domestic creditors?

Yes.

Termination of contract by reason of insolvency
Are contract terms permitting termination of the contract by reason of insolvency valid?

Yes.

Retention of title
Are retention of title clauses effective?

Yes.

Setting aside transactions

Transaction avoidance provisions
What are the main transaction avoidance provisions, and who can challenge transactions?

Saudi law is somewhat uncertain in this respect. While there is no statue law which provides for transaction avoidance, the court can and does make orders setting aside or avoiding transactions and obligations entered into prior to insolvency.

Position of directors

Risks for directors
What are the risks facing the directors of an insolvent company?

Under the Saudi Companies Regulations directors of an insolvent company are jointly liable to compensate the company, its shareholders and creditors for losses arising from the directors’ mismanagement of the company’s affairs and any violations of the Companies Regulations.