Saudi Arabia recently published a new Bankruptcy Law. This is the latest development of a string of reforms under Vision 2030 to further encourage the participation of foreign and domestic investors by structuring the business legal framework. This article provides a general analysis of the new bankruptcy law and its implications for businesses operating in the Kingdom.
The draft Bankruptcy Law was recently approved by King Salman bin Abdulaziz Al Saud pursuant to the Royal Decree No. M/05 dated 28/05/1439H (corresponding to 13/02/2018G) (the "Bankruptcy Law"), which was thereafter published in the official gazette (Um Al-Quraa) on 06/06/1439H (corresponding to 21/02/2018G), edition No. 4712. The Bankruptcy Law will officially enter into force from the date of issuing its related Implementing Regulations (the "Implementing Regulations") that will not exceed 180 days starting from the publication date of the Bankruptcy Law in Um Al-Quraa.
The National Transformation Plan 2020 ("NTP") and Vision 2030 have set the tone for radical changes in the Kingdom of Saudi Arabia ("KSA"), with a clear plan to develop the investment environment to facilitate the operations of local and foreign businesses in the KSA market. As part of the NTP and Vision 2030, the KSA government officials are aiming to improve the current legislations by updating the outdated laws and introducing new laws governing the dynamic needs of the investment market. Accordingly, the Ministry of Commerce and Investment ("MoCI") has published a number of draft laws and regulations for the review and comments of the public, including the Bankruptcy Law which was previously introduced as a draft on 24/12/1437H (corresponding to 26/09/2016G). The Bankruptcy Law will effectively replace:
- The Law of Settlement Against Bankruptcy issued pursuant to the Royal Decree No. M/16 dated 04/09/1416H (corresponding to 24/01/1996G);
- Chapter ten (10) of the Commercial Courts Laws issued pursuant to the Royal Decree No 32 dated 15/01/1350H (corresponding to 01/06/1931G); and
- All provisions of any applied laws or regulations that are inconsistent with the Bankruptcy Law shall be voided.
The Bankruptcy Law contains seventeen (17) chapters and a total of two hundred and thirty one (231) articles that govern three (3) main topics, which are the Preventative Settlement, Financial Reorganisation (re-structuring) and the Liquidation procedures.
Set out below the key elements of the Bankruptcy Law to be taken into consideration:
The main objective of the Bankruptcy Law is to implement detailed provisions related to the Liquidation, Settlement and Financial Reorganisation since the current applied legislations are not sufficiently governing the procedural and judicial aspects of these essential matters. The Bankruptcy Law will further reduce the financial difficulties on bankrupt or distressed debtors by encouraging them to fulfil their obligations, reorganize their financials in order to continue their business operations aiming to support and develop the economy. In addition, it will protect the creditors' rights, reduce the costs and timeframe of the bankruptcy procedures and most importantly encourage small and medium businesses to invest in the commercial market.
The provisions of the Bankruptcy Law will be applied on any:
- natural person practicing commercial, professional and/or profitable activities in KSA;
- KSA registered commercial and professional companies and any other businesses aiming to generate profits on the KSA territory ; and
- natural and/or juristic foreign investors (non KSA nationals) owning assets or practicing commercial, professional and/or profitable activities in KSA through a licensed entity. The Bankruptcy Law shall apply only to the foreign investor's assets existing in the KSA,
The Bankruptcy Law introduces the formation of the specialised committee (the "Committee") that shall oversee all of the bankruptcy matters including but not limited to, setting-up a special bankruptcy register, issuing licenses for bankruptcy experts and trustees, issuing implementing regulations governing the framework of the licensed bankruptcy experts and trustees, coordinating the relevant Liquidation and inspecting all of the ongoing bankruptcy procedures. It is also essential to note that the Committee will be considered as an independent administrative and financial legal body reporting directly to the Minister of Commerce and Investment.
Debtors will be able to submit preventative settlements request ("Settlement Request") to the relevant court (the "Preventive Settlement") upon the occurrence of any of the following events:
- debtors with expected financial distress that may prevent the continuity of the business operation;
- debtors with actual financial distress; and
- bankrupt debtors.
(together the "Bankruptcy Beneficiaries").
The court will thereafter determine a hearing date which must be within forty (40) days of submitting the Settlement Request and the debtor will further be notified of the hearing date within the following five (5) days of submitting the Settlement Request. Debtors may additionally submit suspension of further claims requests noting that they must provide a specific report prepared by a bankruptcy licensed trustee indicating the expected approval of at least the majority of the concerned creditors. In all cases, the suspension period may not exceed in its total one hundred and eighty (180) days. In a nutshell, a suggested settlement report will be prepared to be voted on by the concerned debtors and creditors. Upon the satisfactory of the report's requirements, the court will certify the report and the debtor will be required to finalise the procedures of the Preventative Settlement.
The Committee will be responsible to establish the Bankruptcy Register, which will be open for public view and will contain certain contents to be determined by the Implementing Regulations.
Financial Reorganisation – Restructuring
Debtors may submit a request to the relevant court to reorganise their current financial position (the "Financial Reorganisation"). This warrant will only apply if the debtors were classified as one of the Bankruptcy Beneficiaries. Creditors and any competent government authority will additionally have the right to request the court to reorganise the financial position of the debtors, provided that the concerned debtors must be notified within a period not exceeding five (5) days starting from the day of submitting such requests. In this case, the debtor will have the right to object on such request in cases where:
- the requirements of the Financial Reorganisation were not achieved;
- having on-going dispute over the concerned debt; and
- the requesting party (i.e. creditor) is misusing the Financial Reorganisation procedures.
Nevertheless, it is essential to note that during the procedures of the Financial Reorganisation, debtors, shareholders, managers, board members or auditors will be exempted from the application of certain provisions in the KSA Companies Law which enforces certain liabilities and obligations in cases where the company's losses reach fifty percent (50%) of its total capital. Once the Financial Reorganisation request is submitted to the relevant court, the submission of further claims will be suspended until the court rejects the commencement of the Financial Reorganisation procedures, approves on the Financial Reorganisation settlement report or upon the end of the relevant procedures. The court shall thereafter appoint one of the bankruptcy licensed trustees and the creditors will be notified of the courts acceptance to commence the Financial Reorganisation procedures following which, they will be able to submit their claims requests within no later than ninety (90) days starting from the notification date. The bankruptcy licensed trustee will have a broad authority to review the contracts entered into the debtor and might after meeting certain requirements (set out in the Bankruptcy Law), opt to terminate them in order to protect the creditors. Moreover, a committee consisting of all creditors will be organised which will be subject to the requirements of the Bankruptcy Law and its Implementing Regulations, and the appointed bankruptcy licensed trustee shall prepare the suggested settlement report and ensure to implement the Financial Reorganisation during and following the end of such procedures.
The Liquidation can be progressed upon the request of the debtor himself, his creditors or any other competent government authorities, provided that the debtor must be going through an actual financial distress or bankruptcy. The creditors' debts will be subject to certain conditions in order to be accepted by the court as follows:
- the debt must be due with certain value, cause and warranties (if any);
- the debt value or the total of the creditors' debts must not be less than the determined value by the Committee; and
- the debt must be due based on an enforcement note or any other note, provided that the creditors must prove that they have requested the debtor to fulfil such amount within twenty eight (28) days prior to submitting the Liquidation request to the relevant court.
The relevant court shall have the right to impose any preventative procedures based on its sole discretion or upon the request of any concerned party. Moreover, a bankruptcy licensed trustee will be appointed to carry-out the Liquidation procedures and the debtor or the entity under Liquidation will be prohibited to manage their business operations upon the commencement of the Liquidation.
Preventative Settlement and Financial Reorganisation for Small Businesses and Debtors
Small debtors are defined under the Bankruptcy Law as "debtors whom the standards determined by the Committee and the General Authority of Small and Medium Enterprises apply on" (the "Small Debtors"). The standards are yet to be determined. However, we expect such requirements to be introduced following the actual enforcement of the Bankruptcy Law. It is noticeable that the Bankruptcy Law grants special treatment to Small Debtors in order to facilitate their operations in the market and encourage them to settle their ongoing debts through eased procedures and low costs.
The administrative liquidation is defined as the selling of the Liquidation assets that are not expected to fulfil the expenses of the Liquidation and small debtors' Liquidation procedures (the "Administrative Liquidation"). The Administrative Liquidation may be requested by the debtor himself or the competent authority, provided that the debtor must be distressed, broke or his assets will not cover the expected expenses of the liquidation procedures. The relevant court may reject the Administrative Liquidation request if:
- the request did not fulfil the requirements under the Bankruptcy Law and its Implementing Regulations;
- the business operations of the debtor may be continued and the creditors' liabilities can be fulfilled within a reasonable period (subject to the review and decision of the relevant court);
- the party requesting the Administrative Liquidation is misusing this special procedure;
- the debtor's assets were considered enough to fulfil the expenses of the Liquidation procedures.
An appointed committee will then manage the Liquidation procedures, which should be finalised within twelve (12) months starting from the date of commencing the Administrative Liquidation. The Committee may extend such periods (if required), which should not exceed (90) days.
The debtor is not permitted to secure any guaranteed financing post the commencement of any of the bankruptcy procedures prior to obtaining the court's approval. During the Preventative Settlement and Financial Reorganizing procedures, a debtor may request the court's approval to secure a guaranteed financing provided that such request must contain a report by an expert approving the same. The court will thereafter accept the request if it is considered necessary to continue the operations of the debtor's businesses or protecting the assets during the relevant bankruptcy procedures.
Remunerations and expenses for the appointed bankruptcy licensed trustee and the experts and the cost of selling the assets will have priority over any other debts. However, the fulfilment of creditors' liabilities will be in accordance with certain debts ranking (ranked from highest importance to lowest) as follows:
- secured debts;
- secured financed debts as per art. 184 of the Bankruptcy Law and any other secured financed debts determined by the Implementing Regulations;
- an amount equivalent to thirty (30) days salary for the debtor's employees;
- alimony for the debtor's family as determined by the applicable laws or a court order;
- necessary expenses to ensure the continuity of the debtor's business operations during the relevant liquidation procedures in accordance with the Implementing Regulations requirements;
- accrued wages of the debtors' employees;
- unsecured debts; and
- unsecured governmental official fees, membership fees and taxes in accordance with the Implementing Regulations requirements.
Chapter (13) of the Bankruptcy Law deals with the penalties and the transactions which are subject to cancelation by the court as a result of violating certain provisions. In particular, parties violating Articles 200, 201 and 202 of the Bankruptcy Law could face various penalties. Such as, imprisonment not exceeding five (5) years, fines not exceeding five million Saudi Arabian Riyals (SAR 5,000,000), prohibition in owning shares and managing the operations of any profitable businesses (directly or indirectly) in KSA.
Implications of the Bankruptcy Law on the KSA Investment Environment
The Bankruptcy Law introduces alternative solutions and is expected to increase the percentage of local and foreign investments in the KSA market. Nevertheless, distressed or potentially distressed investors will have the opportunity to re-evaluate their financials, fulfil the pending obligations to creditors and continue their operations with eased and sufficient procedures. Following the enforcement of the Bankruptcy Law, the KSA officials are aiming to support all of the businesses in order to boost the annual growth of the investment market, decrease the possibilities of Liquidation and losing substantive investors.
Following the implementation of the Bankruptcy Law, distressed or potentially distressed businesses should start exploring the available solutions to maintain and strengthen their presence in the ever growing KSA market.