Throughout their journey in the business world, companies face various financial crises. They may experience minor financial difficulties that can be remedied, or sometimes the crisis may escalate to the point of declaring bankruptcy. Regardless of the reasons leading to bankruptcy, a company reaching this stage requires a legal system and structure that regulates the relationship between the company and its creditors.

Therefore, in this article, we will learn about bankruptcy in the Saudi system, how corporate bankruptcy is handled, and how Saudi Arabia has managed to establish a flexible system that supports companies to continue operating and helps them recover, while also guaranteeing creditors their full rights.

What is meant by the term bankruptcy?

Corporate bankruptcy is a financial situation in which a company is unable to fully repay its debts, whether due to a lack of liquidity or because the debts have become greater than the value of the assets. It is a legal status for a debtor who is either in default or bankrupt. A defaulter is a debtor who faces current or anticipated financial difficulties that prevent them from repaying their debts on their due dates. A bankrupt debtor, on the other hand, is one who has stopped repaying their outstanding debts.

Here, legal intervention regulates the relationship between the company and its creditors, helping the company recover, overcome the crisis, and continue its operations, or liquidating its business if that is the only viable option. On the other hand, it also prevents the company from evading its debts and compels it to repay all debts to creditors in a legally regulated manner, overseen by a specialized committee.

Bankruptcy Law in the Saudi System

The Saudi Bankruptcy Law was issued by Royal Decree No. (M/50) dated 28/5/1439 AH, following approval by the Shura Council and the Council of Ministers. With the issuance of this law, previous related regulations were repealed.

The law primarily aims to improve the business environment, attract foreign investment, and achieve a balance between creditors' rights and enabling companies to continue their operations. This is accomplished by regulating bankruptcy procedures and handling the entire process legally. The law supports companies in all procedures, including preventative settlement, financial reorganization, and administrative liquidation.

Bankruptcy Procedures in the Saudi System

The Saudi Bankruptcy Law establishes a set of fixed and integrated procedures to protect the rights of both companies and creditors. These procedures are summarized in seven main steps for dealing with a bankruptcy crisis:

(1) Preventive Settlement: This allows the company the opportunity to settle debts with creditors through negotiation. During this stage, the company continues to operate normally.

(2) Financial Reorganization: This procedure aims to enable companies to restructure their financial obligations and reach an agreement with creditors. The procedure is carried out under the supervision of the Financial Reorganization Trustee.

(3) Liquidation: This involves identifying and determining all debts, selling assets, and distributing the proceeds to creditors. The distribution is carried out according to the priority set by the Bankruptcy Law, and the debt distribution process is supervised by the Liquidator.

(4) Preventive Settlement for Small Debtors: This procedure ensures that the debtor settles their debts easily by reaching an agreement with creditors.

(5) Financial Reorganization for Small Debtors: This procedure aims to reach a flexible agreement between small debtors and creditors to help the debtor reorganize their business.

(6) Liquidation for Small Debtors: This procedure aims to sell the debtor's assets and distribute the proceeds to creditors in an organized manner. This procedure is carried out under the supervision of a competent trustee.

(7) Administrative Liquidation: This procedure focuses on selling assets whose value may not be sufficient to repay debts. The procedure is implemented by the Bankruptcy Committee.

Benefits of Complying with the Saudi Bankruptcy Law for Companies

The bankruptcy law is not only a legal framework that regulates the relationship between companies and creditors, but it is also a highly supportive system that transforms financial distress and severe crises from a real threat to the company's existence into a stage that can be easily overcome. Therefore, your company's compliance with the bankruptcy law provides it with a range of benefits and advantages, most notably:

First: Legal Protection

Entering the bankruptcy proceedings leads to the suspension of individual claims and lawsuits filed against the company, giving it more time to reorganize its affairs without pressures that would exacerbate the situation.

Second: Ensuring Continuity

The procedures established by the system, such as judicial marketing and financial reorganization, allow the company to continue operating instead of ceasing or closing suddenly.

Third: Flexible Debt Repayment

Adherence to the system's provisions regarding debt scheduling, distribution, and repayment methods, as well as reaching agreements with creditors, achieves a fair balance between the company's interests and those of its creditors.

Finally, remember that bankruptcy does not mean the end of a company, especially with the flexible procedures and provisions offered by the Saudi Bankruptcy Law, which ensure business continuity and guarantee creditors' rights.

If your company is experiencing financial difficulties or is even on the verge of bankruptcy, contact us in Mohammed Al-Khliwi Law Firm office to assist you in easily completing all the procedures stipulated by the system, tailored to your company's size and financial situation.

Compliance with the Saudi Bankruptcy Law does not mean the end of the company; rather, it represents a strategic tool for protection, restructuring, and business sustainability within a clear and fair legal framework.

Disclaimer: The above content does not constitute legal advice, and the author of this article assumes no legal responsibility. For legal advice, please contact us.