Insolvency 2024 Comparisons

The Bankruptcy Regulation was enacted by Royal Decree No M/50 of 14 February 2018, and its Implementing Rules were issued on 4 September 2018. Their 329 articles aim to set out a comprehensive code governing insolvencies, and are supplemented by various statutory instruments issued by the Ministry of Commerce, the Ministry of Justice and the Bankruptcy Commission, including:

• the Rules Governing Procedures in Bankruptcy Cases in the Commercial Courts;
• the Rules for the Conduct of Meetings in Bankruptcy Proceedings;
• the Code of Professional Conduct for Officeholders and Experts;
• the Inspection and Investigation Rules;
• the Information and Documents Rules;
• the Rules for the Nomination of Trustees and Experts;
• the Rules Governing the Fees of Trustees and Experts in Bankruptcy Proceedings; and
• the Cross-Border Bankruptcies Rules.

The Bankruptcy Regulation has established the Bankruptcy Commission, which is supervised by the Minister of Commerce and has several specified powers, such as officeholder licensing, rule-making, and inspection and investigation. The Commission maintains a register of documents and information in respect of bankruptcy procedures and publishes announcements on its website. Bankruptcy proceedings come under the jurisdiction of the Commercial Court, except in some provincial towns where they are administered by the general courts.

The legislation sets out the following procedures.

• A protective settlement procedure is intended to facilitate an agreement by the debtor with their creditors for the settlement of their debts, in which the debtor retains the management of their activities under the Commercial Court’s supervision. The applicant must submit a proposal to the court, which must be voted on by the creditors within 80 days. The applicant may apply to the court for an order suspending claims for up to 90 days, which may be extended by another 90 days. Once a proposal is ratified, it becomes a scheme. Upon successful implementation of the scheme, the debtor can return to managing their affairs.
• A financial reorganisation procedure is intended to facilitate an agreement by the debtor with their creditors for the financial reorganisation of their activities under the supervision of one or more trustees in bankruptcy. On the opening of the procedure, all claims against the debtor are automatically suspended for up to 180 days, which may be extended by another 180 days. Creditors have 90 days from the announcement of the procedure to submit their claims to the trustee. When the recognised claims are ascertained, the court must set a time limit for the preparation of a proposal by the debtor with the trustee’s assistance. If accepted by a majority of the creditors and ratified by the Commercial Court, the proposal becomes a scheme, following the successful implementation of which the debtor can return to managing their affairs unsupervised.

• In a liquidation procedure one or more liquidation trustees list creditors’ claims, sell the bankruptcy assets and distribute the proceeds to the creditors under the court’s supervision.
• In an administrative liquidation procedure, the debtor’s bankruptcy assets are sold where such assets are insufficient to cover the expenses of the liquidation procedure or small debtor liquidation procedure, under the management of the Bankruptcy Commission.

The Bankruptcy Regulation also includes a specialised protective settlement procedure, financial reorganisation procedure and liquidation procedure for small debtors, which are largely analogous to the above procedures in simplified form, with the same purposes.

The following officers are licensed by the Bankruptcy Commission.

• In financial reorganisation procedures, one or more trustees in bankruptcy are appointed by the court, and supervise the debtor’s activity until the scheme is completed. The trustees may be proposed by the applicant.
• In protective settlement procedures, a licensed trustee in bankruptcy must endorse the proposal to the effect that the requisite information and documents have been supplied. If the debtor applies for protection from claims, they must submit a report from a licensed trustee confirming that a majority of the creditors will accept the proposal, and that it will be possible to implement it.
• In liquidation proceedings a trustee is appointed by the court, who takes over the management of the debtor’s affairs until the proceedings are completed.

The Bankruptcy Commission has set up a roll of licensed experts who have certain functions such as the evaluation of disputed claims. Trustees may seek the assistance of licensed experts and delegate specific tasks to them.

Trustees must exercise due care with regard to the interests of the creditors but are not liable for the consequences of any of the debtor’s actions which they have approved in a financial reorganisation procedure nor in connection with disposals in a liquidation. Trustees have a duty to inform the competent authorities if they suspect that the debtor or a creditor has committed offences under the Bankruptcy Regulation.

When selecting trustees, the court must have regard to their financial capabilities and qualifications, and the qualifications of their team. A creditor, relative, former partner, employee, auditor or agent of the debtor cannot be appointed as a trustee or expert.

The Bankruptcy Commission’s Rules for the Nomination of Trustees and Experts impose additional criteria for the selection of trustees and experts, including the type of function, the degree of complexity, and previous and current tasks performed by them. A trustee or expert may not discontinue their task without lawful cause that is acceptable to the court.

If there are creditors whose claims are of a different nature, they must be classified into different categories. The Bankruptcy Regulation states that the manner in which claims categories are classified will be provided for in the Implementing Rules, but these do not set out any relevant provisions.

No uniform practice has evolved to date, and there are many ways in which creditors have been classed. One can use the list of priority of debts in a liquidation procedure set out in Article 196 of the Bankruptcy Regulation as guidance (see 2.2 Priority Claims in Restructuring and Insolvency Proceedings), but this is not mandatory in a protective settlement procedure or financial reorganisation procedure, nor is it commonly used in such procedures.

Article 196 of the Bankruptcy Regulation sets out the priority of debts in a liquidation procedure, namely:

• debts secured by specific property;
• secured financing arranged under the court’s supervision after bankruptcy proceedings have commenced;
• employee claims of up to 30 days’ wages;
• family maintenance pursuant to statute or a court order;
• expenses necessary to continue the debtor’s activity during bankruptcy proceedings;
• earlier unpaid wages of employees;
• unsecured debts; and
• unsecured governmental fees, contributions, taxes and dues.

Mortgages can be taken by secured creditors over real estate. Pledges can be taken by secured creditors over equity shares, movable property and certain intellectual property. Security by way of assignment can be taken by secured creditors over certain intangible property. A pledge can be taken and perfected by taking possession of bank accounts.

Secured creditors may not enforce their rights outside bankruptcy proceedings once these have commenced. Creditors claiming security rights over the debtor’s assets must specify details of such rights in the claim submissions.

Secured assets must be sold by the trustee in bankruptcy and the proceeds must be deposited in a separate account for payment of the creditor’s debt in accordance with the ranking of its security. The trustee may also ask the Commercial Court to substitute and vary security over assets, provided the creditor’s rights are preserved.

There are no protections for unsecured trade creditors, who are treated as ordinary creditors without special privileges, other than the general principle of fairness (see 4.2 Statutory Restructuring, Rehabilitation and Reorganisation Procedure).

Pre-judgment attachments are generally available under Saudi Arabian law, but once bankruptcy proceedings are commenced, the attaching creditor’s rights are subject to the procedure and cannot be enforced while claims are suspended. In bankruptcy proceedings, the Commercial Court may order preservation measures of its own motion or on the application of an interested party, including the attachment of the debtor’s assets.

Unsecured creditors have the right to vote in a protective settlement procedure. If more than one-third by value of their claims refuse the proposal, the procedure is terminated.

Unsecured creditors also vote in a financial reorganisation procedure, but their veto right may be overridden by the Commercial Court if at least one category out of the categories of creditors accepts the proposal by a two-thirds majority, and there is a vote in favour by creditors whose claims represent at least 50% of the total value of the voting creditors’ claims of all categories, subject to the court being satisfied that ratification of the proposal would be in the interests of a majority of the creditors.

Unsecured creditors can only stay or defer a liquidation if they can demonstrate to the Commercial Court that general principles of fairness have not been observed (see 4.2 Statutory Restructuring, Rehabilitation and Reorganisation Procedure).

Since there was no comprehensive legislation in Saudi Arabia governing restructurings prior to the entry into force of the Bankruptcy Regulation, until recently consensual and other out-of-court workouts and restructurings were the default mode of dealing with insolvent creditors. One must also bear in mind that Saudi Arabian statute law introduced the concept of mortgages over land as recently as 2012 through the Registered Land Mortgage Regulation. Before then, banks lending money for the purchase of real property would normally take ownership of the property and transfer ownership to the borrower only when the loan was repaid.

There is still a general perception in Saudi Arabia that consensual, non-judicial or other informal restructuring processes are preferable to statutory processes and tend to preserve value for stakeholders. Generally, banks and other lenders are supportive of borrower companies experiencing financial difficulties pending a detailed assessment of their financial position.

Mandatory consensual restructuring negotiations are not required under Saudi Arabian law before the commencement of formal bankruptcy procedures.

The use of consensual “standstills” is limited in Saudi Arabia. Credit agreement default waivers as part of an initial informal and consensual process are more common but are carried out on an ad hoc basis with the timeline usually being a minimum of about one year. Legislation permitting liens or security is recent, and contractual priority and security or lien priority are changed by either being contractually established and/or being registered or perfected.

Equity holder and intercompany (entity) priority rights are contractually subordinated and often not provided with priority and/or security or lien priority. Generally, the relative positions of competing creditor classes remain the same and equity owners are subordinated without priority and/or security or lien priority.

New money is typically injected by the equity owners. Since there are no super-priority liens or rights under Saudi Arabian legislation, such liens or rights are not accorded to new money investors outside a statutory or other formal process.

It is an offence for anyone to submit misleading or incorrect information in any form to the trustee in bankruptcy, the court or the Bankruptcy Commission, or to fail to submit material information to them, if this causes prejudice to the rights of any parties, including the creditors. The Bankruptcy Regulation also makes it an offence for creditors to fraudulently inflate the value of their claims, to knowingly make arrangements with the debtor that are prejudicial to the interests of the other creditors, or to otherwise abuse any bankruptcy procedures. Penalties are imprisonment for up to five years and a fine of up to USD1.33 million.

Credit agreements in Saudi Arabia typically contain terms permitting a majority or supermajority of lenders to bind dissenting lenders to changed credit agreement terms. Informal consensual processes without a credible cram-down feature to deal with dissident creditors are perceived as unworkable. A formal statutory process was clearly needed to bind dissenters, and the enactment of the Bankruptcy Regulation was partly prompted to fill this void in Saudi Arabian law.

An out-of-court restructuring is treated as a binding agreement between the participating parties. If any creditors have not agreed to an out-of-court restructuring, they can have the transaction set aside.

A protective settlement procedure is commenced by the insolvent debtor, who must persuade the court that it can continue its activities and settle the creditors’ claims within a reasonable period. The application must be accompanied by a proposal, which must set out detailed information concerning the debtor’s liabilities and assets, and how they propose to settle the creditors’ claims.

The proposal must be endorsed by a trustee in bankruptcy confirming that all requisite information and documents have been supplied. Furthermore, the court must be satisfied that the proposal is fair, giving the creditors sufficient information to weigh the alternatives available to the debtor in comparison with the proposal, and that the existing rights of creditors are observed.

The debtor can apply for a suspension of claims against it for a period of 90 days, which may be extended to 180 days. The application for suspension of claims must be accompanied by a report from an accredited trustee in bankruptcy, confirming that it is probable that a majority of creditors will accept the proposal, and that it can be implemented.

A financial reorganisation procedure may be commenced by a debtor, a creditor or a competent authority. The applicant must persuade the court that it will be possible for the debtor to continue its activities and to settle the creditors’ claims within a reasonable period.

On the opening of a financial reorganisation procedure, all claims against the debtor are suspended for up to 180 days, which may be extended by another 180 days. If the Commercial Court accepts the application, it must appoint one or more trustees in bankruptcy.

The debtor can propose who should be appointed as trustee in bankruptcy, but the choice is at the court’s discretion. Within seven days of the appointment, the trustee must announce the financial reorganisation on the Bankruptcy Commission’s website.

Creditors have 90 days from the announcement to submit their claims to the trustee. At the end of the 90-day submission period, the trustee has 14 days to submit a list of creditors to the court. The trustee must also prepare an inventory of the debtor’s assets in bankruptcy.

The period can be extended with the court’s permission. Creditors whose claims have been rejected must be notified within five days from the date of submission to the court.

Financial restructuring can be achieved under a protective settlement procedure or financial reorganisation procedure. The key to both procedures is a proposal that must be approved by a majority of the creditors and then ratified by the Commercial Court. Creditors whose claims are of different natures must be classified into different categories.

Voting in a protective settlement procedure is meant to be concluded within 80 days of the opening of the procedure. In practice, the period from opening protective settlement procedures to ratification by the Commercial Court has varied from 54 days to 179 days, with an average of 93 days.

Financial reorganisation procedures take considerably longer. For example, it took two and a quarter years from the opening of the financial reorganisation of Abdul Hamad Algosaibi & Brothers to ratification of the proposal. Delays in financial reorganisation procedures are not unusual.

The applicant in a protective settlement procedure must submit the proposal with the application to open the proceedings, and the creditors are therefore meant to be known from the outset. If ascertained creditors have not been included in the process, they can void the proceedings on the basis of misconduct on the debtor’s part. The rights of unascertained creditors who have not been included in the procedure remain unaffected and can be pursued against the debtor.

In a financial reorganisation procedure, an announcement is made by the trustee in bankruptcy, and creditors have to submit their claims within a given period. Those who fail to do so may lose their rights against the debtor.

In a protective settlement procedure, disputed claims must be assessed by an expert, while the trustee assesses disputed claims in a financial reorganisation procedure. An objection to their ruling can be made to the Commercial Court by the creditor, the debtor or other parties who are affected, such as other creditors, and the court’s ruling can be appealed. A final ruling makes the concerned creditor’s claim res judicata. The process can take several years.

A stay of proceedings must be applied for in a protective settlement procedure and cannot be effective for more than 180 days. The company’s management remains in place and continues its operations under the court’s supervision. The debtor may apply to the court to terminate contracts to which the debtor is a party if this is necessary to protect their activity and in the interests of the majority of creditors, provided that it does not result in major damage to the counterparty. The debtor may obtain financing under the court’s supervision.

In a financial reorganisation procedure, a stay of proceedings for 180 days is automatically applied once the procedure starts and may be extended by another 180 days.

The Bankruptcy Regulation states that the manner in which claims categories are classified will be provided for in the Implementing Rules, but these do not set out any relevant provisions. The list of priorities of debts in liquidation procedures offers some guidance but no uniform practice of classification has evolved to date.

The sale of assets in a financial reorganisation procedure is executed by the managers of a business under the supervision of the trustee in bankruptcy. If the procedure is followed, a purchaser acquires good title free and clear of claims. The sale of assets may be conducted by public auction, which creditors may bid at. Provided the trustee in bankruptcy is informed and the transaction is in the interest of all creditors, sales and similar transactions that have been pre-negotiated prior to the proceeding can be affected.

Secured financing requires an expert’s report confirming that it is necessary for a continuation of the debtor’s activity or the preservation of assets. Unsecured financing may be obtained without the court’s consent. Secured financing that is obtained with the court’s approval has priority ranking.

The parties in bankruptcy proceedings must act in good faith and must, therefore, determine the value of claims in good faith. In theory therefore there should be no disagreement over the value of claims, but this is far from reality in actual bankruptcy proceedings.

Where debts are disputed in a protective settlement procedure, an expert must determine their value. The trustee in bankruptcy must determine the value of disputed debts in financial reorganisation procedures and may request the assistance of an expert in appropriate circumstances.

Any party with an interest may lodge an objection with the Commercial Court to the expert’s or trustee’s determination, and the court’s decision may be appealed to the Court of Appeal. Such proceedings can take several years.

All proposals that have been accepted by a majority of creditors must be ratified by the Commercial Court, subject to the overriding requirement of fairness based on the following criteria:

• the voting procedures have been observed;
• creditors have received adequate information to evaluate the proposal and the alternatives available to the debtor; and
• the existing rights of creditors are observed, and in particular those relating to the sharing of losses and distribution of new rights, benefits and securities.

Automatic set-offs cannot be invoked in protective settlement procedures or financial reorganisation procedures. Proposals in such proceedings may provide for a set-off against specified debts, if they are between the same parties and they have the same capacities and rights with regard to those debts or transactions. The opening of any liquidation procedure results in an automatic set-off in respect of any debt owed to the debtor by the creditor on the date of opening.

A scheme is binding on the debtor, creditors and shareholders. Failure by the debtor or a creditor to comply with the scheme allows a party with an interest to apply for termination of the process, in which case the court may move to liquidation of the debtor’s assets on its own motion or on application by an interested person.

Once the scheme is successfully implemented, the trustee must apply to the court for termination of the financial reorganisation procedure.

There are multiple stages at which a financial reorganisation can fail and result in a liquidation of the debtor’s assets, before and after ratification of the proposal. As set out in the detailed provisions of Article 16 of the Implementing Rules, the proposal must be based on a realistic assessment that the debtor can reach and implement a settlement with his creditors, and thereafter continue in business.

In a protective settlement procedure, the debtor manages the business under the Commercial Court’s supervision. In a financial reorganisation procedure, the debtor manages the business under the supervision of the trustee in bankruptcy and of the Commercial Court.

In implementing the scheme, the debtor must act in accordance with the restrictions imposed on them. Furthermore, protective settlement procedures and financial reorganisations are subject to an overarching requirement of fairness towards creditors, and the debtor’s duty to act in good faith throughout the procedure.

In a financial reorganisation procedure one or more trustees in bankruptcy are appointed to supervise the management and may dismiss them and take over their functions if they are uncooperative or incapable of performing their functions satisfactorily. The trustee(s) may terminate contracts and obtain financing subject to the same rules as apply in protective settlement procedures.

Article 70 of the Bankruptcy Regulation provides that, in a financial reorganisation procedure, the debtor must obtain the trustee’s written consent before taking any of the following steps:

• preparing the proposal and implementing the procedures thereof, including summoning the creditors to vote on it;
• applying for funding;
• paying debts either immediately due or deferred;
• entering into a new contract of insurance that creates an obligation that will have an impact on them;
• vacating any leased assets in bankruptcy and entering into any contract of lease necessary or beneficial for their activity;
• entering into any agreement or settlement with one or more creditors;
• providing or renewing a security to a third party;
• changing any registered premises or office of their company;
• voting on a proposal of a debtor in any bankruptcy proceedings resulting in a waiver of the debtor’s rights;
• entering into a contract to obtain legal, accountancy or other consultancy services in order to assist them in the financial reorganisation of their activity;
• bringing or pleading in any action brought before the judicial or quasi-judicial authorities, or arbitration;
• appointing an agent to act on their behalf, otherwise than within the operation by the debtor of their activity in the usual manner;
• establishing a subsidiary company, or buying stakes or shares in another company;
• transferring ownership of all or part of their business or assets outside the scope of the operation of their usual activity; or
• applying for termination of the procedure.

No corresponding restrictions are imposed in respect of a protective settlement procedure, but debtors are under a general duty to safeguard the creditors’ rights in a fair manner.

Shareholders’ rights remain unaffected unless a business is terminated in the course of a liquidation. If a proposal contains anything that affects shareholders’ rights, the debtor must summon them to vote thereon before the creditors’ vote is held.

In a financial reorganisation procedure, the court may set up a committee made up of at least three creditors who have claims in respect of unsecured debts that have been accepted by the trustee. The creditors’ committee’s functions include approving the sale of any asset whose value exceeds one-quarter of the value of the assets in bankruptcy, but otherwise are mainly advisory.

Article 10 of the Implementing Rules provides that creditors have the right to access information and documents in the trustee’s or the Bankruptcy Commission’s possession, unless the trustee considers certain documents confidential in order to preserve assets and to facilitate a procedure. In practice, however, only creditors whose claims have been recognised by the trustee in bankruptcy are permitted to inspect such documents. In the instances when our firm was deemed entitled to access information, we had to attend a trustee’s office and read the documents on a computer and were not permitted to make copies.

Acceptance of the proposal in a protective settlement procedure requires approval by each category of creditors representing two-thirds of the value of the debts voting in that category, and an overall majority of one-half of the value of total debts owed to unrelated parties. Therefore, if more than one-third of creditors in one category reject the proposal, the process is terminated.

Furthermore, the court must be satisfied that the proposal is fair. Subject to these requirements, the proposal is binding on all creditors, including those who have objected.

Similar principles apply in a financial reorganisation procedure, subject to the Commercial Court having the discretion to ratify a proposal if at least one category out of the categories of creditors accepts the proposal by a two-thirds majority, and there is a vote in favour by creditors whose claims represent at least 50% of the total value of the voting creditors’ claims of all categories, subject to the court being satisfied that ratification of the proposal would be in the interests of a majority of the creditors.

Creditors have the right to lodge an objection with the Commercial Court if they are of the view that their interests are not taken into consideration in the proceedings. It is an overriding principle of the Bankruptcy Regulation that creditors’ rights are safeguarded in a fair manner and that they are fairly treated.

A debtor, a creditor or competent authority may apply for the opening of the debtor’s liquidation if the debtor is in default or is bankrupt. To qualify as a debt in a liquidation, it must be immediately payable and in a definite amount, and due under a final and enforceable judgment or arbitration award, a settlement agreement endorsed by a court, a negotiable instrument, or a notarised contract or instrument.

The Commercial Court may refuse to open a liquidation procedure if it appears probable that it is possible for the debtor’s activity to be continued and for creditors’ claims to be settled within a reasonable period. If the debtor’s assets are insufficient to cover the cost of a liquidation, the court may order the opening of an administrative liquidation, in which the Bankruptcy Commission conducts the sale of the debtor’s assets and distributes the proceeds to the creditors.

Following the opening of a liquidation procedure, a liquidation trustee is appointed and is put in charge of managing the debtor’s business. The trustee has the power to obtain information and documents relating to the liquidation procedure, including, among other things, the debtor’s banking and investment documents.

Creditors are required to present claims to the trustee within 90 days of the announcement of the opening order in order to vote on the liquidation procedure proposal, but when a protective settlement procedure or financial reorganisation procedure is terminated and a liquidation procedure commences, claims that have already been filed and accepted do not need to be presented again.

The trustee is required to submit a progress report to the court every three months, to which the creditors have access.

The trustee must notify any creditor whose claim is recommended for dismissal or referred to an expert, with such a creditor having the right to apply to the Commercial Court for his claim to be heard.

The trustee is in charge of the bankruptcy assets, the procedures for the sale of such assets and the verification of claims and may take such steps as they think fit to sell the assets at the best price possible with the proceeds of the sale deposited in a current account. The trustee is required to provide an inventory of the assets in bankruptcy with relevant details of such assets to the Commercial Court.

The court will require the prior announcement of the sale of certain assets, and specified prior voting and notice requirements are applicable to the sale of any asset valued at over one-quarter the value of the bankruptcy assets. The trustee requires the court’s consent to sell a bankruptcy asset that is disputed.

The trustee must make a decision for the distribution of the proceeds of the sale of the bankruptcy assets to the creditors and is in charge of the distribution of such proceeds in one or more lots in accordance with their ranking. Article 196 of the Bankruptcy Regulation sets out the priority of debts in a liquidation (see 2.2 Priority Claims in Restructuring and Insolvency Proceedings). The Regulation includes mechanisms for handling, among other things, satisfactions by guarantors and other persons of part of the debt owing to a creditor, debts not immediately payable, and the termination of debtor employment contracts. The trustee must return any of the proceeds of the liquidation remaining after satisfying all of the debts to the debtor.

The trustee may, after the rights of the creditors have been satisfied, and at the request of the debtor, apply to the court to defer the termination of the liquidation procedure.

Once a liquidation trustee is appointed, the management of the business is taken out of the owners’ hands. If there is a surplus from the sale of assets after the creditors’ claims are satisfied, this must be returned to the shareholders.

In a liquidation procedure, a creditors’ committee may be set up under the same rules as in a financial reorganisation procedure (see 4.2 Statutory Restructuring, Rehabilitation and Reorganisation Procedure). The trustee must summon creditors to a meeting to discuss and vote on decisions in situations in which he deems it necessary to obtain their consent, including several situations set out in the Bankruptcy Regulation, with decisions deemed valid if satisfying specified voting requirements.

The Regulation includes mechanisms for handling creditor objections to the trustee’s decision subject to specified time limits, retention by the trustee of amounts to cover debts subject to judicial dispute, the apportioning of proceeds in the event there is more than one decision and a creditor submits a claim before the final decision, the payment of claims submitted after implementation of the final decision and before termination of the liquidation procedure, and the distribution of non-cash assets to creditors.

The Cross-Border Bankruptcies Rules were issued in December 2022 and are based on the UNCITRAL Model Law on Cross-Border Insolvency. They govern:

• requests for assistance in Saudi Arabia by foreign courts or officeholders in connection with overseas bankruptcy proceedings;
• requests by the Saudi Arabian Bankruptcy Commission or officeholders to foreign courts or officeholders in connection with Saudi Arabian bankruptcy proceedings;
• situations where the same debtor is subject to bankruptcy proceedings in Saudi Arabia and one or more other jurisdictions; and
• requests for assistance in bankruptcy proceedings by a creditor having an interest in another jurisdiction.

The Cross-Border Bankruptcies Rules are a marked departure from the Saudi Arabian courts’ refusal to recognise laws other than Saudi Arabian law since they require the Saudi Arabian courts to co-operate with foreign courts and officeholders. In line with the UNCITRAL Model Law on Cross-Border Insolvency, foreign proceedings must be recognised if certain requirements are fulfilled, subject to the usual public policy limitations. Foreign proceedings are classed as main foreign bankruptcy proceedings or secondary foreign bankruptcy proceedings, as determined by the jurisdiction in which the main centre of the debtor’s economic activity is located.

In situations where the Commercial Court determines that the Saudi Arabian proceedings are the main proceedings, Saudi Arabian law will be applied.

The only international treaties on the reciprocal enforcement of judgments to which Saudi Arabia is a party are the Arab League Treaty on the Enforcement of Judgments signed at Riyadh on 16 April 1983 and the Arab Gulf Co-operation Council Convention on the Enforcement of Judgments of 6 December 1995.

Saudi Arabian courts have traditionally refused to recognise judgments issued in jurisdictions that do not have treaties on the reciprocal enforcement of judgments with the Kingdom, most recently in 2018 in relation to a judgment issued in England. Although the relevant regulations provide that judgments must be enforced on the basis of reciprocity, this has been interpreted to mean that the judgment was issued in a jurisdiction that is party to a treaty or convention for the reciprocal enforcement of judgments to which Saudi Arabia is also a party, or whose authorities would give executive force to judgments of the courts of Saudi Arabia without the requirement of instituting an action on the judgment.

However, the Bankruptcy Regulation does not require a creditor to have an enforceable judgment to file a claim in bankruptcy. Therefore, a judgment that is issued in another jurisdiction may be used as evidence of a claim even though it is not enforceable in Saudi Arabia.

The Cross-Border Bankruptcies Rules set out detailed provisions on judicial co-operation and co-ordination with foreign courts, in line with the UNCITRAL Model Law on Cross-Border Insolvency.

The Bankruptcy Regulation does not differentiate between domestic and foreign creditors. This is confirmed by Article 7(1) of the Cross-Border Bankruptcies Rules. This was also the practice of the Commercial Court before the Rules were issued since it has always afforded the same rights to foreign creditors as it does to domestic creditors.

A company’s officers owe duties to creditors once debts exceed 50% of the capital and may be subject to criminal sanctions if they continue the business activities in the absence of a possibility of avoiding liquidation. Furthermore, liquidation of an insolvent company other than under the Bankruptcy Regulation makes the officers liable for any shortfall suffered by the creditors. The officers’ duties under the Companies Regulation cease if a financial reorganisation procedure has been registered in a timely manner but continue if the court dismisses or terminates the procedure.

Directors and officers are subject to criminal sanctions for a number of transgressions committed before the opening of bankruptcy proceedings, including:

• wrongful disposition over the assets of the debtor or the assets in bankruptcy or withholding them or abusing their powers;
• carrying on the activity of the debtor with the intention of defrauding their creditors;
• continuing to carry on the activity of the debtor in the absence of the possibility of avoiding liquidation;
• employing means involving recklessness in order to avoid or delay the opening of a liquidation procedure resulting in prejudice to the rights of creditors, including the sale of goods at less than the market value in order to obtain cash liquidity;
• making deals for no consideration or for unfair consideration;
• paying the debts of any creditors in such a manner as to cause harm to the other creditors; and
• abuse of any bankruptcy procedure.

Once bankruptcy proceedings have commenced, a director or officer is criminally liable for the following acts or omissions:

• embezzlement or concealing any assets of the debtor or assets in the bankruptcy;
• concealing, destroying or altering the debtor’s books, or neglect in the keeping thereof, or keeping books of the debtor with deficient or irregular particulars, having regard to the accepted criteria in the management and keeping of accounts;
• keeping fictitious accounts, or not keeping the accounts in accordance with accepted criteria, or removing documents of account;
• a fraudulent disposition for the purpose of increasing the obligations of the debtor or reducing the value of their assets;
• submitting misleading or incorrect information in any form to the trustee in bankruptcy or the court or the Bankruptcy Commission, or failing to submit material information to the court or the trustee in bankruptcy or the Bankruptcy Commission immediately upon demand;
• mortgaging any asset of the debtor or making any disposition thereover or paying debts in whole or in part in contravention of the Regulation or a judicial order;
• settling the rights of any creditor or disposing of the assets of the debtor or the assets in bankruptcy in contravention of the provisions of the scheme, but the same will not include a discharge by the creditor of the debtor in whole or in part; and
• exploitation of powers for private purposes or obtaining an unlawful advantage from a third party, directly or indirectly.

Any of the above may result in imprisonment for up to five years and a fine of up to USD1.33 million. In addition, the court may make an order, on the application of any person having an interest, for one or more of the following:

• nullifying a disposition or the effect resulting from the committing of any of the criminal acts;
• recovery of any of the debtor’s assets and any rights connected therewith; or
• compensation pursuant to the application of any person having an interest.

Creditors and any other person having an interest may lodge a direct claim against the debtors’ officers in respect of the offences and liabilities listed above.

Officers have the same duties and liabilities as directors.

The duties of directors and officers are set out in Articles 26 and 27 of the Companies Regulation and Articles 10 to 12 of the Implementing Rules, the combined effect of which can be summarised as follows.

• To manage the company in good faith to achieve its objectives and “maximise its value for the long-term benefit of partners or shareholders”.
• To exercise reasonable care, attention, diligence and skill.
• To avoid conflicts of interest and disclose potential conflicts of interest.

Articles 28 and 29 of the Companies Regulation make directors and officers jointly and severally liable to the company, the shareholders or third parties for damage arising from violations of the Companies Regulation or the company’s articles of association or bylaws, or any “error, neglect or default” on their part in the performance of the work. This liability may not be waived, but the company may take out suitable liability insurance to cover directors and officers.

Any interested party may apply for nullification of a transaction made by the debtor prior to the opening of bankruptcy proceedings involving one or more of the following.

• Assignment in whole or in part of any of their assets, rights, or securities provided to them.
• Making a deal without consideration, or for a consideration less than the fair value.
• Making a deal involving the settlement of debts before the maturity dates thereof or settling them in an unfair manner.
• Providing security for the debts before such debts have been established against the debtor.
• Discharging a debt of the debtor in part or in whole from the date due to the debtor.

The look-back period is 24 months in respect of transactions with related parties, and 12 months in respect of transactions with unrelated parties.

The complaint must be made within 24 months from the date of opening the procedure.

Complaints in respect of defeasible transactions may be brought by any party having an interest.