The Law Firm of Hazim Al Madani Attorneys and Legal Consultants

New Draft Bankruptcy Law - Advantages and Most Important Procedures

By Abdul Halim Ammar

We have recently noticed that the majority of the Arab States tends to redraft their respective laws and regulations and enact new laws consistent with the economic changes at the level of the world in general and the Arab world in particular. Initially, the KSA has passed the new corporate law, including the incorporation of one-man companies for the first time, and the subsequent amendments thereto. Following, the UAE has passed the new bankruptcy law which shall give new momentum to investment inside the State. Then, the KSA has passed an independent draft bankruptcy law. The KSA`s tendency to the issuance of an independent law regulating the provisions of bankruptcy constitutes robust action, especially that bankruptcy has previously been included in the Commercial Law (Law of Commercial Court) promulgated under Royal Order No. 32 dated 15/01/1350 A.H. as regulating provisions without expansion, being the first Saudi comprehensive commercial law with a whole chapter on the provisions of bankruptcy. This was followed by the promulgation of Composition Law under Royal Decree No. meem/16 dated 04/09/1416 A.H.

Moreover, Egypt is about to draft the bankruptcy bill to eliminate the negative aspects of the Egyptian applicable Commercial Law and replace the same with positives aspects aiming primarily to reassure investors to enter the maximum investments into Egypt without obstacles.

Hereinafter, we will discuss the importance of bankruptcy law in the UAE and the KSA.

Given the state of the Arab market in recent years, the economic recession in many Arab States which forced them to adopt new economic policies, many big and small enterprises were threatened by bankruptcy, which gave rise to the necessity of finding escape from such economic decline which affected directly the operating companies. Thus, the bankruptcy law was the lifeline for insolvent companies as it provides the maximum degree of transparency and protection to investors and obligees to ensure their continual operation, give them the flexibility necessary for managing their financial condition, which enhances the investment climate inside the country and the ability to attract more investors, especially that the objective of this law is to regulate the restructure processes of those companies with financial problems and protect the rights of obligees and shareholders.

First: Considering the UAE Bankruptcy Law, we find that the most important provisions thereof are summed up as follows:

  • The purpose of the issuance of this law at this timeis to strengthen investors` confidence and support economy as this law enables the insolvent companies to reorganize their financial and commercial conditions to overcome the insolvency phase and meet their debts and liabilities without the interruption of production.
  • The bankruptcy law provided also forthe formation permanent committee under the name of “Financial Reorganization Committee” by virtue of decree from the Cabinet, which determines the number of members and the represented entities.
  • The UAE bankruptcy law was drafted and enacted in line with the best international practices and standards and the legislative system, i.e. it did not adopt the law of specific state.
  • The law tackled the problem of bad checks that is deemed crime in the UAE and is still treated as crime at the level of individuals. However, what about companies?The UAE new bankruptcy law provided for some strict penalties against those attempting to circumvent the financial reorganization and bankruptcy law. Those penalties include imprisonment up to five years and fine amounting to one million Dirhams.
  • The bankruptcy law defined the term during which companies are permitted to apply for financial reorganization and bankruptcy at thirty days in case of corporate insolvency to pay to third parties and failure to payment, where an expert assesses the company`s position and makes the relevant decision.
  • Moreover, the bankruptcy law determined to approve the following four steps for rescuing insolvent companies and avoiding their bankruptcy:
  • Financial reorganization of the company;
  • Composition;
  • Financial restructure.
  • Possible procurement of new loans as per the provisions of law.

Through those steps, the application of new law would contribute to raise the value of the obligor`s assets as it shall not be obliged to sell the same for low prices; enable the obligor to restructure its obligations and give the obligor the opportunity to re-enter the market and more time to satisfy its obligations, which would achieve interest to all parties.

  • One of the most important provisions of this lawis that it shall not apply to companies that have declared bankruptcy prior to the issuance of new law as they shall remain subject to the procedures set forth in the Commercial Transactions Law.

Second: As for the KSA draft bankruptcy law, the relevant explanatory note reveals the following:

Considering the introduction of the KSA draft bankruptcy law, we find that the purpose of the issuance thereof at this time is restricted to:

  • Remedy the present deficiency in the KSA applicable regulations through the enactment of comprehensive law tackling the insolvency of commercial and economic enterprises.
  • Encourage activities and projects through an efficient bankruptcy law by way of the financial reorganization of insolvent companies.
  • Improve the KSA investment environment and attract more investments.
  • Enable the insolvent obligor or bankrupt to remedy its conditions through amicable settlement with its obligees, which shall reserve their rights and able it to re-exercise its economic business.
  • Reinforce confidence in the credit market and financial transactions by enacting law taking into account the rights of all obligees.
  • Stimulate small and medium enterprises to take initiative and compete in other economic laws.
  • Enable the regulators of financial sector to regulate the insolvent or bankrupt public entities in a manner commensurate with the nature of each sector and the related risks.
  • Improve the ability to achieve Saudi Vision 2030.

Moreover, the draft bankruptcy law stated the actions it provides to the insolvent or bankrupt obligor as it includes many actions governing the dispositions and assets of obligor who faces insolvency or fails to pay its debts. Those actions provide the obligor with the opportunity to remedy its conditions and proceed with business without prejudice to the rights of obligees. Such actions are as follows:

  1. Preventive Settlement Action: it is an action taken by the court upon the request of the obligor or the authority concerned with the regulation of activity exercised thereby. This action enables the obligor to remedy its conditions with the obligees based on the settlement proposal.

Advantages of Preventive Settlement Action:

The legislator obligates some categories of obligees to comply with the settlement proposal, even if they do not agree, in case the legal requirements are satisfied. Besides, the legislator permits the suspension of obligees` claims against the obligor under decision to be made by the competent court.

  1. Reorganization Action:it is an action taken by the court upon the request of the obligor or the competent authority or through any obligee in case of the financial disorder of the obligor. The reorganization action differs from the preventive settlement action as the former gives greater role to the obligees and the court during the term thereof including the prevention of the obligor from the management of businesses as the management is undertaken by …
  2. Liquidation Action: it is an action taken by the court upon the request of the obligor or the competent authority or through any obligee in case of the financial disorder of the obligor where the obligor faces insolvency or bankruptcy or has no actual opportunity to remedy its financial conditions and benefit accordingly from the preventive settlement and the reorganization actions, a case in which the law seeks to accelerate and facilitate the liquidation actions.

As for individuals who are subject to the draft bankruptcy law, such draft law applies to juridical and natural persons who exercise businesses and develop investment and professional projects.  

The draft bankruptcy law covered the geographic scope of project where the provisions thereof apply to:

  • Saudi and non-Saudi individuals who exercise economic activities in the KSA.
  • Economic entities including companies and institutions registered in the KSA.
  • Foreign companies that exercise business inside the KSA provided, however, that (application shall be restricted to the assets lying in the KSA).

As for the effects of the initiation of actions set forth in the draft law, the draft law gives rise to specific effects on the initiation of actions set forth therein with the aim of achieving the objective of each action. Hereinafter the most important effects of actions set forth in the draft bankruptcy law:

  1. Suspension of Claims: in specific cases, the law permits the suspension of claims raised by the obligees to protect the obligor`s assets and properties during the effective period of action. The objective of this action is to give the obligor the opportunity to remedy its conditions and provide settlement proposals or financial reorganization.
  2. New Finance: the draft law permits the obligor to obtain finance or new loan during the period of settlement or financial reorganization action if such loan or finance is necessary to implement settlement proposal and financial reorganization. However, given the difficulty of obtaining loan by the obligor during such phase, the obtaining of loan is subject to approval of the court.
  3. Continuity of Contracts: among the important matters covered by the draft bankruptcy law is that it inhibits each contractor with the obligor from exercising the option of contract termination including those contracts in connection with the obligor`s operations. In addition, the draft law gives the obligor the right to renew either the contracts it decides to proceed therewith or those it terminates.
  4. Obligor`s Rights with Third Parties: the draft law defined the manner to deal with the obligor`s rights with third parties upon subjection to any of the actions provided for therein. Thus, if the obligor has rights with third parties, it or the appointed liquidator, in cases where the obligor is excluded from the management, must initiate to take actions necessary for claiming the same, a case in which the competent court shall be that of specific jurisdiction unless such claims arise from or in close connection with the bankruptcy actions where jurisdiction is held by the competent bankruptcy court.  
  5. Imposing Settlement on Obligees: among the policies adopted by the draft law is the obligation of obligees to comply with settlement proposal or financial reorganization.

The draft bankruptcy law has also regulated the simplified action to apply to the low-value assets of small obligors, constituting in the preventive settlement action for small obligors; financial reorganization action for small obligors and liquidation action for small obligors.

In addition, the draft law approached the manner to deal with worthless assets; administrative liquidation, inventory and protection of the obligor`s properties and assets and the protection of the obligees` rights.

Moreover, the draft law approached the obligor`s conduct, the recovery of funds and penalties where it provided for the cases where the board members and the executive management assume personal liability for the violation of the principle of corporate assets. The draft law distinguishes between real bankrupt, the obligor in default and the fraud obligor. Thus, the draft law does not punish the obligor with good faith while it deems the obligor in default to assume personal civil liability. For the fraud obligor, it assumes civil and criminal liability and is prevented from exercising any administrative activity in any establishment.

Eleventh: Bankruptcy Committee

The draft law provided for the formation of bankruptcy committee and determined the mechanism of formation, the powers and the modus operandi thereof. The most significant powers of this committee are to:

  • Keep and manage the bankruptcy register.
  • Set a list of bankruptcy trustees or competent persons who represent the obligors or act as experts as per the provisions of law.
  • Administer the actions of administrative liquidation.
  • Make recommendations on the issuance of documents and licenses required under any of the law requirements and provide the same to the Ministry of Trade and Investment.
  • Organize and sponsor initiative aiming to raise the awareness of law.

The above was a summary of the new draft bankruptcy law and the procedures set forth therein as well as the effects thereof on obligors and obligees.

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