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Signs of Economic Recession / Is It Time To Apply The Law Of Preventative Settlement from bankruptcy?

Given the unstable economic situation inside and outside the Kingdom and the emergence of insolvency with certain companies in general and contracting ones in particular in terms of their capacity to satisfy their obligations on time, we, the lawyers, have to seek effective solutions for our clients to maintain their enterprises and protect them from the specter of bankruptcy or liquidation and the relevant consequences including the dismissal of many employees and the unemployment of many workers. We have to find the same away from the monotonous usual solutions such as salary cuts and official or arbitrary dismissal of employees for the reduction of expenses so that companies can maintain the fulfillment of their debts and obligations.

Thus, the application of the law of preventive settlement from bankruptcy established by Royal Decree No. meem/16 dated 04/09/1416 A.H. appears to be a solution that may assist investors and businessmen to maintain the stability of their businesses.

Looking into the text of this law, we find that the First Article thereof states that: “Every, merchant, individual or corporate, whose financial conditions have worsened to a degree presaging the failure to pay debts, may petition for amicable settlement with creditors to the committees to be formed for this purpose with the Chambers of Commerce and Industry, in accordance with the rules and procedures prescribed in the Executive Regulations”.

Moreover, the Second Article of the same law states that: “If an amicable settlement could not be reached or the individual or corporate merchant held onto the opinion that its primary interest lies in composition, it may request the Ombudsman Bureau to invite creditors to offer them said composition”.
Accordingly, an insolvent merchant or company may commence with the attempt of amicable conciliation through the conciliation committees to be formed under decree from the Minister of Trade and Industry and having their head offices at the Chambers of Commerce and Industry. Besides, the individual or corporate merchant shall be entitled to resort directly to the Ombudsman Bureau for settlement in accordance with the specific conditions and requirements stipulated in the law and its Executive regulations.
The law provides for some general conditions that must be satisfied by the individual or corporate petitioner for amicable conciliation or settlement, as shown below:
  • The duration of trade practice by the merchant must be no less than three years, i.e. having passed three financial years;
  • The merchant must be practicing trade on the date of filing the settlement petition, i.e. has not ceased to practice business for whatever reason;
  • The merchant must be characterized by credibility, honesty, good faith and compliance with commercial regulations and customs. It is also considered bad faith to not keep commercial books, or checks without balance, to conceal some debts, not being registered in the commercial registry, as well as deception or fraud in transactions;
  • The commercial disorder must not be ascribed to negligence or bad faith. This requirement is important for protecting those dealing with such merchant or company so that no insolvent merchant or company resorts to settlement without the satisfaction of due diligence primarily.
Moreover, the settlement to prevent from bankruptcy petition must have certain documents attached including a statement showing the debtor’s movables and immovables, the amounts of debt and the creditors and debtors names as well as any other documents that may be required.
Upon approval of the debtor`s petition for composition and issuance of the relevant decision by the Court of Ombudsman Bureau, the Court appoints a judicial receiver to oversee the debtor`s ordinary commercial acts as he shall not be entitled, as of such date, to mortgage, donate or transfer unless with permission from the overseeing settlement judge.

Those judicial receivers to be appointed by the Court may be chartered accountants, lawyers or legal counselors and experts in the relevant laws.

Additionally, the Saudi Arabian Monetary Agency (SAMA) has issued several controls and conditions for the opening of banking settlement accounts including, but not limited to the following:

  • • the judicial receiver must be appointed by decision from the Ombudsman Bureau
  • • the banking accounts are managed via joint signature by the judicial receiver and the settlement petitioner or as may be determined by the relevant decision provided, however, the overseeing settlement judge`s signature is also deemed essential.
The significance of settlement to protect from bankruptcy lies in the fact that it stops all lawsuits and execution proceedings against the debtor while all lawsuits lodged thereby remain effective and subject to the supervision of the judicial receiver appointed by the Court.
Moreover, no creditor may file a new lawsuit against the merchant or request the forced execution against their properties for obtaining debt and right.
The legislator has considered and prioritized some debts that are not subject to settlement such as the wife`s alimony and preferential debts as they are not affected by the effects of decision on the initiation of settlement proceedings.
The law gave each interested party the right to petition to the Ombudsman Bureau within one year as of the date on which the debtor`s fraud is discovered for the annulment of settlement in case the debtor fails to satisfy the conditions mentioned thereof as per the decision made by the Bureau. The examples of fraud include the concealment of properties and the fabrication of debts. Therefore, in case such fraud is established, the Court shall make the decision on the annulment of the settlement protecting from bankruptcy and the debtor`s bankruptcy.
Following the completion of all settlement proceedings, the judge shall issue an order for the closure of proceedings, which shall be published in newspapers. Afterwards, the merchant or the company can resume its commercial activity in an ordinary manner.
By Mohammed Shabaan | Hazim Al Madani Law Firm

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