Is your company facing financial turmoil that exposes it to bankruptcy risk? Did you know that the Saudi Bankruptcy Law provides new mechanisms such as financial reorganization and preventive settlement to protect companies from collapse instead of liquidation? In this article, we answer these questions and shed light on the procedures related to financial reorganization under the Saudi Bankruptcy Law and its protective role, along with an explanation of preventive settlement and liquidation and the differences between them. We will also explore the practical stages of these procedures and the most important laws and regulations issued (including the Bankruptcy Law issued by Royal Decree No. (M/50), dated 28/5/1439H), in addition to the penalties for misuse, concluding with general recommendations and the importance of hiring a specialized lawyer.
Definition of Financial Reorganization and Its Objectives
Financial reorganization is one of the key procedures in the new Saudi Bankruptcy Law. The law defines it as “a procedure aimed at facilitating the debtor’s reaching an agreement with its creditors to financially reorganize its business under the supervision of a financial reorganization trustee.”
In other words, this procedure enables the distressed company or project to restructure its debts and reschedule repayments in a way that ensures continuity of its business operations. It is used when a distressed or potentially distressed entity is facing financial disruptions, where reorganization is more effective than final liquidation.
The objective of the financial reorganization procedures is to protect companies from bankruptcy and give them a chance to restore their financial balance without ceasing operations. As the articles of the law state, the procedure aims to enable the bankrupt, distressed, or financially troubled debtor to reach an agreement with creditors to regulate its financial obligations and continue its business, while fairly considering creditors’ rights. The mechanism also aims to maximize asset value and ensure fair distribution of sale proceeds if necessary.
Through financial reorganization, distressed companies are granted the opportunity to amend their capital or debt structures—or both (such as extending repayment terms, reducing debt ratios, or converting debt to equity)—in line with their future capabilities. A certified financial reorganization trustee supervises the implementation of the plan and monitors the effectiveness of the procedure and the protection of all stakeholders’ interests.
Stages of Financial Reorganization Procedures
The financial reorganization procedure involves several sequential stages for effective implementation. These steps can be summarized as follows:
1. Filing the Request to Commence the Procedure:
The process begins when the debtor or a creditor (or another interested party) submits a request to the competent court to initiate the financial reorganization procedure. According to Article (13) of the Bankruptcy Law, this request may be submitted if the debtor is likely to face financial distress or is already distressed or bankrupt. The request must include the required financial information and documents as stipulated by the law. The procedure may not be requested if the debtor has undergone it—or a similar procedure (for small enterprises)—within the past twelve months.
2. Court Decision to Accept or Reject the Request:
The court schedules a hearing to review the request within no more than 40 days from its filing date, after which it issues a ruling to either commence the procedure or reject the request.
The court opens the procedure if it is convinced that the debtor can continue operations and repay debts within a reasonable timeframe.
And that the debtor is bankrupt, distressed, or exposed to distress, provided the request meets all documentation requirements.
If the request is found incomplete or submitted in bad faith, the court may reject it or convert it into another appropriate bankruptcy procedure. Upon acceptance, the court issues a ruling to begin the financial reorganization procedure.
3. Appointment of a Financial Reorganization Trustee:
Article (50) stipulates that the court shall issue a decision appointing a bankruptcy trustee to manage the financial reorganization procedure. The applicant may propose a trustee from the approved list. The trustee is selected based on financial experience and qualifications.
Also plays a key role in supervising the debtor’s business and preparing the proposal (the plan).
4. Preparation of the Financial Reorganization Plan:
The trustee and debtor collaborate to prepare the financial reorganization plan within the timeframe set by the court. The debtor, being fully aware of its financial status, proposes the most appropriate solutions to restructure the debt (e.g., extend deadlines or reduce debt ratios). The trustee also submits a report to the court assessing the feasibility of the plan and the likelihood of creditor approval.
5. Creditors’ Vote on the Proposal:
After the plan is prepared, the trustee invites verified creditors (with validated claims) to a meeting to vote on the proposal.
Creditors must be notified of the voting date (in person or electronically) well in advance and provided with a copy of the proposal.
Creditors vote according to their debt proportions.
Also the proposal is generally considered accepted if eligible creditor groups vote in favor by a specified majority (as per the law).
6. Court Approval of the Plan:
If the creditors approve the proposal by majority vote, the trustee submits a request to the court to ratify the plan. The court ensures the plan is fair and inclusive of all creditor rights and stakeholder groups. If deemed acceptable and just, the court formally ratifies it. In certain limited cases, the court may compel objecting creditors or classes to accept the plan if specific conditions are met (e.g., acceptance by at least one class and a certain voting threshold).
7. Implementation and Follow-up of the Plan:
Once ratified by the court, the practical implementation of the plan begins. The trustee continues to oversee its execution and provides performance indicators and guidance to the debtor to ensure compliance.
Upon completion of the plan, the trustee submits a final request to the court to close the procedure and settle the debtor’s financial situation.
The procedure concludes with case closure once the debtor fulfills the new obligations and any agreed returns are distributed per the court’s decisions.
Parallel Procedures: Preventive Settlement, Liquidation, and Their Differences
The Saudi Bankruptcy Law includes other related procedures aimed at protecting distressed companies, such as preventive settlement and liquidation. Understanding their differences helps in choosing the appropriate path:
- Preventive Settlement:
This procedure occurs before complete bankruptcy and is sometimes referred to as “early financial rebalancing.” Under it, the debtor voluntarily applies to the court to temporarily freeze claims
and prepare a new debt settlement proposal while retaining control of business operations. The aim is to facilitate an agreement with creditors before the company collapses or ceases operations.
It is less stringent than other bankruptcy procedures and gives the debtor greater management control without full court oversight. The debtor must submit a settlement proposal to be voted on by creditors, which may then receive judicial ratification.
- Liquidation:
A final legal procedure aimed at liquidating the distressed debtor’s assets and selling them to repay debts. A liquidation trustee is appointed to collect creditor claims, inventory assets, sell them, and distribute proceeds. Liquidation is a harsh procedure used when neither the law nor the court sees potential for saving the company through previous arrangements. Unlike financial reorganization, liquidation does not aim to continue the debtor’s business but to end it and sell its assets. - Differences between Procedures:
In summary, preventive settlement and financial reorganization aim to rescue the company and preserve operations by restructuring debts, whereas liquidation seeks to terminate the debtor’s operations and liquidate assets. Preventive settlement does not strip the debtor of management (and is often the first resort in distress).
While financial reorganization is slightly stricter with direct court supervision. Liquidation follows failed agreements and the company’s dissolution. Thus, procedures escalate from most rescue-oriented to most terminal.
Relevant Laws and Regulations
The Saudi Bankruptcy Law governs these procedures in detail. The law was issued by Royal Decree No. (M/50) dated 28/5/1439H (February 14, 2018) and is currently in force.
It replaced the old preventive settlement law and introduced modern tools like financial reorganization and administrative liquidation. A “Bankruptcy Committee” was also formed to manage the list of trustees and experts and to develop the executive regulations.
Following its issuance, the government introduced technical amendments to fine-tune some procedures.
For example,
in March 2020, the Council of Ministers approved an amendment to Article (46) regarding the period for suspending claims
When filing a financial reorganization request.
The court was granted the power to extend the suspension period to allow enough time to prepare proposals. Executive regulation amendments also introduced seven distinct types of bankruptcy procedures (including small business procedures) to simplify the process.
In general, the law remains effective without major changes and is cited in judicial proceedings as needed.
It’s worth noting that other regulations (like the Companies Law and Commercial Courts Law) complement the Bankruptcy Law’s application.
However, the primary legal reference remains the Bankruptcy Law, which was designed to enhance the business environment.
And offer rescue opportunities before collapse.
Therefore, it is always advisable to consult the latest version of the Bankruptcy Law and its regulations for any legal updates.
Brief Practical Examples
A real-world example of the new law’s application is the Saad Group, a major conglomerate operating in banking and healthcare services. The group resorted to bankruptcy procedures under the new law to restructure its debts.
In 2019, the group filed for bankruptcy before the Commercial Court in Dammam under the law that facilitates creditor claims recovery.
And allows restructuring of distressed companies.
This was one of the largest bankruptcy cases in the Kingdom, as the group had incurred massive debts beyond repayment.
The move was a significant precedent, where the new law successfully encouraged creditors and courts.
To consider amicable solutions to restart the group’s operations rather than liquidate.
In addition, other distressed companies also benefited from the new procedures,
Which provide a range of graded legal options before resorting to final liquidation.
These real-world examples illustrate how preventive and financial reorganization procedures can protect companies.
And balance stakeholder rights in the Saudi economy.
Penalties for Misuse and Fraud
To ensure fairness and credibility, the Saudi Bankruptcy Law includes a set of penalties for those attempting to exploit.
Or conceal rights under it.
The law criminalizes certain actions that may be committed by the debtor or related parties to manipulate bankruptcy procedures.
Article (203) stipulates imprisonment (up to five years) and a fine (up to SAR 5 million) for anyone who commits a crime under the law.
Additional penalties apply to those managing the entity in violation of the law, including bans on managing.
Or participating in any company, voting on corporate decisions, or owning shares unlawfully.
The court may also annul any unfair transactions made by the debtor and require restitution.
Or transfer of sold assets to the trustee.
The law also provides for doubled penalties in case of recurrence within three years.
And obligates the trustee to report any suspected bankruptcy crimes to judicial authorities.
This confirms that the Kingdom’s law not only provides legal protection for distressed debtors.
But also firmly warns against fraudulent actions that could undermine rescue procedures.
Abuse or concealment of funds before opening procedures may result in denial of settlement.
And a severe court ruling to terminate procedures and impose the specified penalties.
Conclusion and Recommendations
Considering the above, it is clear that the financial reorganization procedures within the Saudi Bankruptcy Law form a powerful legal tool.
To support distressed companies and prevent full bankruptcy.
These procedures mark a major transformation in the Kingdom’s bankruptcy legislation.
By focusing on preserving economic activity and protecting creditors alike.
However, applying these procedures remains complex and requires precise understanding of related laws, requirements, and procedures.
Therefore, business owners and entrepreneurs are advised to exercise caution and seek specialized legal counsel at all stages of bankruptcy.
And debt settlement to ensure proper litigation procedures are followed and their legal interests are protected.
It is also important to note that every company and financial situation is unique. What works for one may not be suitable for another. Thus, specialized legal consultation ensures the most appropriate procedure is chosen.
Whether preventive settlement or financial reorganization—in line with the business’s current reality and sustainability.
Finally,
Al Mashoura Law Firm is ready to support its clients through all stages of bankruptcy procedures in accordance with the highest professional standards.
Our specialized attorneys are committed to providing accurate legal consultations and judicial representation to protect your rights.
And efficiently manage the procedures, ensuring effective and confident implementation of financial reorganization or preventive settlement solutions.