Introduction:
In light of growing economic challenges and market fluctuations, many commercial establishments in the Kingdom of Saudi Arabia face financial crises that may impact their continuity. For this reason, the Saudi Bankruptcy Law has introduced innovative legal tools designed to help establishments overcome financial distress before reaching full bankruptcy. Among the most prominent of these tools are the Preventive Settlement Procedure and Financial Reorganization, which provide the debtor with formal opportunities to protect its assets and restore financial stability under the supervision of the competent court.
Definition of Preventive Settlement under the Saudi Bankruptcy Law:
Preventive settlement is a legal procedure that enables a debtor, who has not yet reached a state of financial distress, to submit a request to the court to reschedule debts and avoid collapse. This procedure aims to reconcile the debtor with creditors without affecting the management of the establishment. The applicant must be in a difficult financial situation but still capable of operating the business without direct external intervention.
When is an establishment eligible to request preventive settlement?
The debtor must not be actually insolvent at the time of submitting the request but only exposed to a possibility of distress. The debtor must also submit a clear settlement plan and present transparent financial data, including audited financial statements for previous years. Additionally, there must be no ongoing bankruptcy procedure against the debtor that has not been closed.
The Purpose of Financial Reorganization under Saudi Law:
Unlike preventive settlement, Financial Reorganization applies in cases of actual distress or severe threat thereof. This legal tool aims to restructure the debtor’s financial obligations in a manner that allows the continuation of commercial activities in an organized way. A “Financial Reorganization Trustee” supervises this procedure, and creditors participate in drafting and approving the plan.
The Key Differences Between Preventive Settlement and Financial Reorganization:
Preventive settlement differs from financial reorganization in several essential aspects. While preventive settlement is designed for a debtor facing temporary difficulties but not yet insolvent, financial reorganization applies to establishments already in distress or facing an imminent threat.
In terms of judicial oversight, preventive settlement is subject to lighter supervision compared to financial reorganization, which requires more detailed involvement from the commercial court. Additionally, the role of creditors in preventive settlement is consultative, whereas the law requires their active participation in voting and approving the reorganization plan by majority.
Furthermore, appointing a trustee is not always required in preventive settlement, whereas it is mandatory in financial reorganization. Financial reorganization also grants broader powers, such as the ability to cancel certain contracts or rearrange legal obligations—privileges not available in preventive settlement. Finally, the likelihood of transitioning into liquidation is higher in cases where financial reorganization fails compared to preventive settlement.
Legal Requirements for Accepting a Preventive Settlement Request:
A preventive settlement requires submitting a complete application to the competent court, accompanied by a settlement plan, audited financial statements, and detailed information about creditors and obligations. The debtor must also prove the ability to continue operating the establishment. If the court rejects the request, the debtor may appeal in accordance with the legal procedures within the specified timeline.
Legal Requirements for Financial Reorganization:
The debtor must prove actual insolvency or a definite threat of insolvency, along with providing a clear restructuring plan that includes the debt schedule, repayment proposals, and operational details during the procedure. Appointing a trustee is mandatory, and the trustee supervises the entire process. The project is then presented to creditors for voting and submitted to the court for approval.
The Role of the Competent Court in Regulatory Procedures:
The competent commercial court plays a pivotal role in managing these procedures. In preventive settlement, the court receives the request, verifies the requirements, and issues the acceptance decision. In financial reorganization, the court appoints the trustee, supervises the progress, rules on creditor objections, and issues the final decision to approve the plan or open liquidation procedures.
Debt Scheduling: A Key Step in Financial Reorganization
The “Debt Schedule” is one of the core components of the reorganization plan, as it outlines the debtor’s financial obligations, creditor classifications, due amounts, and repayment mechanisms. This schedule serves as the basis for creditor voting and is approved by the court to ensure fairness and balance among all parties.
Protecting the Establishment During Procedures: Suspension of Claims and Lawsuits
Once the court accepts the request for preventive settlement or financial reorganization, all claims and lawsuits against the debtor are automatically suspended. Executions against the establishment’s assets are prohibited during the procedure period, providing a legally safe environment for restructuring and preventing the depletion of essential assets.
Debtor’s Legal Obligations During Settlement or Reorganization:
Throughout the procedures, the debtor is required to fully cooperate with the trustee and auditors, provide all requested documents, and refrain from making any major financial decisions without the court’s approval. The law also obligates complete transparency in presenting information to creditors and all relevant parties.
Creditor Participation and Voting on the Plan:
Creditors are classified into categories based on the nature of their claims, and the reorganization plan is presented to them for voting. Approval requires the numerical and financial majority of each category. If one category rejects the plan, the court may apply what is known as “cram-down approval” under strict conditions, if it deems that the plan serves a legitimate collective interest.
Legal Consequences of the Plan’s Success or Failure:
If the plan is approved and successfully executed, the establishment continues its operations and is discharged from its obligations according to the legal schedule. However, if the plan fails or is not approved by the court or creditors, the court may open liquidation procedures as stipulated in the Saudi Bankruptcy Law. This shift represents the final stage after the failure of all rescue tools.
Conclusion: When Is Settlement or Reorganization the Best Option for Establishments?
Preventive settlement and financial reorganization are among the strongest protective tools offered by the Saudi Bankruptcy Law to shield establishments from complete collapse. Business owners are encouraged to pursue these options early, before the crisis escalates. Expert legal consultation remains a decisive factor in ensuring the success of these procedures and achieving the desired financial recovery.
Frequently Asked Questions (FAQ):
- What is the main difference between preventive settlement and financial reorganization? Preventive settlement is applied before insolvency occurs, while reorganization is applied in cases of actual or imminent insolvency.
- Can the court reject a settlement or reorganization plan? Yes, if the legal requirements are not met or if the required creditor categories do not approve the plan.
- Do the procedures apply to foreign companies? Yes, as long as the company is licensed within the Kingdom and subject to Saudi regulations.
