Bankruptcy system amendments: amicable restructuring out of court and protection for creditors
In a move aimed at enhancing the flexibility of the investment environment and protecting economic entities, the Bankruptcy Committee “Esar” revealed a package of proposed regulatory amendments aimed at legalizing restructuring agreements outside the courts , in order to enable struggling establishments to restore their financial balance more quickly and effectively.
Context of the amendments and their economic importance
These proposals complement the ongoing development of the commercial legislative framework in the Kingdom of Saudi Arabia, which has undergone a significant transformation since the issuance of the Bankruptcy Law in 2018 as part of the Kingdom's Vision 2030 objectives. The law aims, at its core, to shift the traditional perception of bankruptcy from the end of a business activity to a tool for restructuring and sustainability. The new amendments are particularly important because they address the time and procedural gaps that cases may experience within the courts, thereby enhancing the confidence of local and international investors in the efficiency of the Saudi business environment and its ability to handle financial difficulties with a flexibility that rivals global best practices.
The newly developed consensual structuring mechanism
The new draft allows debtors, or small debtors, to reach a direct agreement with creditors on a proactive debt restructuring plan before filing any formal application to initiate bankruptcy proceedings or judicial deposit. To ensure the seriousness and fairness of these settlements, the amendments require the plan to be certified by a licensed bankruptcy trustee, guaranteeing that it meets regulatory standards and serves the interests of the majority of creditors before being submitted to the court for approval.
Court powers and protection of rights
The proposals grant the court the authority to ratify the "consensual plan," thereby securing the agreement and giving the court the right to reject any subsequent requests to initiate bankruptcy proceedings that might threaten its stability. In a move to bolster confidence and ensure that minority creditors are not harmed, the proposed system requires that financial reorganization proposals include a minimum return for dissenting creditors; the return offered to a dissenting creditor must be at least equal to what they would receive if the debtor's assets were actually liquidated.
Balancing asset protection and the public interest
In a delicate balancing act between creditors' rights and the public interest, the amendments included provisions allowing the court to lift the "stay of claims" on specific debts if it is deemed to be in the best interest of the general bankruptcy proceedings. The legislator also introduced an important exception allowing for the suspension of claims in emergency situations related to the environment, health, or public safety, upon the request of the competent authorities. This aligns with international practices and the UNCITRAL Legislative Manual, thus underscoring the Kingdom's commitment to global standards.
Financial independence of the bankruptcy committee
At the institutional level, the draft proposed granting the bankruptcy commission full financial independence by allocating it a separate annual budget within the state budget. The commission's revenue would include fees for managing administrative liquidation proceedings, issuing licenses, and providing professional services. This administrative step aims to emulate successful international models in countries such as Australia and the United Kingdom, where bankruptcy authorities have self-generated resources that enhance their operational efficiency and ensure their sustainability.
