PRESENTATION ON THE DRAFT SAUDI ARABIAN BANKRUPCTY LAW

DR. ZAID MAHAYNI

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18 November 2016

HISTORY OF DEVELOPMENTS

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The Ministry of Commerceand Investment (“MoCI”)published a policy paperon 17 March 2015announcing that abankruptcy law was underpreparation and spellingout the main componentsthat it would likelyinclude.

At present, the legislativeframework governingbankruptcy remains largelyunderdeveloped. It isconstrained to very fewprovisions in theCommercial Court Law, aswell as to the BankruptcyPreventative SettlementLaw.

On 25 September 2016, theMoCI circulated the draftBankruptcy Law and aClarification Guide.

The MoCI described the Draft Bankruptcy Law as a step taken towards the encouragement ofeconomic activity and the implementation of the 2020 National Transformation Plan and Vision 2030.

According to the MoCI, the Draft Bankruptcy Law’s mechanisms attempt to maximize and expediterecoveries by creditors while safeguarding the rehabilitation/continuation of economically viablebusinesses.

SIGNIFICANCE

According to MoCI, the Draft Bankruptcy Law attempts to palliate the typical challenges met bymerchants and investors.

It is yet not clear when theBankruptcy Law will beenacted.

SCOPE OF APPLICATION – THE DEBTOR

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Saudi registered legal entities

Saudi individuals engaged in a commercial,

professional, or lucrative activity in

Saudi Arabia

Foreign investors (either individuals or

companies) which/who own assets in Saudi

Arabia or which/who conduct a commercial,

professional or lucrative activity in Saudi Arabia

Not applicable to:Non-merchant natural persons

SCOPE OF APPLICATION – REGULATED SECTORS

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Specialist regulators may enactsupplementary (but subordinate)legislation governing the entitiesoperating under their scope ofoversight.

(e.g. The Capital Market Authorityin respect of investment firms orthe Saudi Arabian MonetaryAgency in respect of banks andinsurance companies).

BANKRUPTCY COMMITTEE – MOST NOTABLE POWERS

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The creation of a register of individuals and/or entities which have engaged any of the

insolvency mechanisms

The oversight of the effectiveness of the

bankruptcy framework

The preparation of templates for any

documents or forms referred to the in the Draft Bankruptcy Law

Raising public awareness regarding the bankruptcy

framework and its mechanisms

The creation of a list of trustees and experts

Composed of 5

members -

Created by the Council of Ministers

TERMINOLOGY – TYPES OF DEBTORS

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A person who – in addition to having stopped paying his debts – has debts

that exceed all of his assets

A person who has stopped paying his

debts

A person who anticipates

becoming unable to pay his debts

المدين المضطربةأوضاعه

المدين المتعثرلمدين المفلسا

The Insolvent

Debtor The Distressed

DebtorThe Bankrupt

Debtor

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INSOLVENCYMECHANISMS

Preventative Settlement / Conciliation• This process aims at reaching a settlement with

the creditors regarding the value of debts owed tothem and the maturity date.

• The day-to-day management of the businessremains with the debtor.

• The settlement proposal is voted on by creditors(who are divided into classes) and may hence beimposed on dissenting creditors.

Simplified processes exist for low-value

estates

Financial Restructuring / Rehabilitation

• A trustee is appointed totake over day-to-daymanagement of thedebtor’s business.

• The restructuring proposalis voted on by creditors(who are divided intoclasses) and may hence beimposed on dissentingcreditors.

• Restructuring action caninclude such things as debtrescheduling, debt write-offs and debt-to-equityswaps.

Liquidation This process involves the gathering of assets, theirliquidation, and the distribution of the proceeds by atrustee to creditors in circumstances that the companycannot be saved.

Administrative Liquidation This process is engaged where the pool of liquidationassets is insufficient to settle creditor claims and coverthe costs of the liquidation process.

1st

Option

2nd

Option

Last Resort

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Possibility to obtain new financing

with preferred ranking

Stay of (Moratorium on) Creditor

Claims

Right to cancel

transactions and claw

back assets

Restriction on the

termination of contracts by the debtor’s

counterparties

Restrictions on Set-Offs

Restrictions

on the acceleration

of debts

RESTRICTIONS AND COURT PREROGATIVES AVAILABLE IN SUPPORT OF THE INSOLVENCY MECHANISMS

CREDITOR CLAIMS RANKING

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The Draft Bankruptcy Law articulates the following priority ranking for unsecured creditor claims: one month salary for the debtor’s employees; alimony for the debtor’s spouse, children and/or relatives, as required by law or a court judgment; (i) fees, charges and disbursements for the provision of goods and services required for the

debtor’s business, provided that they became due following the commencement of the liquidationprocess; (ii) any dues owed by the debtor and tied to the obligations performed by this latter in hissphere of activity; and (iii) any dues owed by the debtor and tied to the assets under liquidation;

ancillary disbursements and costs associated with any decision taken, following thecommencement of the liquidation process, to continue the debtor’s business;

charges and disbursements associated with any of the Draft Bankruptcy Law mechanisms engaged,including the fees of the trustee and the fees for the preservation and liquidation of assets;

any wages and other entitlements owed to the debtor’s employees pursuant to the Labor Law; any contributions (including late payment charges) due to the General Organization for Social

Insurance; any customs due on merchandize; any other debts owed to governmental authorities; any creditors with prioritized rights under any legislation; any unsecured new financing obtained by the debtor pursuant to the Draft Bankruptcy Law. the generality of unsecured creditors; unsecured creditors who have contractually agreed to subordinate their rights to those of other

unsecured creditors; and the shareholders of the debtor.

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Penalties and Sanctions for

Fraudulent Actions that Compromise

the Processes of the Draft Bankruptcy

Law

Continuation of trading while there are no reasonable

prospects of avoiding

liquidation

Settlement of debts owed to

a single creditor, in a manner that harms other

creditors

Provision of false accounts or information

on behalf of the debtor

Provision of false or

exaggerated creditor claims

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Thank you