A proactive step to enhance the resilience of the Saudi economy
In a move reflecting the ongoing development of the legislative environment in Saudi Arabia, the Bankruptcy Committee (Essar) has unveiled a draft of proposed amendments to the Bankruptcy Law. These amendments aim to introduce a new mechanism known as “consensual restructuring.” This mechanism provides a legal framework that allows companies facing financial difficulties to reach settlement agreements with their creditors outside of court, offering a more flexible and faster path to rescuing struggling businesses and enabling them to resume their economic activity.
Historical context: The evolution of bankruptcy legislation within Vision 2030
These proposed amendments are part of the comprehensive economic reforms spearheaded by the Kingdom’s Vision 2030. In 2018, the Kingdom enacted a new bankruptcy law, marking a significant shift in how financial distress is addressed. The focus has moved from liquidating debtors’ assets to providing them with an opportunity to reorganize their finances and continue operating. Prior to this law, available procedures were limited and lacked flexibility, pushing many viable companies toward liquidation. Today, these amendments aim to build upon this foundation by introducing proactive tools that prevent financial crises from escalating and support business continuity, particularly for small and medium-sized enterprises (SMEs), which are the backbone of the economy.
The mechanism and conditions of "consensual structuring"
The new draft allows debtors, whether large or small, to negotiate directly with their creditors to agree on a debt restructuring plan. To ensure the integrity of the process and protect the rights of all parties, the amendments require that the plan be certified by a licensed bankruptcy trustee. The trustee verifies the fairness and feasibility of the plan, ensuring that it serves the interests of the majority of creditors. The certified plan can then be submitted to the competent court for approval, giving it the force of an enforceable instrument and protecting it from any subsequent bankruptcy claims that may be filed by opposing creditors. This provides the necessary legal certainty for a successful restructuring process.
Importance and expected impact on the investment environment
These amendments are expected to have a profound positive impact both domestically and internationally. Domestically, “consensual restructuring” will reduce the burden on the judicial system, expedite the resolution of financial disputes, and preserve jobs by rescuing struggling companies. Internationally, adopting such advanced practices reinforces the Kingdom’s position as an attractive and secure investment environment. Foreign investors seek markets with clear and effective legal frameworks that align with global best practices, such as the UNCITRAL Insolvency Law Manual. The existence of an out-of-court settlement mechanism enhances investor confidence and underscores the maturity of the Saudi legislative environment and its ability to adapt to the demands of the modern economy.
Additional safeguards and enhanced independence for the bankruptcy commission
The amendments did not neglect the protection of minority creditors' rights, stipulating that a creditor objecting to the plan must receive a return no less than what they would have received had the debtor's assets been liquidated. They also introduced provisions that balance the protection of bankruptcy assets with the public interest, allowing the court to lift the suspension of claims in emergency situations related to public health or safety. To enhance the system's efficiency, the draft proposed granting the bankruptcy commission financial and administrative independence, similar to that of comparable bodies in countries such as Australia and the United Kingdom, enabling it to perform its regulatory and supervisory functions more effectively.
