Dr. Mohammad Bashayreh
Introduction:
The Commercial Court in Saudi Arabia has decided on numerous applications filed by debtors and creditors under the Bankruptcy Regulation of 2018 (1439 H). That Regulation has introduced rescue procedures for financially distressed enterprises, including judicial (preventive) settlement and reorganization, while also regulating liquidation procedures.
Interestingly, as was noted in other jurisdictions, it seems that newly enacted rescue procedures encouraged debtors to file for settlement or reorganization without having serious justifications to do so.[1] However, the jurisprudence of the Commercial Court in Saudi Arabia has demonstrated that filing for bankruptcy is not ‘a soft touch’. In this regard, two observations can be made based on the published court decisions:
One expects that bankruptcy law in Saudi Arabia will benefit from the court’s jurisprudence. Areas for improvement will soon be identified. This links with the development of bankruptcy courses in law schools. Here at PMU, an undergraduate course studies bankruptcy and a forthcoming master’s program will include bankruptcy law in a comparative context, while also examining its international aspects.
It is important for practitioners and academics to follow new cases on bankruptcy. In deciding on bankruptcy petitions, the Commercial Court has elucidated certain aspects of the Bankruptcy Regulation. The following paragraphs highlight some of them.
Disclosure and good faith requirements in debtors’ filings:
A company demonstrated through its accounts that it had been performing well for the past decade, but started to face greater competition that reduced its market share, and then lockdowns due to COVID-19 outbreak affected it badly. Based on the company’s history and accounts, the court was satisfied that the filing for reorganization was justified since the company had real risks of accelerating its existing financial distress and the reorganization had good potential of helping the company survive and improve financially.
The first hearing took place on 16/9/1442, and the decision was delivered on 21/10/1442.
A company filed for a preventive settlement based on financial hardships. The court was satisfied that the business could improve, and the company demonstrated good faith through full disclosure and its diligence in listing and notifying all its creditors.
The case was filed on 8/9/1442, and the decision was rendered on 22/10/1442.
Act of Bankruptcy and the court’s power to order the appropriate bankruptcy procedure
A creditor filed a liquidation application against debtor. The debtor did not attend hearings. The court noted that a creditor could file a petition of liquidation against his debtor if the latter commits an act of bankruptcy, namely stopping to pay due debts. And the court was satisfied that the debtor went into default by his failure to discharge court orders of payment. The court inquired about the assets and accounts of the debtor from relevant authorities and banks, and was satisfied that the creditor’s own debt exceeds proved assets of the debtor. However, the court found that the proved assets of the debtor fell short from meeting the expected liquidation expenses. Therefore, the court refused to order liquidation and, instead, exercised its power to order administrative liquidation by the Bankruptcy Committee at the Ministry of Trade.
The first hearing took place on 18/6/1442, and the decision was given on 21/10/1442.
A creditor filed a petition for liquidation against its debtor. The creditor provided a court decision ordering the debtor to pay, and stated that the debtor has defaulted. The court dismissed the petition because it found that the creditor did not provide proof that he has demanded repayment from the debtor. The court pointed out that under section 9 of the Implementing Bylaw of the Bankruptcy Regulation, a creditor filing for liquidation against its debtor must provide proof of a legal notice for payment served on the debtor at least 28 days prior to the filing, and according to section 48 of the same Bylaw, the legal notice must specify the debt, its cause, and its amount. The court decision ordering payment itself was not a sufficient act of bankruptcy to prove missing payment.
The petition was filed on 8/5/1442, and the decision was delivered on 21/10/1442.
Creditors barred from seeking liquidation pending a reorganization procedure:
An attorney representing 94 creditors filed a petition for liquidation against the debtor. The court found that a reorganization procedure had already been ongoing and, therefore, a petition for liquidation was inadmissible.
This decision indicates that creditors may not be able to seek termination of a reorganization procedure.
The decision was issued on 28/10/1442.
A debtor who has ceased to carry on business is not eligible to file for liquidation
A debtor filed for liquidation based on his debts that he could not pay back, and which had led to discontinuing his business since 2017. The court dismissed the application. The court reasoned that for a debtor to be eligible to file for liquidation must be carrying on an economic activity according to the Bankruptcy Regulation. The court interpreted the condition of “carrying on” an economic activity as requiring actual carrying on of the business through an existing establishment, with a valid legal permit, at the time of the filing or until shortly prior to it. The court noted that the debtor did not operate during the last 24 months and said that the existence of an inoperative establishment did not make the debtor eligible to file for liquidation.
This decision triggers questions about the interpretation of “the carrying on of an economic activity” as a condition for the application of the Bankruptcy Regulation to a debtor. In other national laws, one finds that a trader who stopped carrying on his business could file for bankruptcy based on debts arising from the discontinued business. And creditors could seek liquidation of the estate of a deceased debtor. It seems, therefore, that the court’s view is subject to reconsideration in future cases to extend the scope of the Bankruptcy Regulation to debtors whose debts resulted from their economic activity, even if that activated had been discontinued.
[1] For example in Australia, see R. Azmi and S. Ahmad, Discharge and pre-rehabilitation under bankruptcy law and Islamic law: a boon or a bane?, Commonwealth Law Bulletin, 2019 (45) 2, 189, 195; and for an example from Belgium, see Melissa Vanmeenen, Corporate Rescue in Belgium, in Teaching and Research in International Insolvency Law: Challenges and Opportunities (Michael Veder and Paul Omar, eds. ) INSOL Europe, Nottingham, 2015, 77, at 79, 87-90.
21-Jun-2021
