Preventive Settlement and Financial Reorganization in Saudi Arabia

If your company is under financial pressure but the business itself can still work, the Saudi Bankruptcy Law gives you two court procedures that stop short of liquidation. In a preventive settlement, you keep running the company and agree a settlement of your debts with your creditors, which the court confirms. In a financial reorganization, you keep operating under the supervision of a court-appointed trustee. Both can be opened before you default, as soon as financial difficulties that could lead to default are likely. So act early: build an accurate financial picture, talk to your main creditors, and bring in a lawyer and financial advisers before claims and lawsuits pile up. This guide follows the official text of the law published by the Bureau of Experts, and it does not replace a lawyer’s review of your case.

The Bankruptcy Law’s procedures at a glance

The Bankruptcy Law was issued by Royal Decree No. M/50 and replaced the older preventive settlement law. Article 2 lists the procedures it governs:

• Preventive settlement, and preventive settlement for small debtors.
• Financial reorganization, and financial reorganization for small debtors.
• Liquidation, and liquidation for small debtors.
• Administrative liquidation.

The official English translation calls the first two the “protective settlement” and “financial restructuring” procedures, so you may see both names. The settlement and reorganization procedures are rescue tools: the aim is a deal with creditors that lets the business carry on. Liquidation sells the assets and shares the proceeds among creditors when carrying on is not possible.

Article 1 defines a distressed debtor as one that has stopped paying a due debt that has been demanded, and a bankrupt as one whose debts have consumed all its assets. Claims suspension, which the translation calls a moratorium, is a stop for a set period on any action or lawsuit against the debtor, its assets or the guarantor of its debt. Under Article 4, the law covers individuals doing business in the Kingdom, profit-making companies registered there, and foreign investors with assets or a licensed business in the Kingdom, in which case only their Saudi assets are affected. The Commercial Court rules on the procedures. The Bankruptcy Commission, which works under the supervision of the Minister of Commerce, runs the Bankruptcy Register, licenses trustees and sets the small-debtor criteria with Monsha’at (Article 9). Banks, insurers and other regulated entities need their regulator’s approval before their petitions are registered.

Preventive settlement step by step

Preventive settlement helps the debtor reach a settlement with its creditors while it keeps managing its business. It suits an owner whose problem is cash and debt timing, not whether the business makes sense.

Who can apply and what to file

This procedure is in the debtor’s hands. Article 13 lets the debtor petition the court if it is likely to face financial difficulties that could lead to distress, if it is distressed, or if it is bankrupt. It cannot apply if it went through this procedure, or its small-debtor version, in the previous 12 months. The first situation is the real opportunity: moving while the company still pays its bills.

Under Article 14, the petition comes with a proposal that describes the debtor’s financial position, the effect of economic conditions on it, and how its creditors are grouped into classes. Classification matters: a mortgage-secured bank, an unsecured supplier and a related party such as a partner are in different positions, and the court checks that the classes are fair.

Timelines, voting and confirmation

• The court holds a hearing within no more than 40 days of registration (Article 15) and opens the procedure if, among other conditions, the business is likely to continue and claims are likely to be settled within a reasonable time.
• The opening ruling sets the creditors’ vote within no more than 40 days, which the court may extend by up to another 40 days (Article 16).
• If the proposal affects the owners’ rights, they vote first.

Under Article 31, the proposal passes only if every class approves. A class approves when creditors holding two-thirds of the value of the debts of those voting in it vote yes, including creditors holding more than half of the debt owed to unrelated parties. The court then confirms the proposal if it meets the fairness criteria in Article 35: proper voting, enough information for creditors, including the alternatives open to the debtor, and respect for creditors’ existing rights, especially in sharing losses. Once confirmed, the plan binds the debtor, the creditors and the owners (Article 37).

Claims suspension and contracts: what stops and what continues

Suspension in preventive settlement

Suspension is not automatic here. The debtor must request it when filing, with a report from a listed trustee saying most creditors are likely to accept the proposal and that it can be carried out (Article 17). The court may suspend claims for up to 90 days from opening and extend this by 30 days at a time at the debtor’s request, up to a total of 180 days (Article 18). During the suspension, Article 20 prohibits:

• Any action or lawsuit against the debtor or its assets, including a petition to open another bankruptcy procedure.
• Enforcing against assets given as security, unless the court approves.
• Action against a personal guarantor or a provider of security, unless the court approves.

The court can still allow a secured creditor to enforce in limited cases set out in Article 21.

Suspension in financial reorganization

Under Article 46, as amended, simply registering a petition for financial reorganization suspends claims for 180 days, and the court may extend this by no more than another 180 days. The suspension ends earlier if the petition is rejected, the proposal is confirmed or the procedure ends. The same effects of suspension and the same contract rules apply (Article 91).

Contracts, set-off and new financing

• No acceleration, no termination clauses: the procedure does not make debts due early or affect the debtor’s contracts, and clauses saying otherwise are void (Articles 22 and 23).
• Contracts keep running: the other party must keep performing, and the debtor must pay obligations arising after opening on time; older unpaid amounts join the claims list (Article 24).
• Exceptions: government procurement contracts are excluded from these rules, and bank and finance company facilities are excluded from most of them (Article 26), so have your lawyer review these contracts before you file.
• Set-off: automatic set-off is prohibited once either procedure opens, unless the proposal allows it for specific mutual debts (Article 188).
• New financing: secured financing needs court approval backed by an expert report and is granted when needed to keep the business going or protect the assets (Article 183); approved secured financing ranks as priority financing (Article 187). Unsecured financing needs no court approval (Article 185).

Opening a preventive settlement and confirming the proposal do not exempt the debtor from its obligations under other laws (Article 33). Assume your duties to employees, GOSI and ZATCA carry on as normal, and confirm the details with your advisers.

Financial reorganization: when a trustee comes in

Who can apply

The debtor, a creditor or the competent regulator can request financial reorganization, in the same three situations, unless the debtor went through it, or its small-debtor version, in the previous 12 months (Article 42). If a creditor files, the court notifies the debtor within no more than 5 days, and the debtor can object if the conditions are not met, the debt is disputed or the creditor is abusing the procedure (Article 44). The court sets a hearing within 40 days of registration (Article 47).

The trustee’s role

The court appoints a trustee from the Commission’s list, and the applicant may suggest a name (Article 50). The trustee announces the opening within 7 days and invites creditors to file claims within no more than 90 days (Article 56). The debtor keeps managing the business under the trustee’s supervision (Article 69), but needs the trustee’s written consent before many actions listed in Article 70, including:

• Seeking financing or paying debts.
• Making any agreement or settlement with creditors.
• Giving or renewing guarantees.
• Transferring assets outside the normal course of business.

If management is negligent or uncooperative, the trustee can ask the court to remove the debtor from management, and the court can put the trustee or someone else in charge, or move to liquidation. The trustee can also end contracts that stand in the way of the plan, within the limits of Article 61.

Voting and confirmation

Creditors vote with the same threshold inside each class (Article 79). The key difference is confirmation. Under Article 80, the court confirms a fair proposal if every class of creditors and owners accepts it, or if at least one class accepts it, creditors holding at least 50% of the total claims of those voting across all classes vote yes, and the court finds that confirmation serves most creditors. During implementation, the debtor reports to the trustee every 3 months (Article 84).

Preventive settlement or financial reorganization: how to choose

• Control: preventive settlement leaves management fully with the debtor; reorganization adds a trustee whose consent you need for major decisions.
• Who files: only the debtor can open a preventive settlement; a creditor can push for reorganization.
• Suspension: requested and shorter in preventive settlement; automatic on filing and longer in reorganization.
• Approval: preventive settlement needs every class; reorganization can be confirmed with one class plus the overall threshold.

As a general guide, preventive settlement suits a company that is close to a deal with its bank and largest suppliers. Reorganization suits cases with many creditors who disagree, or a deeper review of contracts and debts under neutral supervision. Your lawyer and financial advisers should make the final call.

The small-debtor procedures

The law gives small debtors simplified versions of the procedures, designed to be simple and low-cost (Article 127). A small debtor is one that meets the criteria set by the Bankruptcy Commission with Monsha’at, so check the current criteria on the Commission’s official website. A small debtor can still choose the standard procedure.

• Opening: in preventive settlement for small debtors, there is no court ruling to wait for. The debtor prepares the proposal, issues the opening decision on the Commission’s form and deposits it in the Bankruptcy Register, and it takes effect on deposit (Article 129).
• Voting: the unsecured creditors vote, with the same two-thirds and more-than-half test (Article 134).
• Suspension: the debtor may ask the court for a suspension of up to 90 days, and the court rules within 5 days (Article 131), but it does not cover secured debts (Article 133).

In financial reorganization for small debtors, the debtor issues the opening decision after agreeing with a listed trustee, and it takes effect only after the trustee files it with the court in what the law calls a judicial deposit (Article 145). Under Article 147, as amended, claims are suspended for 180 days, extendable by up to 120 days. Secured creditors must approve the proposal unanimously (Article 154).

Liquidation and administrative liquidation: when rescue is not possible

The debtor, a creditor or the competent regulator can request liquidation if the debtor is distressed or bankrupt (Article 92). A creditor’s petition needs a debt that is due and fixed in amount, not less than the amount set by the Bankruptcy Commission, and proof that payment was demanded 28 days before the petition was registered, with no payment and no dispute (Article 93). If the debtor disputed the debt first, the petition is not registered (Article 94). A company facing a creditor’s petition can object and can ask for preventive settlement or reorganization instead if it proves the business can continue in a way that serves most creditors (Article 95).

Once liquidation opens, the debtor loses control as soon as the trustee is appointed (Article 100). Assets are sold, proceeds are paid out by priority, and a company is dissolved at the end. Administrative liquidation, run by the Bankruptcy Commission, is for a debtor whose assets will not even cover liquidation costs (Articles 167 and 171).

No voluntary liquidation for a distressed company

Under Article 7, no one may be liquidated under another law unless its assets cover all its debts and it is not distressed. If a company is voluntarily wound up in breach of this, its board members or managers are jointly liable for the debts left unpaid. A partners’ resolution to close a distressed company is not a safe exit.

What creditors, employees and guarantors can expect

Creditors whose rights the proposal affects vote within their class (Article 27), and a creditor who voted no can object at the confirmation hearing if it reasonably believes the proposal harms it and breaches the fairness criteria (Article 34). The Bankruptcy Register is open to the public (Article 227), so suppliers and banks can check whether a customer has entered a procedure.

In liquidation, the trustee’s and expert’s fees and the costs of sale come first (Article 195). Debts are then paid in this order (Article 196):

1. Debts secured by security over assets.
2. Priority secured financing.
3. An amount for the debtor’s workers equal to 30 days’ wages.
4. Family maintenance set by law or a court ruling.
5. Expenses needed to keep the business running during the procedure.
6. Workers’ earlier wages.
7. Unsecured debts.
8. Unsecured government fees, contributions, taxes and other dues.

Employees: during the rescue procedures, the business keeps operating, employment contracts stay in force, and obligations under the Labor Law continue, including paying salaries on time. Any change to pay or hours needs the employee’s written agreement and must follow the Labor Law; the procedure gives no right to change terms unilaterally. In liquidation, the court may consider ending employment contracts at the trustee’s request, under the relevant laws (Article 114).

Guarantors: many family businesses rely on owners’ personal guarantees. During a preventive settlement suspension, guarantors cannot be pursued without the court’s approval (Article 20), but a suspension is only a temporary stop, not a release, so deal with the guarantees explicitly in your talks with the bank. In liquidation, jointly liable owners must cover any shortfall (Article 120).

Common mistakes, out-of-court options and when to get advice

Mistakes that make things worse

Under Article 200, certain acts are violations when they lead to a bankruptcy procedure or happen during one and harm creditors, including:

• Carrying on the business when liquidation can no longer be avoided.
• Reckless moves to delay liquidation, such as selling goods below market price for cash.
• Paying some creditors in a way that harms others.

Penalties include imprisonment and fines, and the court can add a ban on managing businesses (Article 203). Separately, any interested party can challenge transactions made in the 12 months before opening with an unrelated party, or 24 months with a related party, including deals that gave away assets, sold below fair value, settled debts early or gave security for debts not yet owed (Article 210). Repaying a partner’s loan first, or moving an asset to a sister company for a token price, may be undone.

Out-of-court options

Not every cash squeeze needs a court. With few creditors and trust still in place, a direct deal is usually faster and cheaper:

• Rescheduling bank installments or agreeing a grace period, backed by a clear cash plan.
• Agreeing a payment schedule for arrears with key suppliers while supplies continue.
• Collecting overdue receivables in an organized way, including from government clients.
• New capital from partners, or converting their loans into equity, as part of capital restructuring.

Treat creditors fairly, put agreements in writing, and start with a realistic weekly cash forecast, as our guide to managing cash flow in a crisis explains. If an outside event caused the problem, review your contracts with our article on force majeure under Saudi law.

When to get advice

Get legal and financial advice as soon as you see these signs, not after the first lawsuit:

• Late salaries, government dues or bank installments.
• A cash forecast gap that your facilities do not cover.
• Formal demands from creditors or threats to enforce security.
• Losses eating into capital and raising questions under the Companies Law.

A fractional CFO or a cash flow and treasury support team can prepare the numbers a proposal rests on: financial position, cash forecast, creditor classes and the company’s ability to deliver the plan. Innovant acts as financial adviser at this stage and coordinates with partner lawyers, because the petition, the proposal and the creditor classes are legal work for a lawyer.

Frequently asked questions

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