Introduction:

In light of growing economic challenges and market volatility, many commercial establishments in the Kingdom of Saudi Arabia face financial crises that may affect their continuity. For this reason, the Saudi Bankruptcy Law has introduced innovative legal tools designed to enable businesses to overcome financial distress before reaching full bankruptcy. Among the most prominent of these tools are Preventive Settlement Procedures and Financial Reorganization, which provide the debtor with legal opportunities to protect assets and restore financial balance under the supervision of the competent court.

Definition of Preventive Settlement under the Saudi Bankruptcy Law

Preventive settlement is a statutory procedure that enables a debtor who has not yet reached a state of financial default to submit a request to the court to reschedule debts and avoid collapse. The purpose of this procedure is to reconcile the debtor and creditors without interfering with the management of the business. The applicant for preventive settlement must be in a difficult financial position, but still able to continue managing the establishment without direct intervention from an external party.

When Is an Establishment Entitled to Request Preventive Settlement?

The debtor must not be actually insolvent at the time of filing the application, but only exposed to a risk of imminent distress. The debtor must submit a clear settlement plan and provide transparent financial data, including audited financial statements for previous years. There must also be no open bankruptcy proceeding pending against the debtor that has not yet been closed.

The Purpose of Financial Reorganization in Saudi Law

In contrast to preventive settlement, Financial Reorganization applies in cases of actual distress or a serious threat of distress. This legal tool aims to restructure the debtor’s debts and financial obligations in a way that allows the continuation of commercial activities in an orderly manner. The process is supervised by a “Financial Reorganization Trustee,” and creditors participate in the preparation and approval of the plan.

Key Differences Between Preventive Settlement and Financial Reorganization

Preventive settlement differs from financial reorganization in several essential aspects. Preventive settlement is designed for a debtor facing temporary financial difficulties who has not yet reached the stage of actual distress, whereas financial reorganization applies to establishments that are already distressed or directly threatened with distress.

In terms of judicial oversight, preventive settlement is subject to lighter supervision compared to financial reorganization, which requires more detailed intervention from the commercial court. The role of creditors in preventive settlement is largely consultative, while the law requires their active participation in voting on the financial reorganization plan and approving it by the required majority.

In preventive settlement, the appointment of a trustee is not always mandatory, whereas in financial reorganization the appointment of a trustee is compulsory. In addition, financial reorganization grants broader powers to terminate certain contracts or rearrange legal obligations, powers that are generally not available in preventive settlement. Finally, the likelihood of transitioning to liquidation is typically higher when financial reorganization fails than when preventive settlement fails.

Legal Requirements for Accepting a Preventive Settlement Application

Preventive settlement requires filing a complete application before the competent court, accompanied by a settlement plan, audited financial statements, and detailed information on creditors and obligations. The debtor must also prove that they are still able to continue operating the establishment. If the court rejects the application, the debtor may file a grievance in accordance with the statutory procedures within the specified period.

Legal Requirements for Financial Reorganization

The debtor must prove the existence of actual distress or a confirmed threat of distress, and submit a clear restructuring plan that includes a schedule of debts, proposed repayment methods, and details of business operations during the procedure. Appointment of a trustee is mandatory and the trustee supervises the entire process. The proposed plan is presented to creditors for voting and then submitted to the court for approval.

The Role of the Competent Court in Reorganization Procedures

The competent commercial court plays a central role in managing these procedures. In preventive settlement, the court receives the application, verifies that the conditions are met, and then issues a decision on admission. In financial reorganization, the court appoints the trustee, supervises the course of the proceedings, decides on creditors’ objections, and issues the final decision approving the plan or opening liquidation proceedings.

Debt Schedule: A Fundamental Component of Financial Reorganization

The “debt schedule” is one of the core elements of the financial reorganization plan. It sets out the debtor’s financial obligations, the classification of creditors, the amounts due, and the payment mechanisms. This schedule serves as the basis for creditor voting and is approved by the court to ensure fairness and balance among all parties.

Protecting the Establishment During Proceedings: Suspension of Claims and Lawsuits

Once the court accepts the preventive settlement or financial reorganization application, all claims and lawsuits pending against the debtor are automatically suspended. Enforcement against the establishment’s assets is prohibited during the proceedings, thereby providing a legally safe environment for restructuring and preventing the depletion of vital assets.

Debtor’s Legal Obligations During Settlement or Reorganization

During the proceedings, the debtor is required to fully cooperate with the trustee and external auditors, provide all requested documents, and refrain from undertaking any major financial transactions without court approval. The debtor is also legally required to maintain full transparency in disclosing information to creditors and other stakeholders.

Creditors’ Participation and Their Role in Voting on the Plan

Creditors are divided into classes according to the nature of their claims, and the reorganization plan is presented to each class for voting. Approval of the plan requires both numerical and value-based majorities within each class. If one class does not approve the plan, the court may, under strict conditions, apply what is known as a “cram-down” mechanism if it finds that the plan achieves a legitimate collective interest.

Legal Consequences of the Success or Failure of the Plan

If the plan is approved and successfully implemented, the establishment continues its activity and is discharged from its obligations in accordance with the approved schedule. If the plan fails, or is not approved by the court or the required creditor majorities, the court may open liquidation proceedings in accordance with the Saudi Bankruptcy Law. This shift is considered the final stage after the failure of all statutory rescue tools.

Conclusion: When Are Settlement or Reorganization the Best Options for Establishments?

Preventive settlement and financial reorganization are among the most powerful preventive tools provided by the Saudi Bankruptcy Law to protect establishments from complete collapse. Business owners are advised to resort to these options early, before the crisis becomes unmanageable. Specialized legal advice remains a decisive factor in ensuring the success of these procedures and achieving the desired financial recovery.

Frequently Asked Questions (FAQ)

1. What is the main difference between preventive settlement and financial reorganization?
   Preventive settlement is applied before actual distress occurs, while financial reorganization is used when the establishment is already distressed or is on the brink of distress.
2. Can the court reject a settlement or reorganization plan?
   Yes, the court may reject the plan if it does not meet statutory requirements or if the required creditor classes do not approve it.
3. Do these procedures apply to foreign companies?
   Yes, as long as the company is licensed to operate within the Kingdom and is subject to Saudi regulations.