Insolvency Beyond Borders: Saudi Arabia’s recent rules of cross-border bankruptcy proceedings

The Kingdom introduced its first ever bankruptcy law in 2018 which has created a foundation for a business rescue culture in Saudi Arabia. Companies undergoing financial difficulties are equipped with the tools that allow them to either trade out of a difficult period or liquidate the business in a manner which does not leave creditors out of pocket. More recently, to complement the existing insolvency regime, rules of cross-border bankruptcy proceedings came into effect on 16 December 2022 (“Rules”). The Rules are based on the UNCITRAL Model Law on Cross-Border Insolvency and are aimed at streamlining insolvencies that span across various jurisdictions. We summarise the key provisions of the Rules below and what they could mean in practice.

Judicial assistance: Foreign courts or foreign officeholders

A notable feature of the Rules is that a foreign court or a foreign officeholder can seek judicial assistance from the Saudi court in connection with a foreign proceeding (including the recognition of foreign proceedings by the Saudi court). 

This is particularly useful where assets are located in Saudi Arabia and where, for instance, a foreign officeholder is seeking to realise an asset for purposes of a foreign insolvency proceeding. 

Upon recognition of a foreign insolvency proceeding, the Rules afford the foreign office-holder the same rights as a local officeholder and this includes but is not limited to requesting assistance from the Saudi court to (i) collect evidences or deliver information related to a debtor's assets, rights or obligations; or (ii) delegate the foreign officeholder to manage or dispose of all or some of the debtor's assets in the Kingdom or distribute the proceeds of sale of the debtor's assets in the Kingdom, provided adequate protection is afforded to the interests of creditors.

Recognition of a foreign proceeding in the Kingdom will result in a suspension of the right to take or complete any action or disposition against the debtor, his assets, rights or obligations; a suspension of the right of execution on any of the debtor’s assets; and a suspension of the right to transfer, mortgage, or dispose of an asset of the debtor in any way. The existence of what appears to be an automatic and long-term moratorium will provide the appropriate breathing space required to allow the proceeding to run smoothly and the limitations on disposal will help ensure that the assets, and subsequently the interests of creditors, are adequately protected. 

However, there is a provision in the Rules which suggests that the suspension discussed above does not restrict the right to submit a request for the commencement of bankruptcy proceedings, submit requests on a proceeding or file individual suits or requests, to the extent necessary to preserve a claim against the debtor, so it will be interesting to see how this is interpreted in practice.

Judicial assistance: Saudi courts or Saudi officeholders

Likewise, the Saudi court or a Saudi officeholder can seek judicial assistance from a foreign court or foreign officeholder in connection with Saudi insolvency proceedings. The scope of judicial assistance includes the coordination between national courts and the foreign courts in relation to cross-border insolvency procedures. 

Without prejudice to the regulations of the foreign state, a Saudi officeholder can also, under the Rules, exercise his powers in a foreign state and communicate directly with the foreign court under the supervision of the Saudi court.

The dynamic between Saudi courts and foreign courts and the appetite to coordinate and streamline cross-border insolvencies will be a particular point of interest for many officeholders that deal with cross-border insolvencies.

Creditors

Under the Rules, where creditors in a foreign state have an interest in requesting the commencement of, or participating in, Saudi insolvency proceedings, they can make an application to the Saudi Court on that basis. In addition, foreign creditors will have the same rights as local creditors (provided that the court is satisfied that the interests of the debtor, creditors and other interested persons are adequately protected). 

This level of accessibility to foreign creditors is a welcomed step which is likely to further encourage foreign entities to engage and transact with Saudi companies, knowing that they have the option to place a Saudi company into an insolvency proceeding in the event of default or that they can meaningfully participate in a formal insolvency (including potentially benefiting from any realisations). 

Separately, as a mechanism for protecting creditors, upon recognition of a foreign proceeding, the foreign representative has standing to initiate actions to avoid or otherwise render ineffective acts detrimental to creditors. The Rules also provide that without prejudice to creditors’ claims secured by in-kind securities, a creditor who has received part payment in respect of its claim in a proceeding pursuant to a law relating to bankruptcy in a foreign state may not receive a payment for the same claim in a proceeding under Saudi law regarding the same debtor (provided that the payment to the other creditors of the same class is proportionately less than the payment the creditor has already received).

Further, specific provisions on notification have been introduced which require notification of local insolvency proceedings or recognition of foreign proceedings to be provided to foreign creditors with no addresses in the Kingdom in order to give them a reasonable period to file claims in respect of their debt.

Conclusion

Having a well-developed insolvency regime is fundamental for a business and investor friendly economy, something which Saudi’s Vision 2030 is striving to promote, as it creates investor confidence and allows businesses and creditors alike to know they are sufficiently protected in the event of financial uncertainty. 

It is likely that the wider impact of insolvency regime and the Rules will unfold in the Kingdom in the next few years, and we will begin to witness their tangible effect in practice. The Kingdom’s efforts to align with international practices is a step in the right direction, particularly as many complex insolvencies have cross-border elements.

Clyde & Co LLP has specialist and experienced insolvency and restructuring expertise across the Middle East. Our experts in our UAE, Saudi and London offices have the experience and capabilities to assist in both local and cross-border insolvency mandates. 

Specialists from our Dubai and Saudi offices will be attending the INSOL International Riyadh Seminar on 22 January 2024. Please feel free to reach out if you have any queries.