In light of economic changes and challenges facing businesses, bankruptcy procedures have become essential tools to support business sustainability and economy protection. The Preventive Settlement in Bankruptcy is a Procedure that is sought by firms in Saudi Arabia as the most effective solution among the other several bankruptcy procedures there. It aims to enable financially distressed companies to reorganize their affairs before reaching full bankruptcy. this procedure reflects the Kingdom's commitment to providing a flexible legal environment that helps companies navigate financial crises, enhancing investor confidence and contributing to the stability of the Saudi market, through its Bankruptcy Law, Saudi Arabia seeks to protect creditors' rights and ensure the continuity of business operations despite financial difficulties, this article will explain preventive settlement as a bankruptcy procedure in Saudi Arabia.

Definition of Preventive Settlement

Saudi Arabia’s Bankruptcy Law defines preventive settlement as a procedure aimed at facilitating an agreement between the debtor and their creditors to settle debts while allowing the debtor to retain control of their business operations. This reflects the evolution of Saudi Arabia’s economic legal laws, offering distressed individuals the opportunity to restore financial balance and avoid bankruptcy, thereby enhancing business sustainability and economic stability, this progressive step aligns with Vision 2030, which aims to enhance the national economy and create a flexible, attractive investment environment.

Filing Petitions for the Initiation of Preventive Settlement Procedure

A debtor may request the court to initiate preventive settlement in any of the following cases:

• likely to suffer financial difficulties that may lead to distress;
• distressed.
• bankrupt.

It shall be noted that a petition for the initiation of preventive settlement procedure shall not be filed if the debtor has been subject to such procedure or to a small debtors’ preventive settlement procedure during the 12 months preceding the petition.

The petition for the initiation of preventive settlement procedure shall include a proposal for preventive settlement, detailing the debtor's financial situation, the economic factors affecting it, a classification of creditors into categories if their debts or rights differ, and relevant information and documentation. This proposal shall be reviewed and endorsed by a trustee listed in the bankruptcy trustees' register to ensure it meets all requirements.

Court Powers in Initiation of Preventive Settlement

- Setting a Hearing Date for Petition for the Initiation of Preventive Settlement

The court shall set a date for considering the petition for the initiation of a preventive settlement procedure within 40 days from the date of filing, and shall notify the debtor thereof within five (5) days from the date of registering the petition. The court shall take any of the following decisions:

• Initiate the procedure if:
• The debtor is likely to remain in business, and the claims of creditors are likely to be settled within a reasonable time;
• The debtor is bankrupt, distressed, or is likely to suffer financial difficulties that may lead to distress.
• The debtor provides the required information and documents.
• The debtor has fairly and with due diligence classified the creditors into classes.
• Reject the petition if:
• The petition does not satisfy the statutory requirements or is unjustifiably incomplete; or
• The petitioner acts in bad faith, or commits any of the offenses stipulated in this Law.

If the court rejects the petition, it may instead order the initiation of another suitable bankruptcy procedure.

• The court may postpone the hearing session for a period not exceeding 21 days if:
• the court requires the debtor to provide additional information or documents; or
• the court requires the debtor to amend the classification of creditor categories in the proposal in a manner that ensures fair classification.

The debtor shall provide the court with the required information, documents or the amendment of the classification of creditors on the set date, prior to the date set for the postponed hearing. The court will then decide either to initiate the procedure or reject the petition, The court may, on its own motion or upon the request of the debtor or any of the creditors, summon any person who has information or documents related to the petition for the initiation of the procedure to attend the hearing. The summoned person shall provide the court with such information or documents. The debtor shall notify the creditors specified in the proposal of the court’s decision and shall deposit a copy of the decision at the Bankruptcy Register.

It is noteworthy that the court, in its decision to initiate a protective settlement procedure, the court shall set the date on which the creditors vote on the proposal within a period not exceeding 40 days from the procedure initiation date, unless the court, decides to set a later date, , provided it is within a period not exceeding an additional forty days. The debtor shall publish the initiation of the procedure within seven days from the date of issuance of the court’s decision to initiate such procedure.

Moratorium of Claims in Preventive Settlement

Upon filing a petition for the initiation of a protective settlement procedure, the debtor may petition the court to order a moratorium, provided his petition is accompanied by a report issued by a listed trustee indicating his opinion on the likelihood of the majority of creditors approving the proposal as well as the feasibility of its implementation. .

The court may order a moratorium for a period not exceeding 90 days from the procedure initiation date, and may extend such period for one or more additional thirty-day periods at the request of the debtor. In any event, the moratorium period must not exceed 180 days.

During this period, the debtor shall notify his creditors of the court’s moratorium decision upon its issuance, and shall, during the moratorium period, exercise due diligence to convince his creditors to vote in favor of the proposal. During this period, it shall be prohibited to undertake or continue any of the following actions or measures such as:

• any procedure, action, or lawsuit against the debtor or his assets, including filing a petition for the initiation of a bankruptcy procedure;
• any enforcement procedure against any bankruptcy assets provided as security, except upon the approval of the court;
• any procedure or action against the personal guarantor or the in-kind guarantor of the debtor’s debt, except upon the approval of the court; or

The court may, on its own motion or upon the request of a person with interest, order the recovery of any assets disposed of during the moratorium period, or take any other appropriate action, without prejudice to the rights of bona fide third parties. An aggrieved party may file a claim for compensation. The court shall, during the moratorium period, approve the petition for enforcement against bankruptcy assets, or the assets of the guarantor of the debtor’s debts offered as security if:

• enforcement does not affect the continuation of the debtor's business or obtaining the acceptance of creditors and owners of the proposal; or
• the rejection of such petition may cause substantial damage to the secured creditor rendering the debtor unable to compensate him therefor, and such damage outweighs any damage that may be sustained by the debtor and other creditors.

Voting on the Preventive Settlement Proposal

The proposal shall be voted on only by the creditors or the owners whose statutory or contractual rights will be affected by such proposal, If the proposal would affect owners’ rights, the debtor shall call upon them to vote thereon according to relevant laws, provided that such vote precedes the creditors’ vote.

In case of multiple creditors with debts or rights of different nature, the debtor shall classify them into categories. Creditors then vote on the proposal in accordance with the procedures set out therein and following the owners' vote of acceptance, if applicable. The proposal shall be deemed approved if all classes of creditors vote in its favor, whereas, creditors representing two-thirds of the value of debts owed to voters in the same class, and such voters include creditors whose claims represent more than half of the debts of non-related parties (if any).

If creditors accept the proposal, the debtor shall file a petition with the court to confirm it and shall, prior to filing the petition, notify creditors accordingly. The court shall set a date for the confirmation hearing.

The initiation of a protective settlement procedure and the confirmation of the proposal shall not relieve the debtor of any obligation relating to his business under relevant laws. Termination of the Preventive Settlement Procedure

Upon completion of the implementation of the plan, the debtor shall file a petition with the court to render a decision terminating the protective settlement procedure, and shall attach therewith the information and documents specified in the Regulations. The debtor shall notify the creditors of such petition prior to filing. Any person with interest shall have the right to object to such petition before the court within 14 days from the date of filing the petition.

The court may terminate the protective settlement procedure if:

• the debtor files a petition with the court for the termination of the procedure due to the completion of the implementation of the plan;
• the quorum required for voting on the proposal by the owners or creditors is not met, or if it is not possible for the owners or creditors to vote on the proposal on the set date;
• The court refuses to confirm the proposal;
• The debtor files a petition for the termination of the procedure due to the fact that procedure initiation conditions are no longer applicable;
• The debtor or the creditor files a petition for the termination of the procedure due to inability to implement the plan;
• The debtor files a petition for the termination of the procedure due to the debtor's intention not to continue management of his business or implementation of the plan; or
• A person with interest files a petition for the termination of the procedure due to material violations during the procedure, or due to the debtor's commission of any of the offenses stipulated in this Law.

The debtor shall deposit the court’s decision to terminate the procedure in the Bankruptcy Register within a period not exceeding five days.

In conclusion, Saudi Arabia’s dedication to establishing clear guidelines for preventive settlement procedures demonstrates its commitment to supporting individuals in overcoming financial crises before reaching bankruptcy. By providing a legal framework for preventive settlement, the Kingdom ensures a balance between protecting creditor rights and maintaining business continuity. This enhances economic stability and promotes sustainable growth, aligning with Vision 2030, which aims to create a resilient and attractive economic environment. This effort highlights the Kingdom's resolve to provide transparent and efficient legal solutions to help businesses face financial challenges with efficiency and fairness.

Legal services related to Bankruptcy Procedures

Bankruptcy procedures in Saudi Arabia are governed by the Bankruptcy Law (No. M/50) issued in 1439 AH, which aims to regulate bankruptcy cases in a manner that ensures a balance between the rights of creditors and debtors, while encouraging the economic continuity of distressed firms. Dr. Fahad Al-Rafaei & Partners Consulting & Law Firm offers a wide range of legal services to help individuals and firms navigate Bankruptcy Procedures in accordance with this law. Below are the key legal services related to Bankruptcy Procedures in Saudi Arabia:

• Legal Consultations on Bankruptcy Options
• Filing for Preventive Settlement
• Negotiating with Creditors and Restructuring
• Managing assets during bankruptcy.
• Representing clients before the competent courts.
• Preparing a firms reorganization plan.

For Bankruptcy application services in Saudi Arabia, please contact Dr.Fahad Alrefaei & Partners Consulting & Law Firm at 920012753 or via [email protected]
We are pleased to assist you.

Please find: Bankruptcy Application Services