The Creditor’s Guide to the Saudi Bankruptcy Law: When to Take the Initiative, How to File Your Claim within 90 Days, How to Vote, and Where You Rank in the Distribution

Most of what is written about the Bankruptcy Law is addressed to the debtor. Yet the party that loses most from not knowing the Law is the creditor: the supplier who missed the claims deadline and lost its vote, the bank unaware that its security in rem ranks ahead of everything except the costs of the procedure, the contractor who could have applied to open a liquidation procedure against its insolvent customer a year earlier. This guide arranges the creditor’s rights under the Bankruptcy Law issued by Royal Decree M/50 dated 28/5/1439H in five steps: when to take the initiative, how to file your claim, how to vote, where you rank in the distribution, and how to object.

1. The creditor can take the initiative

A creditor does not have to wait for the debtor to decide. A creditor may apply to the court to open a liquidation procedure where the debtor is insolvent or bankrupt (Article 92), and may also apply to open financial restructuring, as explained in our guide on financial restructuring. Registration of a creditor’s application is, however, conditional (Article 93):

• The debt must be due, and its amount, cause and any security must be specified.
• The debt, or the total debts of the applying creditors, must not be below the amount set by the Bankruptcy Commission.
• The debt must be payable under an enforceable instrument, or under an ordinary document together with proof that the creditor demanded payment at least 28 days before registering the application and the debtor neither paid nor disputed it.

A creditor’s application is not registered if the debtor disputed the debt before the application was made (Article 94), and the court notifies the debtor so that it may object or apply to open another procedure (Article 95). The documented demand letter sent 28 days in advance is therefore not a formality but a condition of admissibility.

2. Filing the claim within 90 days

On opening, the officeholder announces the judgment within 7 days of appointment and invites creditors to file their claims within no more than 90 days of the announcement, notifying known creditors directly (Article 56). The officeholder then prepares the claims list and submits it to the court within 14 days of the deadline, stating each claim amount, identifying secured creditors and estimating the value of the security, listing debts subject to set-off, and recommending acceptance, rejection or referral to an expert for each claim (Article 68).

Situation	Effect	Basis
The creditor misses the 90-day deadline	Excluded from voting on the proposal, unless it proves to the court that its claim did not arrive for reasons beyond its control or that the debtor or officeholder omitted it from the list	Article 64
Late claim in a liquidation procedure before the final distribution	The officeholder considers it and makes a recommendation, but the late creditor cannot object to any distribution made before its claim	Article 112
The officeholder recommends rejection or referral to an expert	The creditor is notified within 5 days and may ask the court to consider the claim and list it for voting if accepted	Article 68(2)
The debtor also owes the creditor	Automatic set-off applies to mutual debts existing at the opening date, and the claim is for the balance after set-off	Articles 191 and 193
The debt is in a foreign currency	Converted to Saudi riyals at the exchange rate prevailing on the opening date	Article 194

What gets a claim accepted first time?

From our work as officeholders, claims are rejected or referred to an expert mostly for accounting rather than legal reasons: a statement of account that does not reconcile to the invoices, interest and late penalties added without a contractual basis, a balance not reduced by what a guarantor paid, or a security whose document and valuation were not attached. A good claim contains a statement of account reconciled document by document, the contract or purchase orders, invoices and proof of delivery, the debt computed to the opening date without subsequent interest, the security document where one exists, and a statement of any set-off. We prepare these files for creditors within our court-directed reports service.

3. Voting on the proposal

In protective settlement and financial restructuring, creditors are grouped into classes, and the proposal is accepted if every class approves it; a class approves when creditors holding two thirds of the value of the debts of those voting in the class vote in favour, including creditors holding more than half of the debts of non-related parties (Articles 31 and 79). In financial restructuring the court may ratify the proposal despite the rejection of some classes if at least one class accepted it, creditors holding at least 50% of the total claims of those voting across all classes voted in favour, and the court considers ratification to serve the interests of the majority of creditors; a creditor who voted against may object at the ratification hearing on the ground of a breach of the fairness standards (Article 80).

In a liquidation procedure the officeholder calls the creditors to vote when selling an asset exceeding a quarter of the estate, on multiple purchase offers, on suing a third party, on deferring a sale, or on a settlement; decisions pass by a majority in value of the claims of those voting, and only creditors with undisputed claims vote (Articles 106, 108 and 109).

4. Your rank in the distribution

In a liquidation procedure the officeholder’s and expert’s fees and the costs of selling the assets rank ahead of all debts (Article 195); thereafter the higher-ranking debt is paid before the lower under Article 196:

1. Debts secured by a right in rem.
2. Secured financing under Article 184 and other security the Regulations specify.
3. An amount equal to 30 days’ wages for the debtor’s employees.
4. Family maintenance fixed by statute or court judgment.
5. Expenses necessary to continue the debtor’s business during the procedure.
6. Earlier wages of the debtor’s employees.
7. Unsecured debts.
8. Unsecured fees, subscriptions, taxes and government dues.

Proceeds are shared pro rata among creditors of the same rank where they do not suffice (Article 198). A secured creditor has a special rule: any excess of the proceeds of the charged asset over the debt is deposited in the estate account, and any shortfall becomes an unsecured debt (Article 197). The officeholder then notifies each creditor of the distribution decision at least 30 days in advance, and the creditor may object to the court, which rules within 20 days (Article 116).

5. Objection and appeal

Any interested party may object to the court of appeal against the court’s judgments and decisions on specified matters, including the opening or refusal of a liquidation procedure, the listing or non-listing of a claim, the classification of creditors and the voting and its result, ratification of the proposal, and the appointment and fees of officeholders (Article 217). A creditor may also ask the officeholder to seek the debtor’s removal from management in a restructuring where negligence or mismanagement is shown (Article 69).

6. Recurring creditor mistakes

• Waiting until the 90 days have passed, then discovering that the vote is lost and the first distribution has gone.
• Claiming interest and penalties accrued after the opening date without a basis.
• Failing to disclose security in rem or to value it, so the claim is treated as unsecured.
• Not applying set-off before filing, so the claim appears overstated and is referred to an expert.
• Voting against without attending the ratification hearing to object on fairness grounds.

7. How we help

For creditors we prepare the claim file reconciled document by document and the account report to the opening date, evaluate a settlement or restructuring proposal before the vote by comparing the creditor’s recovery under it with recovery in liquidation, and represent creditors in voting meetings and creditors’ committees. As a firm licensed as an officeholder, we know what the officeholder looks for in a claim before recommending its acceptance. See also our guide on company liquidation versus bankruptcy liquidation.

Sources

• Bankruptcy Law, Royal Decree M/50 dated 28/5/1439H, Articles 1, 31, 56, 64, 68–69, 79–80, 92–95, 106–109, 112, 116, 191–198 and 217 (Bureau of Experts, Council of Ministers)