Protective Settlement under the Saudi Bankruptcy Law: Stay of Claims, Voting and Ratification

What usually kills a distressed Saudi business is not the size of the debt. It is the timing of the claims. One creditor attaches assets, another files suit, a third goes after the personal guarantor — each acting rationally from where they sit, and the combined effect dismantles a company that could have been saved.

The protective settlement procedure under the Saudi Bankruptcy Law was designed for exactly that moment. It is the only procedure in which the debtor keeps running the business and keeps control of its assets, while obtaining a court-ordered breathing space in which claims are suspended and a deal can actually be negotiated. What follows is the procedure as the Law states it — article by article.

What the protective settlement procedure is

It is a court procedure available to the debtor alone. The debtor puts a proposal to its creditors for settling its debts. If the creditors approve it by the statutory majority and the court ratifies it, the proposal becomes a plan binding on the debtor, the creditors and the owners — including those who voted against it.

One structural point separates it from the other procedures: the Law does not give the officeholder management of the business or supervision over it in a protective settlement. The debtor manages throughout.

When your business is eligible

Article 13 allows the debtor to apply in any of three situations:

• Where it is likely to suffer financial disturbance that may lead to distress — that is, before actual distress.
• Where it is distressed.
• Where it is bankrupt.

The first limb is the commercially important one. The Law does not require a company to be on the edge of collapse; it opens the door at the point where financial disturbance is merely likely. In practice most businesses arrive far later than that — after the assets have eroded and creditor goodwill has run out.

The same article bars an application where the debtor has been subject to this procedure, or to its small-debtor equivalent, in the preceding twelve months.

Suspension of claims: the part that makes the procedure work

The court-ordered stay is what makes a protective settlement viable at all. It is not automatic. The debtor must ask the court for it when filing the application to open the procedure.

And here is the requirement most applicants discover too late. Article 17 requires the request for suspension of claims to be accompanied by a report prepared by an officeholder listed on the bankruptcy officeholders register, setting out their assessment that the majority of creditors are likely to accept the proposal and that it is capable of being implemented. In plain terms: no licensed officeholder’s report, no stay.

How long the stay lasts

Under Article 18, the court may suspend claims for a period not exceeding 90 days from the date the procedure is opened, and may extend it by 30 days once or more at the debtor’s request, provided the total does not exceed 180 days in any event.

The stay ends on expiry, or earlier if the court ratifies the proposal or the procedure is terminated. Practically, that gives you six months at the outside to reach a deal — ample for a debtor who filed with a finished file, and far too short for one who starts assembling the numbers after opening.

What actually stops

Article 20 lists what may not be taken or continued during the stay:

• Any action, disposition or suit against the debtor or its assets — including an application to open any other bankruptcy procedure.
• Any enforcement against assets of the estate given as security, except with the court’s approval.
• Any action against the personal guarantor or the provider of real security for the debtor’s debt, except with the court’s approval.

That third limb deserves attention. In a large share of Saudi corporate borrowing the owner is a personal guarantor. Protecting the guarantor during the stay means the owner is not being pursued personally while negotiating. Anything done in breach of Article 20 is void, and the court may order the recovery of assets disposed of during the stay, subject to the rights of bona fide third parties.

The stay is not absolute. Under Article 21 the court will permit enforcement against secured assets where the enforcement would not affect the continuation of the debtor’s business or the prospect of obtaining creditor and owner approval of the proposal.

Opening the procedure: four conditions and two grounds for refusal

The court sets a hearing date within 40 days of registration of the application and notifies the debtor of it within 5 days. It then either opens the procedure, refuses the application, or adjourns for up to 21 days.

Under Article 15, the court opens the procedure where four conditions are met:

1. It considers it likely that the debtor’s business can continue and that creditors’ claims can be settled within a reasonable period.
2. The debtor is bankrupt, distressed, or likely to suffer financial disturbance that may lead to distress.
3. The debtor has submitted the information and documents required by Article 14.
4. The debtor has exercised due care in fairly classifying creditors into more than one class.

Conditions one and four are where applications fail. The first means the procedure is not available to a business the court cannot be persuaded will continue. The fourth means creditor classification is not an administrative formality but a condition of opening — a rushed classification, or one engineered to force a vote through, can cost you the procedure at the first hearing.

The court refuses the application where it does not meet the statutory requirements or is incomplete without acceptable justification, or where the applicant has acted in bad faith or committed an act criminalised under the Law. On refusal, the court may order the opening of the appropriate bankruptcy procedure — so a weak application does not merely fail; it can result in a different procedure being opened, one the debtor did not choose.

The vote: the majority you actually have to plan for

Only a creditor or owner whose statutory or contractual rights are affected by the proposal votes on it. Where the proposal affects owners’ rights, the owners must be invited to vote before the creditors do.

The threshold is finer than most people assume. Under Article 31, the proposal is accepted if every class of creditors votes in favour. A class is treated as approving where both of the following hold:

• creditors whose claims represent two-thirds of the value of the debts of those voting in that class vote in favour; and
• those in favour include creditors whose claims represent more than half of the value of the debts of non-related parties (where there are any).

The second condition matters most for family businesses and companies with related-party balances: a proposal cannot be carried on the votes of creditors connected to the debtor. Which is why classifying creditors, and establishing who counts as a related party, is work that belongs before the application is filed, not after.

Where claims are disputed, the debtor must appoint an expert from the register of experts, approved by the court, to value them for voting purposes.

Ratification and the binding plan

If the creditors accept the proposal, the debtor applies to the court to ratify it, having first notified the creditors, and the court sets a ratification hearing. The court ratifies the proposal after verifying both that the creditors accepted it and that it satisfies the criteria of fairness — the numerical majority alone is not enough. A creditor may object at the ratification hearing.

Once ratified, the proposal becomes a plan binding on the debtor, the creditors and the owners. That is the real prize: a single enforceable settlement effective against everyone, instead of bilateral negotiations with each creditor that any party can walk away from.

Note also that neither opening the procedure nor ratifying the proposal relieves the debtor of the obligations relating to its business under other laws — zakat, tax, GOSI and licensing obligations continue to run.

How the procedure ends

On completion of the plan, the debtor applies to the court for a judgment terminating the procedure, having notified the creditors beforehand. Any interested party may object within 14 days of the application.

The court also terminates the procedure where the required majority is not achieved, where the vote could not be held on the appointed date, where the court refuses to ratify the proposal, or where the debtor applies for termination.

How we help

Al-Mousa & Al-Tamimi Certified Public Accountants includes an officeholder licensed by the Bankruptcy Commission (licence no. 148045). That means we can prepare the officeholder’s report required by Article 17 for the suspension of claims — not merely support the debtor’s file.

Our work normally begins before the application is filed: reading the financial position and establishing whether the business is bankrupt, distressed, or facing financial disturbance; building a proposal whose numbers hold up in front of the court and the creditors; classifying creditors fairly into classes, which is a condition of opening rather than a formality; and identifying related parties before that becomes a surprise on voting day.

See our bankruptcy officeholder service · Read next: what a bankruptcy officeholder does and when you need one · Contact us

The Saudi Bankruptcy Law series

• What a bankruptcy officeholder does and when you need one
• Financial restructuring: three differences that decide it
• Small debtor procedures: when the simplified track fits

Sources: Bankruptcy Law, issued by Royal Decree No. (M/50) dated 28/5/1439H — official text on the Saudi Laws Portal; Bankruptcy Commission (Eisar) — Bankruptcy Procedures. This article is general guidance and is not a substitute for advice on a specific case.

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