The Financial Restructuring Procedure (FPR) under the Bankruptcy Regime in the Kingdom of Saudi Arabia

published on 22 March 2021 | reading time approx. 5 minutes

Since the implementation of the new Bankruptcy Law in 2018 in the Kingdom we were given the opportunity to experience several cases that led us to a deep dive into the new Financial Restructuring Procedure (FRP) that has been issued by the Kingdom Saudi Arabia under their Bankruptcy Law.

The FRP as a Debtor's Duty and Opportunity

During the Covid-19 Pandemic, the FRP has already claimed its right of existence more than ever. It is likely that the FRP will play a significant role in the coming months and years. The new FRP provides comprehensive and relevant knowledge about a preliminary stage of a bankruptcy situation in KSA. This Article aims to provide a rough overview about risks but also opportunities under the new FRP.

The FRP is a new model bankruptcy procedure established by the Bankruptcy Law, which was issued by Royal Decree No. (M/50) dated 28/05/1439. Such a model was not covered by the previous bankruptcy laws or in any other Saudi law.

A preliminary stage to avoid complete Bankruptcy in KSA

The purpose of its creation is to enable the debtor to reach an agreement with its creditors, through which the debtor may maintain its business and continue to manage and operate himself (under the supervision of a bankruptcy trustee). In return, the creditor obtains his rights through the proceeds from the sale of some of the debtor's assets, and from the returns of the debtor's operation of its ongoing business.

In general, the FRP differs from the common liquidation procedure from several aspects, including, but not limited to, that the FRP is essentially based on the exploitation of the time element, meaning that the implementation of the FRP is not carried out immediately, but, if the FRP plan is approved, its implementation may take several years, as the debtor implements the plan in two parts, mainly by:

selling some of its assets and paying off a part of the debts through the sale proceeds as an immediate part, and
benefiting from the debtor’s operation of its business under the supervision of the trustee and using the profits of the business (if any) to pay off the remainder of the debts as a continuous part.

FRP and other means of Restructuring under the Bankruptcy Law

Compared to the FRP, in a preventive settlement, the debtor keeps the administration of its business in entirety, without appointing any trustee. In the liquidation process, the debtor shall cease to manage its business immediately, and it shall be replaced entirely by a bankruptcy trustee in performing all its obligations and obtaining all its rights.

In case of a preventive settlement, the moratorium does not take place automatically upon the commencement of the procedure, but rather the debtor shall submit to the court a request to order the moratorium. Such request shall be supported by a report by a licensed trustee advising the court that most creditors would accept the proposal. The court may accept or reject the moratorium request, based on its discretion. In FRP and liquidation however, the moratorium takes place immediately upon filing the application to commence the procedure. The difference between the two procedures is the expiration date of the moratorium.

The Commercial Court supervises the implementation of the procedure in general and decides on disputes that may arise out of such implementation and imposes criminal penalties stipulated in the Law – for example where an FRP has been initiated but the debtor has filed its application on false or insufficient information by not disclosing all debts or not informing the creditors accordingly.

How to deal with commercial Contracts under the FRP

Commercial contracts are not automatically terminated once the procedure is commenced. In addition, the debtor or creditor is not obligated to terminate any contract. All contracts generally remain valid without change, and the two parties remain obligated to complete each's implementation of contracts according to their terms. However, if a contract states that a party shall have the right to terminate the contract or to request immediate full repayment if the other party is subject to FRP, this clause shall be null and void, and the contract shall remain the same no matter of this clause.

The debtor must disclose its financial position and the size of its debts in general, including details and information on its creditors and their contracts in two stages. If the debtor is the one who filed the request to commence the FRP, it must submit to the court all information and documents related to its financial situation, and these information – of course – include detailed information about debts and creditors and all documentation related to them.

If the debtor is not the applicant, then the court will oblige the debtor to provide it with the same information and documents. After that, the debtor must present to the bankruptcy trustee – upon its appointment – a detailed list of the valid contracts accompanied by copies of those contracts and a report containing which contract the debtor wishes to continue or terminate and the justifications for that.

The creditors shall be informed about the commencement of the debtor's FRP by two means, namely public announcement, and private notification.

Creditors are advised to observe their Customers and correspondent Payment Terms

Within (90) days from the date of the announcement or notification in accordance with the previous paragraph, the creditor must submit to the trustee its claims, and shall provide him with all documents and information related to the claims and proving them, including but not limited to the value of the claim, and the amount of debt that has not become due yet, and when it will be due, whether the debt is secured or not, the nature of the security, and any other substantial information related to the claim.

If a creditor fails to submit its claim after having been notified within the specified period (90 days from the date of announcing the FRP commencement), the creditor will generally be excluded from voting on the FRP proposal. However, it requires a detailed evaluation on the creditor´s rights in case of non-notification and expiry of deadline to submit its claims.

The debtor is obligated to divide the creditors into different categories if there are multiple creditors and there is a difference regarding their debt origin or their rights. Despite the clarity of the Law regarding the debtor’s obligation to divide creditors into categories, the Regime is not clear about how to divide creditors into classes.

In case Companies are affected by any FRP as debtor or creditor, companies should seek professional advice in due time to secure its rights to the extent possible. Please note that this article does not constitute nor replace legal advice.