Consensual structuring: Bankruptcy system amendments to promote amicable settlements
In a move aimed at enhancing the flexibility of the economic legislative environment in Saudi Arabia, the Bankruptcy Committee (Essar) has unveiled a package of proposed regulatory amendments designed to formalize restructuring agreements outside of court, known as "mutual restructuring." This step comes in response to the demands of the current phase, which is witnessing significant economic activity within the framework of the Kingdom's Vision 2030. Regulatory bodies are striving to provide practical solutions that enable struggling businesses to regain their financial stability without resorting to lengthy and complex legal proceedings.
Consensual structuring mechanism outside of courts
The new draft allows debtors, whether large corporations or small businesses, to directly agree with creditors on a proactive debt restructuring plan. This mechanism is advantageous because it occurs before any formal application is filed to initiate bankruptcy proceedings or judicial filing, thus preserving the business's reputation and minimizing the negative impact of publicizing the debt. To ensure the seriousness and fairness of these settlements, the amendments require the debtor to have the plan certified by a licensed bankruptcy trustee, who plays a pivotal role in verifying that the plan meets fairness standards and serves the interests of the majority of creditors before being submitted to the court for approval.
Protecting the rights of creditors and dissenting minority
The new proposals grant the commercial court the authority to ratify the "consensual plan," a procedure that effectively secures the agreement and empowers the court to reject any subsequent bankruptcy proceedings that might threaten its stability. To bolster trust between parties to the commercial relationship, the proposed system includes stringent safeguards to protect creditors who might vote against the plan. The amendments stipulate that financial reorganization proposals must include a minimum return for dissenting creditors, ensuring that the offered return is at least equal to what they would receive if the debtor's assets were actually liquidated, thus guaranteeing that their financial rights are not harmed.
Balancing asset protection and the public interest
On another front, the amendments included flexible provisions allowing the court to lift the "stay of claims" on specific debts if it is deemed to be in the best interest of the general bankruptcy proceedings. The legislature also introduced an important exception, in line with international standards, permitting the suspension of claims in emergency situations related to the environment, health, or public safety, upon request from the relevant authorities. This exception aims to balance the protection of bankruptcy assets with considerations of the higher public interest, consistent with international practices and the UNCITRAL Legislative Guide on Insolvency Law.
Financial independence and emulation of global models
At the institutional level, the draft proposed a qualitative shift in the work of the Bankruptcy Commission by granting it full financial independence through the allocation of a separate annual budget within the state budget. The Commission's financial income would include fees collected for managing administrative liquidation proceedings, issuing licenses, and providing professional services. This administrative step aims to emulate successful international models in countries such as Australia and the United Kingdom, where bankruptcy authorities have self-generated resources that enhance their operational efficiency and ensure their sustainability in regulating this vital sector.
