Consensual restructuring: Amendments legalize out-of-court settlement bankruptcy

The legislative and commercial environment in Saudi Arabia has witnessed a significant development with the announcement of new regulatory amendments related to "consensual restructuring," a step aimed at legitimizing and regulating "settlement bankruptcy" procedures outside of court. This move seeks to enhance the flexibility of the financial and commercial system and enable struggling companies to rectify their situations more effectively and quickly.

General context and development of the bankruptcy system in Saudi Arabia

These amendments did not come about in a vacuum; rather, they are a continuation of the development of the legal and commercial environment that began intensively with the launch of the Kingdom's Vision 2030. Since the issuance of the Bankruptcy Law by Royal Decree No. (M/50) dated 28/5/1439 AH, the Kingdom has sought to bridge the legislative gap that faced struggling companies. Before this law, companies had limited options, often ending up in liquidation and exiting the market, which harmed the national economy and resulted in the loss of many jobs.

The Saudi bankruptcy system represents a significant leap forward, encompassing various procedures such as preventative settlement, financial reorganization, and liquidation. The recent amendments concerning "amicable restructuring" introduce a vital option, allowing debtors and creditors to reach amicable settlement agreements without resorting to lengthy and complex litigation from the outset, while simultaneously providing legal and regulatory frameworks for these agreements.

The importance of consensual structuring and its economic impact

The importance of legalizing “bankruptcy settlement” outside of court lies in several key points that positively affect the local economy and enhance the Kingdom’s regional and international standing:

• Speeding up procedures: Consensual structuring allows companies to bypass bureaucracy and lengthy timeframes associated with courts, helping to save assets before their value erodes.
• Relieving the burden on the judiciary: By resolving financial disputes outside of courtrooms, the pressure on commercial courts is reduced, allowing them to focus on more complex cases.
• Boosting investor confidence: Foreign and domestic investors view clear and flexible mechanisms for dealing with financial distress as a key safety factor. The availability of options such as consensual restructuring improves the Kingdom's ranking in international ease of doing business indices.
• Maintaining the continuity of establishments: The ultimate goal of these amendments is to enable economic establishments to continue and contribute to the gross domestic product, instead of collapsing due to temporary liquidity crises.

In conclusion, these amendments represent a step forward towards the maturing of the legal environment for business in Saudi Arabia, as they balance the rights of creditors to recover their money, and the need of debtors to have a chance to catch their breath and rearrange their financial affairs away from the pressures of compulsory liquidation.