Saudi Arabia has enacted a law that will equip it with a new, modern framework for corporate bankruptcy that experts believe will help attract foreign direct investment into the Kingdom.
The legislation was approved by the Council of Ministers and decreed by King Salman last week, according to legal sources, and will be implemented soon.
It is seen as a groundbreaking event in the business history of the Kingdom, and regarded as an essential element in the drive to diversify the economy away from oil dependency under the Vision 2030 strategy.
George Sadek, research analyst at Global Legal Monitor, part of the US Library of Congress, said: “The purpose of the (new law in Saudi Arabia) is to attract foreign investors and encourage small and medium corporations to grow financially … Its main goal is to provide for the operation of indebted corporations while they gradually pay off their debts.
“It allows creditors and debtors to enter into agreements to schedule the payment of debts, a measure that will enable indebted corporations to achieve a stable financial status.”
The new law will give Saudi Arabia, for the first time, a legal infrastructure to deal efficiently with companies that get into financial difficulties. At the moment, there is little alternative to liquidation of corporate assets — often in haste and at a discount — for companies that get in trouble.
The law was drawn up after consultation with international experts and follows similar laws in a number of countries, such as the UK, Germany, Singapore and the US, that are regarded by the World Bank and the International Monetary Fund (IMF) as having the best bankruptcy regimes.
The new law will extend similar levels of protection as in the US, with its Chapter 11 provisions that allow companies time to satisfy their creditors and provide legal protection from arbitrary action.
Other countries in the Gulf region have also moved gradually toward a more regulated bankruptcy process.
Dubai’s Decree 57, which also included provision to force acceptance of terms agreed by companies and the majority of their creditors, was enacted by the emirate’s authorities in 2010 to deal with the crisis at the Dubai World conglomerate, which ended with an orderly restructuring of billions of dollars’ worth of debt. The UAE followed that with a broader bankruptcy law last year.
A Dubai-based financier, who wanted to remain anonymous because his comments had not been authorized for publication, said of the new Saudi bankruptcy bill: “This is great for the region. It will encourage foreign investors to enter knowing that there is some protection in case of problems.”
Fatimah Baeshen, spokesperson at the Saudi Arabian embassy in Washington DC, tweeted that the new law amounted to “structural reforms to further facilitate a dynamic business environment that encourages participation — a critical variable in further developing the entrepreneurial ecosystem, investments and so much more.”
One immediate consequence of the new bankruptcy law could be to hasten the resolution of the long-running case involving the Al-Gosaibi conglomerate in Saudi Arabia. The Alkhobar-based family business has been in negotiations with creditors since 2009, when it collapsed after a dispute with family member Maan Al-Sanea.
The Al-Gosaibis have reached agreement with about two-thirds of their creditors on proposals to repay some of the billions of dollars they owe, but the process has been held up due to opposition by some Saudi and regional creditors.
Bader Al-Busaies, managing partner at Al-Suwaiket and Al-Busaies law firm in Alkhobar, told Reuters: “The timing is excellent. Lots of companies are facing financial difficulties. Before it was either liquidation or stakeholders had to inject money. The new law is an alternative solution — the international practice has proven that insolvency law offers a good solution for companies.”
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With the new bankruptcy law in place, Al-Gosaibi would be able to force dissident creditors to accept the terms, a practice known as “cramdown” in the financial industry.
The Al-Gosaibi proposals are currently being considered by legal authorities in Alkhobar.
Al-Sanea is also believed to be considering a plan to present creditors with proposals to settle his debts, which could also benefit from the new bankruptcy proposals.
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