Insolvency refers to the inability of an entity to meet its financial obligations on time, such as paying its lenders. It may result from a reduction in cash inflow, an upsurge in expenditure, and poor fiscal management, among other reasons.
There is a slight difference between being insolvent and bankrupt. You can utilize different strategies to survive insolvency. Your options may include borrowing money, growing your income, or developing more lenient payment plans with your creditors. You become bankrupt when you run out of options to clear your debt.
Insolvency and Bankruptcy in Saudi Arabia
Before the bankruptcy law of 2018, insolvent companies in the UAE and Saudi Arabia had limited alternatives. It was criminal by default to be bankrupt, and business owners would get detained for failing to pay debts. For this reason, many would flee when their inability to pay became apparent.
Let’s discuss the genesis of the insolvency law in Saudi Arabia and the UAE and highlight some recent cases of insolvency.
The Inspiration Behind the Insolvency Law
The drop in oil prices from $115 per barrel in 2014 to a mere $27 in January 2016 hurt the economy of Dubai and Saudi Arabia significantly. Most small and medium-sized enterprises went into financial distress after customers couldn’t pay on time. The price of oil remains unstable despite having risen.
The UAE’s economic growth dropped to 3.1 percent in 2014 from 6.8 percent in 2012. At that time, the International Monetary Fund predicted that it would sink further to 2.3 percent by 2016. Experts reported more than 800 cases of business owners who had fled the UAE due to debt accumulated in six quarters.
Most of the runaway incidents involved companies that traded in goods. A decrease in bank lending and lack of liquidity had fueled the massive payment delays, forcing entrepreneurs to close shop.
Due to this trend, Saudi Arabia and the UAE found it necessary to reexamine the laws surrounding insolvency. There was a need to reassess the crime of bankruptcy and review the conditions for bounced checks. The insolvency law to come would also address insolvency proceedings initiated by creditors.
The Kingdom of Saudi Arabia (KSA) authorized the bankruptcy law in February 2018, which came to effect later in August. It consists of 17 chapters and 231 clauses which outline the procedures for bankruptcy. It provides friendlier avenues for dealing with insolvent entities to make business smoother in Saudi Arabia.
The UAE Supplier Who Fled to Britain
Pervez was a British trader who lost his business after becoming insolvent in Dubai. The construction materials supplier set up shop in the UAE before a financial crunch struck Dubai from 2008. His real estate customers would later pay only a percentage of invoices issued for supplied products and services.
He managed to survive as large scale construction work resumed in 2011 after the Arab Springs anti-government protests subsided. In 2014, another crisis took place following a regional slump in oil prices. Most customers in the construction industry either paid late or defaulted.
A fraction of his debtors ran away to avoid imprisonment, plummeting his market considerably. After some time, Pervez could not service his debts, and the bank froze his account.
He decided to flee to Britain when due dates of checks he had guaranteed approached. Soon after departure, his staff collapsed the business.
The case is synonymous to what many construction and trading companies have gone through in Saudi Arabia.
Saad Group and AHAB Bankruptcy
Maan al-Sanea owns the Saad Group, a company with interest in banking and healthcare in the city of Khobar, Saudi Arabia. Together with, Ahmad Hamad al-Gosaibi and Brothers (AHAB), Saad defaulted about $22 billion owed to banks in 2009.
For the past decade, creditors have been pursuing Saad and AHAB for the unpaid debts. Maan al-Sanea became insolvent despite having featured in the Forbes list of the world’s 100 wealthiest people in 2007. The authorities detained him in 2017 for failing to meet the said financial obligations.
Maan Al-Sanea’s Bankruptcy Filing Approved
Saad, Sanea’s company, was quick to file for bankruptcy soon after the new law came into effect. The court accepted his request, according to the Saad Group’s financial advisor.
The ruling was a leap towards resolving one of the biggest debt sagas in Saudi Arabia. In March 2018, the public gathered as Saudi government agents auctioned Maan al-Sanea and Saad’s vehicles and possessions in Dammam.
Regional and international creditors claimed at least 85 percent of the debt. Given the commercial law practices surrounding the Saad’s debt, experts saw a high chance of success in resolving the matter through bankruptcy law.
On approving the application, a Dammam commercial court appointed a third-party trustee to supervise the process of financial reorganization. Saleh A. Al-Naim, the trustee, notified Saad’s creditors to submit their claims in 90 days.
AHAB’s Application Accepted
A commercial court based in Dammam approved AHAB’s request to settle their decade-long dispute with creditors under the bankruptcy law. The ruling saved the conglomerate from liquidation as per the HSBC and Raiffeisen Bank filing.
The International Bank Corporation (TIBC) was pleased with the court’s decision to allow financial restructuring. AHAB owes the Bahrain bank close to $3 billion. In what a court in the Cayman Islands called a massive Ponzi scheme, TIBC had raised money in international markets and transferred it to AHAB.
This case was among the first ones to put the kingdom’s bankruptcy law to test in solving insolvency. After approving the filing, the court would appoint a bankruptcy trustee to evaluate and collect the claims of the creditors.
How the Bankruptcy Law Can Benefit You
The Kingdom of Saudi Arabia finally enacted the bankruptcy law in 2018. It provides better solutions to disputes between creditors and insolvent debtors in the KSA.
The law will allow distressed investors to re-evaluate their finances and meet their pending obligations to creditors. As a result, they will run their operations in smoother and more tolerable conditions.
The government hopes to boost the growth of the investment market and reduce cases of business liquidation. By so doing, KSA will stop losing substantive investors who undergo resolvable financial crises.
Contact us to discuss any matters of business law in Saudi Arabia and the UAE.