Saudi Arabia has undertaken major economic reforms in recent years as part of its Vision 2030 initiative, with a strong focus on improving the business environment, attracting foreign investment, and diversifying the national economy. One of the most significant reforms is the introduction of a new bankruptcy law, which came into force in August 2018. The Saudi Bankruptcy Law (SBL) represents a paradigm shift from previous insolvency practices and aims to support struggling businesses by offering modern mechanisms for debt restructuring and liquidation. A key area of focus within this legal framework is corporate debt restructuring—an essential tool for financially distressed companies aiming to maintain operations, protect stakeholders, and contribute to economic stability.
In the past, distressed companies in Saudi Arabia often had few viable options for recovery, leading to either prolonged legal battles or abrupt closures. However, under the new legal system, business restructuring is not only possible but is actively encouraged through structured, court-supervised processes. The SBL allows companies to initiate procedures that can either reorganize their financial obligations or liquidate assets in an orderly manner, depending on the viability of the business. This shift marks a significant departure from creditor-centric models, moving towards a more balanced and sustainable approach that considers the interests of both debtors and creditors.
Understanding the New Bankruptcy Framework
The SBL provides three main procedures: preventive settlement, financial restructuring, and liquidation. Each serves a distinct purpose and is tailored to different levels of financial distress.
- Preventive Settlement: This procedure allows a debtor to negotiate with creditors before insolvency becomes imminent. It’s a proactive approach designed to preserve business continuity.
- Financial Restructuring: This is the core of corporate debt restructuring under the new law. It provides a legal process through which a financially troubled company can propose a plan to reorganize its debts under court supervision.
- Liquidation: If restructuring is not viable, the company may enter into liquidation, allowing assets to be sold and distributed among creditors.
The financial restructuring procedure under the SBL is particularly relevant for larger corporations with complex debt structures. It empowers debtors to maintain control of their operations while engaging in negotiations with creditors to reach a viable solution. This mechanism is designed to provide breathing space for companies and avoid the destructive impacts of uncontrolled insolvency.
Corporate Debt Restructuring: A Strategic Tool
Corporate debt restructuring under the new Saudi legal framework is intended to serve not merely as a lifeline, but as a strategic tool for companies facing financial headwinds. By using restructuring proactively, businesses can reprofile debt, extend maturities, renegotiate interest rates, and even convert debt into equity where appropriate.
This is particularly valuable in a region where businesses can face cash flow disruptions due to delayed payments, oil price fluctuations, or geopolitical developments. Under the new system, distressed companies can file for restructuring with the court, presenting a plan that must be approved by a majority of creditors in terms of both value and number. Once approved, the plan becomes binding on all creditors, including dissenters, allowing the company to implement recovery strategies without the threat of piecemeal litigation or aggressive debt collection.
For example, in 2020, Ahmad Hamad Algosaibi and Brothers (AHAB), a major Saudi conglomerate, pursued one of the largest debt restructuring efforts in the Middle East, amounting to approximately $7.5 billion. This case, although initiated before the SBL’s full implementation, demonstrated the growing recognition of structured restructuring as a preferred solution over liquidation.
Role of the Bankruptcy Commission and Court Supervision
The Saudi Bankruptcy Commission, established under the new law, plays a pivotal role in ensuring the integrity and transparency of the process. The commission supervises the appointment of trustees, oversees the execution of proceedings, and provides resources to help businesses and professionals navigate the system.
Court supervision also ensures fairness and legal certainty. Debtors are protected from legal actions during the restructuring process, allowing them to focus on turnaround strategies without fear of asset seizures or insolvency petitions from aggressive creditors. On the other hand, creditors are granted a transparent process in which they can vote on proposed plans and voice objections in a structured forum.
This balance of power fosters trust in the system and has helped to reshape the corporate culture around insolvency in the Kingdom. It is no longer a taboo to admit financial difficulties; instead, businesses are encouraged to act early and responsibly through business restructuring.
Key Benefits to the Saudi Economy
The benefits of the new bankruptcy framework extend beyond individual businesses. A well-functioning corporate restructuring system strengthens the overall economy in several ways:
- Preservation of Jobs: When viable companies are saved from collapse, employment levels are protected, reducing social and economic costs.
- Continuity of Services: In sectors like healthcare, utilities, and infrastructure, the ability to restructure ensures essential services are not disrupted.
- Credit Market Stability: A transparent and efficient insolvency system builds creditor confidence, improving access to capital and lowering the cost of borrowing.
- Foreign Investment Attraction: Investors are more likely to enter a market where legal protections exist for resolving financial disputes and recovering investments.
By fostering a culture that supports timely and strategic business restructuring, Saudi Arabia positions itself as a competitive, investor-friendly market that is resilient to economic fluctuations.
Challenges and Areas for Improvement
Despite the progress made, there are still challenges to be addressed. The new system is relatively young, and many companies and legal professionals are still adapting to its complexities. Issues such as limited availability of specialized insolvency practitioners, procedural delays, and varying interpretations by courts can hinder the effectiveness of the process.
Furthermore, cultural barriers persist. In some cases, businesses delay filing for restructuring due to reputational concerns or the belief that such action reflects managerial failure. This can worsen financial distress and reduce the chances of successful recovery.
Efforts are being made to increase awareness and education about the benefits of timely business restructuring, especially among SMEs, which form the backbone of the Saudi economy. Continued training for judges, trustees, and financial advisors is essential for building a robust and efficient system.
Conclusion
Saudi Arabia’s new bankruptcy framework marks a major step forward in modernizing its economic and legal infrastructure. Corporate debt restructuring, under this law, offers a powerful mechanism for businesses to regain financial health, preserve value, and contribute positively to the national economy.
As the Kingdom continues its journey under Vision 2030, fostering a dynamic private sector and promoting sustainable economic growth, the importance of efficient restructuring mechanisms cannot be overstated. Encouraging early intervention, supporting distressed businesses, and strengthening legal institutions are critical components in ensuring the long-term success of this initiative.
The path ahead involves not only refining the existing legal processes but also changing mindsets—embracing restructuring as a prudent and strategic response to financial challenges, rather than a sign of failure. In doing so, Saudi Arabia can establish itself as a model for business restructuring in the region and beyond.
