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Saudi’s recent Bankruptcy law clears the path for investments and large-scale projects

Saudi’s recent Bankruptcy law clears the path for investments and large-scale projects

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The new bankruptcy law of Saudi Arabia has raised the expectations of the foreign and local investors for a reliable framework that will reduce risks of conducting business in the Kingdom. This law will help improve the appeal of Saudi Arabia among global investors and will raise significant economic activity in the region as per the view of the analysts.

The primary aim of the law is to allow a bankrupt debtor to resume activity mindful of the creditor’s rights. The Saudi Ministry of Commerce and Investment aims to raise the kingdom’s global ranking in settlement of bankruptcies.

Saudi ranks in the 168th place (out of 190 countries) in the World Bank’s Ease of Doing Business ratings for 2018 in regards to bankruptcy cases. The new law is expected to change the position of the country.

The neighboring country of Saudi Arabia, the UAE had implemented the bankruptcy law back in 2016. It came into effect in  2017, and the objective was to reduce the risk of conducting business in the country. In some cases, it was also the sparing of imprisonment for failure to pay the debt.

Bankruptcy law is meant to support confidence and to smooth up possible new investments needed to support the long list of giga-projects and expected IPOs,” as said by an economics and energy partner at a consultancy firm advising on investment risks in the Middle East.

“It is also a major step forward to increase confidence in Saudi Arabia for investors and operators, all in line with the Vision 2030 drive, and not to be forgotten the MSCI Emerging Market Index Listing,” he added.

The Kingdom has started to implement a motivating economic overhaul that will oversee the launch of major projects and allocate the state’s resources. This projects also includes the substantial 500 billion ‘NEOM’ business zone project. This project’s size is to be more than 33 times the size of New York City.

There was a need for a new, up-to-date bankruptcy law as international investors are apprehensive about issues related to recuperating funds and investments when involved with a Saudi entity over the past years.

The is a preparation of a regulated schedule which details the insolvent status of the debt-ridden companies. It is a combination of US (Chapter 11) and European bankruptcy provisions, and would allow involvement from all parties with interest in the process.

The stock market of the KSA is the Arab area’s most significant bourse and is now placed on the ‘watch list’  of the emerging market index by the global index supplier MSCI.  This inclusion is the result of the decision taken in June. A positive result would guarantee the inflow of foreign funds and an increase of business set up in Saudi.

Providing opportunities:

“The adoption of the bankruptcy law is part of the development of the country’s economy and will open up opportunities for new projects to gain access to, and participate in, the market effectively while avoiding any loss that may result from the restructuring of the economy,”  as said by Faisal Al Olayan, a Riyadh-based independent economic consultant.

“The bankruptcy law aims at enabling the debtor to recover and resume activity and also takes into account the rights of creditors. The current law in the kingdom does not include an easy way to liquidate the company’s activities,” he added.

Before the introduction of the Bankruptcy law, very scarce regulations were governing the process of declaring bankruptcy, the treatment of creditors and their claims, or the rights obligations of insolvent parties, according to a Saudi-based associate at law firm.

He said that the existing statute was highly reflective of traditional Islamic principles and cultural issues unique to the region, which largely seek to bring disputing parties together in an amicable agreement without forcing a judicially-imposed settlement against either party’s will.

Formal judicial insolvency and bankruptcy proceedings have been fairly uncommon occurrences in Saudi Arabia, and financially distressed parties and their creditors generally seek to work out their disputes and settlements on a private, one-to-one basis.

Long-term disputes:

Many disputes are pending in the Kingdom due to the absence of proper bankruptcy laws.

According to a law firm founder “The lack of a formal bankruptcy system meant that restructuring companies often presented financial hurdles that were too difficult to overcome.

Liquidation was the only solution when the debt exceeded the value of the assets, which ends the work of the investor completely, though it could have been resolved by (methods other than) liquidation and balance between the rights of creditors and debtors.

The new Saudi bankruptcy law gives more clarity and transparency, and presents a higher chance of a business resuming activity under the supervision of specialist insolvency experts, he added, without disruption to creditors’ rights.

Enacting a more robust bankruptcy statute has added a level of certainty to the legal environment in Saudi, and clients and companies investing and doing business in Saudi Arabia will feel more comfortable doing so.”

The new bankruptcy law started to take shape in early 2015 when the Ministry of Commerce and Investment (MOCI) released a policy paper for public comment entitled “General Policies of Bankruptcy.” The article suggested a legal framework for bankruptcy and insolvency procedures that coexists with the international standards. The law has been derived from existing structures in the Czech Republic, England and Wales, France, Germany, Japan, Singapore, and the United States, Burns noted. 

 

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