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In light of the importance of regulating the status of financially distressed debtors, the Bankruptcy Law has established a set of legal procedures aimed at addressing financial distress. Among the most prominent of these procedures are Financial Restructuring and Bankruptcy (Liquidation). However, they differ in terms of their nature, objectives, and legal effects, which necessitates clarifying the distinctions between them.
First: Nature and Concept
Financial Restructuring:
A procedure aimed at enabling the debtor to continue conducting its business activities through the preparation of a financial restructuring plan that ensures the settlement of debts under judicial supervision and with the approval of creditors.
Bankruptcy (Liquidation):
A procedure resorted to when the debtor’s financial distress reaches a stage where continuation of the business is no longer feasible. In such case, the debtor’s assets are identified, liquidated, and distributed among creditors according to the statutory order of priority.
Second: Purpose and Objective
Financial Restructuring:
Its purpose is to rescue the enterprise and enable it to continue operating while achieving the best possible return for creditors over the medium or long term.
Bankruptcy (Liquidation):
Its objective is to terminate the business activity and liquidate it in order to maximize debt repayment through the sale of assets.
Prepared by: WSN Khaled Al-Murshid
Article Five of the Bankruptcy Law provides that bankruptcy procedures aim to achieve the following:
A. Enabling bankrupt or distressed debtors, or debtors expected to experience financial instability, to benefit from bankruptcy procedures in order to reorganize their financial affairs, resume their activities, and contribute to supporting and developing the economy.
B. Safeguarding creditors’ rights in a fair manner and ensuring equitable treatment among them.
C. Maximizing the value of bankruptcy assets, ensuring their orderly sale, and guaranteeing fair distribution of the proceeds among creditors upon liquidation.
D. Reducing the costs and duration of procedures and increasing their efficiency, particularly in relation to restructuring small debtors or liquidating assets and distributing proceeds fairly within a specified period.
E. Providing administrative liquidation for debtors whose assets are insufficient to cover liquidation expenses, or for small debtors.
Third: Procedures
Financial Restructuring
Preparation of a restructuring plan proposal.
Voting by creditors on the proposed plan.
Judicial approval of the plan.
Continuation of the business under the supervision of a trustee or competent authority.
Filing for Commencement of the Procedure
Article Forty-Two of the Bankruptcy Law provides:
Without prejudice to the provisions of relevant laws, the debtor, a creditor, or the competent authority may file an application to commence Financial Restructuring procedures in any of the following circumstances:
A. If the debtor is likely to experience financial disruption that may lead to distress.
B. If the debtor is distressed.
C. If the debtor is bankrupt.
An application for Financial Restructuring may not be filed if the debtor has previously undergone Financial Restructuring or Small Debtors’ Financial Restructuring within the preceding twelve months.
Commencement of the Procedure
Article Forty-Seven of the Bankruptcy Law provides:
Financial Restructuring procedures shall commence pursuant to a court judgment under Article Forty-One of the Law, or pursuant to paragraph (2) of this Article.
The court shall schedule a hearing within forty days from the registration date of the application and notify the applicant and debtor within five days thereof. The court may decide as follows:
A. Commence the procedure if:
It appears likely that the debtor’s business can continue and creditors’ claims can be settled within a reasonable period.
The debtor is bankrupt, distressed, or likely to experience financial instability leading to distress.
The applicant has submitted the information and documents referred to in Article Forty-Three of the Law.
B. Reject the application if:
The application fails to meet statutory requirements or is incomplete without acceptable justification.
The applicant acted in bad faith or committed any acts criminalized under the Law.
The court may, upon rejecting the application, order the commencement of an appropriate bankruptcy procedure.
C. Postpone the hearing for a period not exceeding twenty-one days to allow submission of additional information or documents requested by the court.
The court shall notify the debtor who did not attend the hearing of its judgment within five days from issuance.
Effects of Commencement of the Procedure
(Appointment of the Trustee, Expert, Supervisory Judge, and Their Powers)
Article Fifty of the Bankruptcy Law provides:
The court shall appoint a trustee from among those registered on the list of bankruptcy trustees. The applicant may propose the trustee’s name.
In appointing the trustee, consideration shall be given to the trustee’s financial capabilities, academic qualifications, and the qualifications of the trustee’s team.
The trustee shall exercise due care toward creditors’ interests.
Subject to court approval, the trustee may delegate certain duties to another registered trustee or expert when necessary.
The court may appoint more than one trustee to act jointly and designate one as chairperson.
The trustee shall deposit a copy of the court judgment commencing the procedure and appointing the trustee in the Bankruptcy Register.
Bankruptcy (Liquidation)
Issuance of a liquidation judgment.
Appointment of a liquidation trustee.
Identification and sale of assets.
Distribution of proceeds among creditors.
Fourth: Status of the Debtor
In Financial Restructuring:
The debtor is in a state of financial distress or instability but remains capable of continuing operations.
In Bankruptcy:
The debtor is in an actual state of inability to pay debts, accompanied by cessation of business or the impracticability of continuing it.
Fifth: Legal Effect
Financial Restructuring
Protection of the debtor from individual claims and enforcement actions.
Continuation of the legal entity and business activities.
Possibility of restoring financial balance.
Bankruptcy
Restriction of the debtor’s powers of disposition.
Termination of business activities in most cases.
Distribution of assets according to statutory priorities.
Sixth: Creditors’ Interests
In Financial Restructuring:
Creditors’ interests are achieved through organized and gradual repayment, which may yield better returns than liquidation.
In Bankruptcy:
Creditors’ interests are achieved through the distribution of the remaining assets, which are often insufficient to cover the total debts.
Conclusion
It is evident that both Financial Restructuring and Bankruptcy constitute independent legal frameworks aimed at addressing financial distress through different mechanisms. Financial Restructuring focuses on enabling the debtor to continue operations and reorganize financial affairs, whereas Bankruptcy (Liquidation) is directed toward liquidating assets when continuation becomes impossible.
Accordingly, distinguishing between the two procedures is essential for the proper application of the Bankruptcy Law and the protection of the rights of all concerned parties.
The Bankruptcy Law in the Kingdom of Saudi Arabia adopts a graduated system of procedures that balances the interests of both debtors and creditors. Financial Restructuring serves as a preventive and corrective mechanism intended to rescue economic activity, while Bankruptcy (Liquidation) represents the final solution where recovery is no longer possible.
Therefore, the distinction between the two procedures is fundamentally based on one key criterion: the feasibility of continuing the business activity. This criterion directly affects the nature of the procedure and its legal consequences.
Prepared by: Wasn Khaled Al-Murshid
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