Revising Bankruptcy Procedures for Individuals and Corporations in the Kingdom of Saudi

Arabia by Drawing from Insolvency Laws in the United Kingdom

Running Head: REVISING BANKRUPTCY PROCEDURES KSA

TABLE OF CONTENTS

Introduction 3

Justification for the research topic ...

Research objectives ...

Main hypothesis ..

Literature review

Research Methodology ..

Outline of the Thesis ..

Bibliography

List of Articles

List of Books ..

Word Count:

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Running Head: REVISING BANKRUPTCY PROCEDURES KSA

Introduction

It is a common characteristic of healthy economies that the inflow of money and investment is
promoted1. For this to be possible, self proprietorships and large businesses alike should be able
to enter and exit the market effectively. At present, Arabian financial systems are too basic to
appropriately address complex financial transactions2. Existing laws on bankruptcy enshrined in
the 1931 Commercial Court Law (CCL) for individuals provide for lax procedures controlled
primarily by the debtor. This breeds mistrust amongst creditors who become hesitant to lend
money in furtherance of the debtors business as a going concern. Creditors generally remain so
unless it is clear that a creditors interests are given due protection by laws on insolvency.

In the corporate setting, the existing policies set forth in the CCL as well as the Law of
Settlement Preventing from Bankruptcy as promulgated by the Ministry of Commerce and
Industry are heavy handed and focus primarily on the dissolution and liquidation of larger
businesses as a going concern. The CCL does not make any distinction between personal and
corporate debt. It merely classifies debtors as real, negligent or fraudulent based on loosely
defined criteria. Real debtors are those accorded assistance by the court as they have not incurred
their debts in violation of the rights of citizens, slipshod book keeping or improvidence in
making payments. Negligent and fraudulent debtors are punished harshly under the criminal
provisions of the CCL.

There is clear inadequacy in the present state of Saudi Arabian laws. The present state of the law
is not directed towards saving floundering business entities3. Unlike the United Kingdom and the
United States, Saudi Arabia does have established procedures for the restructuring of debt
specifically from the perspective of the creditor. Unless the government itself is responsible for
extending credit to the individual or business, creditors generally may not pro-actively pursue the
financial rehabilitation of the debtor. It is up to the debtor to seek assistance from government
instrumentalities such as the Ministry of Commerce and Industry to restructure their debt 4. The
default course of action is the liquidation of the debtors assets to which preferential debts take
precedence over the claims of creditors.

Due to the existence of preferential debts, the money realized from any successful liquidations
proceedings are diminished prior to creditors being able to effect their claims. Basic personal
1 Simon, G. (n.d.). Factors of Growth in the Resource-Intensive Economy of Saudi
Arabia.SSRN Electronic Journal.

2 Elshurafa, D. (2012). Insolvency Laws in Saudi Arabia: Time for

Change?. International Corporate Rescue, 9(9), pp.44

3 Rice, G. (2003). Doing business in Saudi Arabia.Thunderbird International

Business Review, 46(1), 59-84.

4 Pattherwala, M. (2013). Dealing with Bankruptcy in the Global Financial Crisis:

Saudi Arabia. Kuwait Financial Research Journal, 7(2), 4-22.

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Running Head: REVISING BANKRUPTCY PROCEDURES KSA

expenses, expenses for dependents, rent costs, wages of servants and dowries are included in the
list of preferential debts provided for in Articles 105-107 of Chapter 10 of the CCL. No limit is
provided for such preferential debts which make the provisions open to abuse by the debtor.

It is only upon satisfaction of the preferential debts that the remainder of the proceeds from
liquidation proceedings are distributed equally amongst all unsecured creditors. This is based on
the principle of equanimity between creditors which is enshrined in Islamic Law. While creditors
can rely on the courts to enforce their rights against negligent or fraudulent debtors, there is little
protection against improvidence encountered by real debtors who can structure preferential debt
favourable so as to leave as little amount as possible for the claims of unsecured creditors.

The supplementary preventive settlement law was enacted in an attempt to address the
shortcomings of the CCL. However, preventive settlement as a remedy pales in comparison to
administration and receivership with are both featured in laws in the United Kingdom.
Preventive settlement is still a debtor initiated action through which a debtor foreseeing threats in
his ability to pay debts coordinates with the Chambers of Commerce and Industry to mediate in
settlement proceedings between him and his creditors. In the preventive settlement law

Justification for Research Topic

It can be determined from preliminary studies that there are observable drawbacks on existing
laws for bankruptcy in Saudi Arabia. However, it is also clear that there are superior methods of
addressing bankruptcy in other states such as the United Kingdom. It is important therefore to
look into the strong points of bankruptcy procedures outside Saudi Arabia, with particular focus
on administration and receivership and determine how these can be assimilated into the existing
system.

Research Objectives

The following are the research objectives for this proposal:

To study the existing laws on bankruptcy in Saudi Arabia, giving due focus on the
Commercial Court Law and the laws of settlement set forth by the Ministry of
Commerce and Industry

To study the existing procedures for insolvency in the United Kingdom, giving due
focus on the Insolvency Act of 1986 and the procedures on Administration and
Receivership included therein.

To compare the strong points and weak points of Saudi Arabian bankruptcy
procedures vis a vis their equivalents in the United Kingdom

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Running Head: REVISING BANKRUPTCY PROCEDURES KSA

To determine ways by which Saudi Arabia can improve and revise its existing system
for resolving bankruptcy cases by assimilating procedures from the United Kingdom.

Main Hypothesis

Literature Review

A more extensive review of literature on the matter of insolvency proceedings reveal harsh
criminal penalties on companies and individuals. There is a lack of governmental vehicles
through which floundering businesses and individuals may be rescued or rehabilitated
financially. This remains in stark contrast with economic studies of westernized economies such
as the United Kingdom which focus on alternative methods through which businesses can be
kept afloat. A recurring theme in studies is the locus of control in insolvency proceedings. In
Saudi Arabia, control of the proceedings appears to be with the court and with the debtor.
Conversely, the United Kingdom empowers creditors to be participative as insolvency
proceedings take place.

Research Methodology

The study makes use of a qualitative research method known as comparative analysis.
Commonly used in sociological studies to determine logical conclusions by placing two sets of
data side by side, it will be used in this study to analyse the strengths and weaknesses of the
group of laws implemented in Saudi Arabia and the United Kingdom for bankruptcy cases. Due
focus will be given to finding gaps in the existing laws and procedures of Saudi Arabia.

By finding gaps in the laws and procedures in Saudi Arabia, recommendations can be made on
possible improvements and revisions in the law. Subject to future legislation, the findings of the
study can contribute to the betterment of insolvency proceedings in the subject state.

Outline of the Thesis

I. Introduction
a. Illustrate inadequacy in existing laws for personal and corporate insolvency in
KSA Law.
i. Cite key provisions and shortcomings in Chapter 10 of the Commercial
Court Law of 1931 (CCL)
1. The CCL provides no distinction between personal and corporate
bankruptcy.
2. According to Articles 105,106 and 107 of the CCL, personalities
are classified as real, negligent or fraudulent bankrupts based on a
very loose set of criteria such as:
a. Improvidence in payment
b. The act of keeping books
c. Wastage of the rights of citizens

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Running Head: REVISING BANKRUPTCY PROCEDURES KSA

d. [cite other qualifications that have no operational

definition]
3. Poor concurrence and preference of credits:
a. Privileged Debts are taken first from the resulting
realisations from liquidation:
i. Basic personal expenses
ii. Expenses of dependents
iii. Rents for residence and business
iv. Wages of servants
v. Wifes dowry
b. The CCL imposes no limit to privileged debts
c. The remaining portion of the realisations will go to
unsecured creditors receiving an equal portion as a
complete or partial satisfaction of the amount owed to them
by the debtor
4. Overtly abstract principle of equanimity between creditors which
does not exist in Westernized Legal Jurisdictions
ii. Cite Key Provisions in the Supplementary Preventive Settlement Law
1. The remedy presented to debtors is Amicable Resolution or
Preventive Settlement which become available to debtors who
foresee impending insolvency
a. There exist shortcomings to the remedy
i. All encompassing temporary prohibition vs. creditor
action when the remedy is sought
ii. Privileged Debts (enumerated above) are still
existent
iii. There is still no concurrence or preference amongst
creditors
b. Explain the purpose of the paper in light of the shortcomings to the law on
insolvency and bankruptcy in the KSA:
i. This paper aims to propose revisions to the Saudi bankruptcy settlement
system (BSS) that will provide a workable solution for dealing with
troubled or insolvent individuals and corporations, drawing specifically
upon the System of Administration in the United Kingdom in insolvency
law.
c. Briefly outline different remedies in the United Kingdom for insolvency based on
the Insolvency Act of 1986.
i. Administration
ii. Voluntary Arrangement
iii. Receivership
iv. Liquidation
II. Proposed Revisions to the System for Insolvency in the Kingdom of Saudi Arabia
a. Implement the remedies discussed in the Insolvency Act of 1986
b. Set a cap on Privileged Debts or Establish fixed exemptions from liquidation
proceedings such as:
i. The family home

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Running Head: REVISING BANKRUPTCY PROCEDURES KSA

ii. Ordinary tools used in the livelihood of the debtor

iii. Necessary clothing and items for personal use, excluding jewelry and
other surplus items of value
iv. Household furniture and utensils provided that these are of modest value
v. Provisions for the debtors family and dependents for four months. The
value of these provisions should be adjudged by the court.
vi. Professional library for lawyers, doctors etc provided that the value of the
books may not be deemed excessive by the court and that no books are
acquired further upon establishment of insolvency proceedings.
vii. The right to receive legal support
viii. Properties exempted by other existing laws in the KSA except the CCL
and the supplementary preventive settlement law.
c. Establish concurrence and Preference of Credits based on the UK Insolvency Act
III. Conclusion

Bibliography