What happens when a Saudi company goes bust
What happens when a company gets into difficulties and has no option but to cease trading? Often, the answer is that it goes into liquidation.
This may be simply defined as the process by which a company’s operations are brought to an end, and its property and assets redistributed. One of the aims behind liquidation is to recoup as much as possible of the money owed to the company’s partners, who have priority access to the cash once their creditors are paid and they have fulfilled any other obligations.
Under Saudi law, when a company is wound up it is immediately in liquidation. The first task is to appoint liquidators. By law, while the directors of the company have no more power, they may be considered liquidators if no external party is appointed. The law determines how such liquidators are appointed. One or more representative from the company’s partners, shareholders or general assembly will appoint the liquidators and determine their costs. Of course, if the company has been wound up by the commercial disputes resolution body, it will appoint the liquidator and determine costs.
The law requires publication of the liquidators’ names and how they intend to realize the company’s assets, along with registration with the commercial registrar.
Because of the sensitivity of this work, a liquidator’s duties and responsibilities are clearly defined in law. They are required to meet the partners and shareholders to prepare an inventory of the company’s assets and properties within three months of the start of liquidation; they also have the power to sell the company’s properties, including equity in other companies. Of course, starting new projects is prohibited without permission from higher authorities, or unless the work involves completion of existing projects. They are required to pay the company’s debts, noting that debts relating to the liquidation process take priority.
After all the debts are paid and other obligations discharged, liquidators are required to return the remainder of the liquidated money to the shareholders, and divide any profits or losses according to the company’s regulations.
The liquidators must submit a report at the end of the fiscal year, along with their observations and reservations on the liquidation proceedings and their proposals to extend the liquidation period if necessary.
Upon completion of liquidation proceedings, the liquidators must show the final report to the partners or shareholders, and their acceptance is required. They must then register it at the commercial registrar in order to remove the company’s name, thus terminating its status as a legal entity.
If there is more than one liquidator, they must work together unless agreed otherwise. In the event of an error by liquidators, the company is entitled to investigate them and the liquidators are required to make reparation for any losses incurred as a result. Finally, Saudi law allows three years after closing the liquidation to hear any objections to the process.
Dimah Talal Alsharif is a Saudi legal consultant, head of the health law department at the law firm of Majed Garoub and a member of the International Association of Lawyers. Twitter: @dimah_alsharif