Legal Update
August 2018
Introduction – New Laws Boosting Saudi Arabia’s International Rankings
The past months have seen very intense legislative activity in the Kingdom of Saudi Arabia.
New Labor Courts have been launched, backing up the unrelenting efforts of the Ministry of Justice to improve legal adjudication processes, which have already pushed up the country’s ranking in the World Bank’s ‘Doing Business’ report from an extremely weak 148, in 2010, to an encouraging 83 for the current year. The new courts are set to start operations at the beginning of the new lunar year (10 September 2018) which will surely propel the ranking further upwards. Most recently, the Ministry of Justice has pushed forward especially the digitalization of the judicial process. The regional (MENA) average ranking is around 130.
The legislative drafting services of the Ministry of Commerce and Investment, too, have not been dormant in the past two quarters, as the now enacted new Bankruptcy Law is set to become effective through the impending publication of its Implementing Regulations, which is expected to catapult the Kingdom’s ‘Doing Business’ rank from a frustrating 168 (‘no bankruptcy law’) this year well above the regional average of 145 for the year 2019, and maybe even towards the rank of the regional leader (UAE): 69.
In the field of minority shareholders’ protection, the Kingdom is even set to overtake the UAE as both countries are currently ranking number 10 shoulder on shoulder in the World Bank study, whereas the new protection rules enacted in April 2018 are now deploying their beneficial effects.
Jochen Hundt
LABOR LAW
Launch of the Labor Courts
The Ministry of Justice and the Ministry of Labor and Social Development are cooperating to finalize arrangements necessary for launching labor courts and panels under the jurisdiction of the general judiciary.
This cooperation aims at achieving ministry of justice objectives to boost the performance of labor courts in a manner that will positively impact the labor market, abridge procedures, and accomplish digital integration between these courts and the two ministries.
It is worth mentioning that the Ministry of Justice has been training the justice staff needed for the Labor Courts by launching a special training program. The goal is to enhance the judges’
efficiency in terms of qualifications and skills needed, whether scholarly, legal, or administrative.
Other recent initiatives of the Ministry of Justice include the following:
• The Commercial Courts have begun implementing the electronic litigation process, starting from filing a commercial case until the appeal judgment, including obtaining a copy of the judgment by printing it electronically, without having to visit the Court.
• The Ministry has announced the official launch of its “publishing in English” initiative to open channels with non-Arabic speakers.
• The Execution Courts have also implemented digitalization. Execution seekers can now recover their dues through a fully electronically backed-up process.
COMPANY LAW
In April 2018, the Council of Ministers approved eleven amendments to the Companies’ Law 2015. Companies established in Saudi Arabia should therefore consider reviewing existing shareholder arrangements, constitutional documents, and corporate governance procedures to ensure compliance with these amendments. Officers and directors in Saudi companies should also be aware of new risks. The amendments (‘Amendments’) in a nutshell:
Paid-up capital
The Amendments provide that for the establishment of limited liability companies, payment of the entire share capital is not required upon incorporation. This seems to reflect the joint stock company approach – whereby one-fourth of the share capital can be paid on incorporation with the remaining three-fourths paid within the next five years. In practice, however, this provision will likely only be applicable to wholly Saudi owned companies – since foreign investors are generally required to produce a bank certificate evidencing deposit of the entire capital as part of the incorporation process.
Unlike joint stock companies, the Amendments do not specify a timeframe for when the LLC's share capital must be fully paid-up.
Share transfer restrictions
The existing Companies Law provided a rudimentary statutory framework governing LLC shareholder pre-emption rights. The existing statute was unclear and vague with respect to the terms and conditions of the transfer and restrictions thereon.
However, the Amendments clarify the pre-emption rights apply to proposed transfers to third parties and may be based on the third party's proposed purchase price within 30 days or any other time period or valuation method agreed by the shareholders. The Amendments also require disclosure of the identity of the buyer.
Minority shareholders
Whereas the existing Companies’ Law requires shareholders representing at least half of the capital to be able to call an extraordinary general assembly meeting, the Amendments lower this threshold to only 10% of the capital.
Clarifying directors' liabilities in conflicts of interest
The Amendments clarify that damage caused to a joint stock company by a director's conflict of interest shall be attributable to that director and to the wider board – except for those directors who opposed the action giving rise to the harm and whose objections were duly noted in the minutes. Absence from a board meeting where a director's conflict of interest caused harm to the company is not a defense to liability unless the director can also prove that he had no knowledge of the proposed resolution.
Additionally, whereas previously the board's consent to a director's personal interest in the company's affairs could be renewed annually, the Amendments provide that such consent must be made “in accordance with the controls laid down by the competent authority”.
Cost-shifting in shareholder lawsuits
The Amendments provide that a shareholder may sue the company, and the company shall bear the costs of the lawsuit – no matter the result of the claim – if the following conditions are met:
1. The claim filed in good faith, on valid legal grounds, and is in the best interests of the company as per Art. 79 of the Companies’ Law (pertaining to lawsuits against the board of directors instituted by the shareholders at an ordinary meeting); and
2. The shareholder submitted the complaint to the company prior to filing the claim and did not receive a reply within 30 days.
BANKRUPTCY LAW
For the first time in Saudi history, a Bankruptcy Law has been recently approved by the Custodian of the Two Holy Mosques, pursuant to Royal Decree No. M/5 dated 28/05/1439H (the "Bankruptcy Law"). It will officially enter into force from the date of issuing its related Implementing Regulations (the "Implementing Regulations"), which must take place within six months from the date of publication in the official gazette, i.e. by the end of August 2018 (expected).
The main objective of the Bankruptcy Law is to implement detailed provisions related to the liquidation, settlement and financial reorganization, since the currently applied laws and regulations are insufficient to govern the procedural and judicial aspects of these essential matters. The Bankruptcy Law will further reduce the financial difficulties on bankrupt or distressed debtors and reorganize their financials. In addition, it will protect the creditors' rights, reduce cost and time of the bankruptcy procedures and, most importantly, encourage small and medium businesses to invest in the Saudi Arabian market.
Debtors may submit a request to the competent Commercial Court to reorganize their current financial position (the "Financial Reorganization"). This warrant will only apply if the debtors have been classified as one of the ‘Bankruptcy Beneficiaries’. Creditors and any competent government authority will additionally have the right to request the Court to reorganize the financial position of the debtors, provided that the concerned debtors must be notified within a period not exceeding five days starting from the day of submitting such requests. In this case, the debtor will have the right to object to such a request if
1. The requirements of the Financial Reorganization were not met;
2. There is an ongoing dispute over the concerned debt; or
3. The requesting party (i.e. the creditor) is misusing the Financial Reorganization procedures.
Nevertheless, it is essential to note that during the procedures of the Financial Reorganization, debtors, shareholders, managers, board members or auditors will be exempted from the application of certain provisions in the Companies’ Law, with respect to the enforcement of certain liabilities and obligations in cases where the company's losses reach fifty percent of its share capital. Once the Financial Reorganization request is submitted to the relevant Court, the submission of further claims will be suspended until the Court rejects the commencement of the Financial Reorganization procedures, approves the Financial Reorganization settlement report or at the end of the relevant procedures. The Court shall thereafter appoint one of the bankruptcy licensed trustees, after which the creditors will be notified of the Court’s acceptance to commence the Financial Reorganization procedures. Afterwards, they will be able to submit their claim requests within no later than ninety days starting from the notification date. The bankruptcy licensed trustee will have a broad authority to review the contracts entered into by the debtor and might, after meeting certain requirements (set out
in the Bankruptcy Law), opt to terminate them in order to protect the creditors. Moreover, a committee consisting of all creditors will be organized, which will be subject to the requirements of the Bankruptcy Law and its Implementing Regulations. The appointed bankruptcy licensed trustee shall prepare the suggested settlement report and ensure to implement the Financial Reorganization during and following the end of such procedures.
Liquidation
The Liquidation can progress upon the request of the debtor himself, his creditors or any other competent government authorities, provided that the debtor must be going through an actual financial distress or bankruptcy. The creditors' debts will be subject to certain conditions to be accepted by the Court as follows:
1. The debt must be due with certain value, certain cause and certain warranties (if any);
2. The value of the debt or the total of the creditors' debts must not be less than the value determined by a specialized Committee; and
3. The debt must be due based on an enforcement note or any other note, provided that the creditors must prove that they have requested the debtor to fulfill such amount within 28 days prior to submitting the liquidation request to the competent Court.
The competent Court shall have the right to impose any preventative procedures based on its sole discretion or upon the request of any concerned party. Moreover, a bankruptcy licensed trustee will be appointed to carry out the liquidation procedures and the debtor or the entity under liquidation will be prohibited from managing their business operations upon the commencement of the liquidation.
Preventive settlement and financial reorganization for small businesses and debtors Small debtors are defined under the Bankruptcy Law as "debtors to whom the standards determined by the Committee and the General Authority of Small and Medium Enterprises apply " (the "Small Debtors"). The standards are yet to be determined. However, we expect such requirements to be introduced following the actual enforcement of the Bankruptcy Law.
It is noticeable that the Bankruptcy Law grants special treatment to Small Debtors to facilitate their operations in the market and encourage them to settle their ongoing debts through eased procedures and low costs.
Administrative liquidation
It is defined as the selling of the liquidation proceeds that are not expected to cover the expenses of the liquidation (the "Administrative Liquidation"). The Administrative Liquidation may be requested by the debtor himself or by the competent authority, provided that the debtor must be distressed, insolvent or his assets will not cover the expected expenses of the
liquidation procedures. The competent Court may reject the Administrative Liquidation request if:
1. The request did not fulfill the requirements under the Bankruptcy Law and its Implementing Regulations;
2. The business operations of the debtor may be continued, and the creditors' liabilities can be fulfilled within a reasonable period (subject to the review and decision of the relevant court);
3. The party requesting the Administrative Liquidation is misusing this special procedure;
or
4. The debtor's assets were considered enough to cover the expenses of the Liquidation procedures.
The specialized Committee will manage the liquidation procedures, which must be finalized within twelve months starting from the date of commencing the Administrative Liquidation.
The Committee may extend such periods (if required), which should not exceed 90 days.
Financing
The debtor is not permitted to secure any guaranteed financing post the commencement of any of the bankruptcy procedures prior to obtaining the court's approval. During the Preventative Settlement and Financial Reorganizing procedures, a debtor may request the court's approval to secure a guaranteed financing provided that such request must contain a report by an expert approving the same. The court will thereafter accept the request if it is considered necessary to continue the operations of the debtor's businesses or protecting the assets during the relevant bankruptcy procedures.
Ranking of debts
Remunerations and expenses for the appointed bankruptcy licensed trustee and the experts, as well as the cost of selling the assets will have priority over any other debts. However, the fulfillment of the creditors' liabilities will be in accordance with certain debts according to the following ranking (from highest importance to lowest):
1. Secured debts;
2. Secured financed debts as per Art. 184 of the Bankruptcy Law and any other secured financed debts determined by the Implementing Regulations;
3. An amount equivalent to 30 days’ salary for the debtor’s employees;
4. Alimony for the debtor’s family as determined by the applicable laws or a Court order;
5. Necessary expenses to ensure the continuity of the debtor's business operations during the relevant liquidation procedures in accordance with the Implementing Regulations requirements;
6. Accrued wages of the debtors' employees;
7. Unsecured debts; and
8. Unsecured governmental official fees, membership fees and taxes in accordance with the Implementing Regulations requirements.
Penalties
Chapter 13 of the Bankruptcy Law deals with the penalties and the transactions which are subject to cancelation by the competent Court as a result of a violation of certain provisions.
In particular, parties violating Articles 200, 201 and 202 of the Bankruptcy Law can face various penalties such as imprisonment not exceeding five years, fines not exceeding five million Saudi Arabian Riyals, prohibition to own shares and manage the operations of any profitable businesses (directly or indirectly) in Saudi Arabia.
Done in Riyadh, on 9 August 2018
The Law Office of Khalid O. Alattas
in association with Hundt Legal Consultancy
Jochen Hundt LL.M
jochenhundt@hundtlegal.com Mob. +966 504 233 752 Tel. +966 11 279 5132 www.hundtlegal.com
with input from:
Yassen Azeroil LL.M, Legal Consultant Nouf Al-Qahtani, Trainee Legal Consultant Abdullah Hundt, Paralegal
