Businesses facing bankruptcy, liquidation still entitled to claim rights: Lawyer

Hisham Al-Askar, commercial law and capital markets lawyer

Businesses going through bankruptcy or liquidation are still entitled to claim their rights whenever the insolvency trustee proves that the company’s management misused these rights, Hisham Al-Askar, commercial law and capital markets lawyer, told Argaam in an exclusive.

Under Article 79 of the Companies Law, the company has the right to file a claim of liability against the board of directors or the executive management for actions that may weigh on both the company as well as shareholders. In this case, the company, in its general meeting, will appoint a representative to proceed with the legal claim, Al-Askar added.  

However, if the company is considered bankrupt, a claim shall be filed by the bankruptcy trustee, and if it is liquidated, the liquidator will take control of the court’s winding-up order.  

Al-Askar indicated that types of bankruptcy are straight bankruptcy, bankruptcy by default and bankruptcy fraud, stressing that the bankruptcy trustee should investigate the events that faced the business and the validity of its financial statements, to ensure that the board of directors and the executive management did not commit any misconduct or violations that may indicate a bankruptcy fraud. 

Bankruptcy fraud, the most serious type of all, is the act of falsifying information when filing for bankruptcy. Debtors commit concealment of assets fraud to intentionally neglect to list all their assets, believing that creditors cannot obtain payment from the sale of assets that are not known. Debtors may also transfer the assets they wish to keep to the name and financial accounts of other person.  

The financial reorganization of some joint stock companies failed due to the inefficiency of the financial restructuring procedure, Al-Askar noted. 

A Financial Reorganization Procedure (FRP) allows the debtor to reach an agreement with its creditors by reorganizing its business under the supervision of a licensed bankruptcy trustee to ensure fairness of the procedure and its execution. However, in case the debtor is unable to settle the due payments on time, the court will issue a winding-up order for a compulsory liquidation of the business.  

Earlier this month, Saudi Indian Company for Cooperative Insurance (Wafa Insurance) said that the bankruptcy trustee submitted a request to the court to terminate the procedures for the financial reorganization of the company, as the plan could not be implemented. 

Similarly, Abdullah A. M. Al-Khodari Sons Co. (Al-Khodari) announced that it received the decision issued by the First Department of Dammam Commercial Court to end the company's financial restructuring procedure and start its liquidation. This came after Al-Khodari's creditors rejected the financial reorganization proposal under the Saudi Bankruptcy Law. 

Al-Askar said few companies are currently facing a financial crisis, adding that they should begin a financial restructuring procedure, or face liquidation.