Explore our New Companies Law Series Below:
- About Saudi Arabia’s New Companies Law
- Provisions for LLCs under the New Companies Law
- New Foreign Investment Guidelines Under New Saudi Arabian Companies Law
- Regulatory Frameworks of Companies Under Saudi Companies Law
- Provisions for Professional Companies under the New Companies Law
- Provisions for Joint Stock Companies Under the New Companies Law
- Provisions for Simplified Joint Stock Companies Under the New Companies Law
- Provisions for Not-For-Profit Companies Under New Companies Law
- Provisions for Debt Instruments & Financing Sukuk Under New Companies Law
- Responsibilities of Managers Under New Companies Law
- Closure of Companies Under New Companies Law
- Simplified Joint Stock Companies versus Limited Liability Companies Under New Law
Closure of Companies Under New Companies Law
As companies are set up to carry out economic activities, they sometimes need to be closed down or terminated for a variety of reasons. Understanding the requirements, procedures, and processes for the closure of companies is important for several reasons. Besides the direct interests of partners and shareholders, there may be other stakeholders whose interests, too, need to be duly protected before the closure of a company or its merger with another entity or division into several entities.
The Saudi Arabian Companies Law promulgated vide Royal Decree No: (M\132) dated 01\02\1443 H. along with the Rules of its Implementation (Law), which became effective as of 19 January, 2023 cover in detail the manner in which the five forms of companies can be closed or terminated.
Except for a few provisions related to the closure or continuation of companies which are stated in specific sections, the provisions for closure and the process of closure are mostly addressed under Section Twelve of the Law.
Continuation of Company
As a general provision, the Law enables a company set up in any form to continue in case of death; removal; withdrawal or interdiction; bankruptcy or insolvency of any of the partners unless otherwise provided in the Articles of Association (AoA) or the partners failing to fulfill certain requirements prescribed by the Law for the continuation of the company[1].
There are, however, certain exceptions where a company will be obliged to terminate by the force of law. For instance, if a partner who is solely licensed to practice a profession loses their license permanently and fails to rectify the situation within a grace period of six months or any extended period approved by the competent agency, the company shall be obliged to take procedures for closure.[2]
Unlike the old law, the new Law has eliminated the provision concerning the termination of a company by the force of law when the losses of a limited liability reach half of its paid-up capital and the partners or shareholders fail to decide to continue or dissolve the company within the prescribed period. This is provided, however, that an entity having an interest shall have the right to seek judicial intervention to dissolve the company in the event of the partners or shareholders not taking the appropriate procedures to deal with the losses[3].
Creditors’ Rights During Division/Split of a Company & Mergers
While enabling the division or split of a company into two or more, even if it is in a liquidation stage, the Law provides that partners or shareholders have the right to transfer the assets, rights, and obligations among the companies resulting from such a split. However, the law adequately protects the rights of creditors who may request the company which is undergoing the split, or the companies resulting from the division, to satisfy the debts and obligations of the company being split.
Similarly, the creditors of a company undergoing a merger are entitled to object to the merger and register their objection within 15 days of the announcement of the merger. The company shall be required to fulfill the debt of the objecting creditor if it is due or provide sufficient guarantees if the debt will be due later.
If the debt is not fulfilled or sufficient guarantees are not provided to the creditor, the creditor will be entitled to request intervention by the competent judicial authority to suspend the merger within a period of ten days before the date fixed for the merger. The competent court may order the suspension of the merger if it determines that the merger might cause serious damage to the objecting creditor. The Law further adds that the competent authority may decide to indemnify the creditor for damages caused in case there was any delay in the issuance of the decision before the date of the merger.
Liquidation Provisions
A company will terminate upon expiration of its term if stipulated in the constitutional documents and subject to following and fulfilling the required procedures.
However, the Law provides that the term of a limited liability company will be deemed to have been renewed for a similar term upon expiration if the partners did not make a decision to continue but continued to operate the company with provisions allowing the partner not interested in continuance to withdraw.
In all cases, partners or shareholders may decide to close a company at any time, subject to satisfying the relevant provisions of the Law and in line with the AoA of the Company. The Company may also be terminated by a judicial decree.
Voluntary Liquidation
Where the liquidation is optional or voluntary, the first requirement under the Law is that the managers or the board of directors, as the case may be, provide a statement of the company’s situation to the partners or the shareholders within a maximum period of 30 days of its preparation. The statement must state therein that the company is capable of meeting its debts at the end of the liquidation period and that the company is not distressed to be falling under the purview of bankruptcy law.
If the manager(s) state that the assets of the company are not sufficient to satisfy the debts of the company, the partners or shareholders shall not take a decision to terminate the company voluntarily. Otherwise, they will be severally and jointly liable for the debts owed by the company.[4]
Judicial Liquidation
If the assets are not sufficient to satisfy the debts of the company or the company is distressed under bankruptcy law, the company will request the competent court to initiate liquidation proceedings.
The competent court shall require the manager or the board of directors to furnish a statement of the company’s financial situation and financial statements within 30 days of such request before issuing a decision to appoint a liquidator and detailing in it the powers, remuneration, restrictions, and the period of liquidation.
Liquidation Process
The partners, shareholders, or the general assembly of shareholders shall appoint a liquidator for the company within 60 days from the date of the decision to terminate the company by a decision adopted in line with the conditions prescribed for amending the AoA. Otherwise, the competent judicial authority, upon request of any shareholder, partner, or stakeholder, shall appoint the liquidator.[5]
The powers and authorities of the managers of the company shall end upon issuance of the decision for liquidation. However, they may represent the company before the third parties until the appointment of a liquidator. Moreover, the partners and shareholders may exercise their powers through general assemblies if they are not inconsistent with the powers of the liquidator.[6]
Powers of Liquidator
The liquidator shall represent the company before the courts, arbitration panels and others, exercise the required powers for liquidation, and take measures to turn the company’s assets into cash, including the auction of movables or real estate. He shall not have any right to commence a new business activity unless it is required to complete any previous activity. The powers of the liquidator expire at the end of the liquidation works or upon expiration of the liquidation period (whichever is earlier) unless extended under the provisions of the Law.
Responsibilities of Liquidator
The liquidator shall register and publish the decision of his appointment in the commercial register with the Ministry of Commerce.
If multiple liquidators are appointed, they shall act jointly unless otherwise provided by the appointment decision.[7] The liquidator shall prepare a statement covering the inventory of the company’s assets, obligations, and rights within 90 days of the date of appointment and the auditor if appointed, shall issue a report in this regard.
At the end of each financial year, the liquidator will be required to prepare financial statements and a report on the liquidation works, including a statement of his observations and reservations about the liquidation works, the reasons for its obstruction or delay, if any, and his recommendations for an extension of the liquidation period. He shall provide the Commercial Registry with a copy of the aforesaid documents and shall submit the same to the partners or the general assembly of shareholders for their approval in accordance with the terms of the Company’s AoA[8].
If a liquidator notices at any time that the assets of the company shall not suffice to satisfy the debts, he shall immediately inform the partners or shareholders and the company’s creditors about such insufficiency. At the same time, he shall request the competent judicial authority to order the initiation of the liquidation process according to the bankruptcy regime.[9]
The Law obliges the liquidator to return the amount of capital to the partners and shareholders as well as any residual amounts that remained after the settlement of all debts in proportion to their shareholdings unless otherwise provided in the AoA of the Company.
Penalties on Liquidator
Liquidators are liable severely and jointly (in the case of several liquidators) if the decision was taken unanimously for any damages arising out of exercising power or authority in excess of what was granted to them or for committing mistakes in the performance of the liquidation works.[10]
The Law provides for a penalty not exceeding SR. 5 million and/or imprisonment not exceeding 3 years in case a liquidator intentionally provides any misleading information in the financial statement related to the sufficiency of assets for satisfying debts, omits any material fact from any financial statement prepared by the liquidator, uses the funds or assets or claims against third parties in a manner harming the interests of the company, or causes harm to partners or shareholders or creditors for the sake of personal gains.
A fine not exceeding SR. One Million and /or imprisonment not exceeding 1 year may be imposed upon a liquidator if he uses or exploits information of the company with the intent to harm or fails to register the decision appointing him as liquidator or notification of completion of the liquidation process.
Conclusion
Closure of companies, especially LLCs, requires a great deal of caution on the part of the partners in determining the financial status of the company to be liquidated to avoid liabilities and responsibilities for satisfying the debts of the company. The liquidators, too, require diligence in exercising their powers and authorities to avoid penalties which include imprisonment.
If you have any questions regarding the closure of companies under the new Saudi Arabian Companies Law, we encourage you to reach out to our team. We’ll be happy to discuss the topic with you further and provide you with our guidance.
AlGhazzawi & Partners
1 Article 50, 57,184 of Companies Law.
2 Article 211(3) of Companies law
3 Article 132,182 of Companies Law.
4 Article 242 and 245 of Companies law
5 Article 248 (1) of the Companies Law.
6 Article 246 of Companies Law
7 Article 251 of Companies Law.
8 Article 253 of Companies Law.
9 Article 254 of Companies Law
10 Article 251, 258 of Companies Law.