Saudi bankruptcy law lays foundation for Vision 2030

Saudi Arabia, revamps, bankruptcy law, Vision 2030, economists, long term, economic, growth, Kingdom, comprehensive, reforms, Crown Prince Mohammed bin Salman,
Seen here is former U.S. Secretary of State Rex Tillerson shaking hands with Saudi Crown Prince Mohammad bin Salman Al Saud. © Wikimedia Commons

Saudi Arabia’s comprehensive bankruptcy law has gone into effect last month, with economists saying the move will significantly impact long term economic growth in the country. The Kingdom’s first comprehensive bankruptcy law is one of the many reforms Crown Prince Mohammed bin Salman is pushing, as part of his Vision 2030 initiative to diversify the economy and wean it away from its oil-centric focus.

The legal reforms have grabbed investor attention not only because they are highly technical but also because their scope is wide ranging and covers areas including new laws for the creation of courts as well as the training of judges.

The newly drafted bankruptcy law creates a clear route for companies who are struggling to obtain relief from creditors while they undergo a restructure or are liquidated. It may potentially free up billions of dollars that have been frozen in debt disputes.

While there are still concerns on the Kingdom’s legal system, which last year got highlighted by the detentions of top Saudi businessmen and officials during a crackdown on corruption. Nevertheless, the reforms are changing the playing field for companies.

“While the headline setting Vision 2030 continues to be the face of change in Saudi Arabia, the driving force behind it remains the tangible and impactful modifications done to local laws and regulations that drive investment,” said Bruce McAlister, general counsel for industrial conglomerate GE with reference to the new bankruptcy law.

He went on to cite new laws which allow government-private sector partnerships as well as rules allowing 100% foreign ownership of trading firms.

“The legal reform process is progressing. It’s a work in progress and it will take more time, but the environment is clearly changing,” said Grahame Nelson, head of the Riyadh office of Al Tamimi & Co regarding the new bankruptcy law.

Bankruptcy law and the common law tradition

While many foreign firms come from a background of a common law tradition where precedent plays a significant role, the Kingdom’s legal system is based on the sharia, a set of Islamic principles that stresses the idea of fairness and gives little weight to legal precedent.

Although the new bankruptcy law do not change the fundamental religious basis of the system, it does however make matters smoother and more predictable with new procedures and institutions. Case in point: unlike in the past, the new bankruptcy law provides for a committee of experts who will oversee bankruptcy cases.

This could potentially speed up the resolution of long-running disputes such as a $22 billion, nine-year-old impasse over debts left by collapsed Saad Group and Ahmad Hamad al-Gosaibi & Bros Co, opine bankers.

According to Tim Callen, the International Monetary Fund (IMF) mission chief in Saudi Arabia, the IMF’s forecast for non-oil economic growth to accelerate from 1.1% in 2017 to more than 3% early next decade was based partly on the legal reforms. This goes to underscore the significance of this new bankruptcy law.

While in the past Saudi courts have rarely enforced the judgments of foreign courts and arbitration centers against Saudi companies, the Kingdom is gradually changing – it has received 163 applications to enforce foreign judgments worth $667 million in 2017.

Last year, as a measure that underscores the systemic importance of new bankruptcy law, among several successful applications received in recent months, a court in Riyadh enforced a U.S. ruling for a Saudi tourism firm to pay $3.8 million while a court in Jeddah ordered a Saudi miner to pay a Chinese firm $10.1 million, said the Justice Ministry without naming the firms.

However, concern over Saudi’s legal system are still lingering. A lot depends on how quickly and consistently courts can implement new laws; for example, the bankruptcy law has yet to be tested in practice.