Companies and Corporation Liquidation and Bankruptcies: With a Focus on Saudi Arabia Essay

Introduction

Incorporation can be termed as the setting up of a (new) institution that is given a charter thereby acquiring independent-legal-entity recognition with its liabilities being discrete from its pioneers. Different forms of corporations exist in the field of business. Corporations come into existence as a result of corporate law. Their rules and regulations balance the different interests of all the stakeholders, their management whose task is to operate design the operations of the corporations, creditors who offer their resources in form of loans to the corporations, employees who work for the corporation, and the shareholders who put their resources as investments into the corporation’s operations (Seligman et al 404). A corporation is also known as a limited liability company. In all cases, incorporation is abbreviated as Inc. incorporated entity becomes separate from its owner and the owner cannot be held responsible for any liability incurred by the incorporated entity. When a business entity is incorporated, a certificate of incorporation is issued by the relevant authority to the owner. When a company is to be dissolved, the incorporation procedure is reversed. After the dissolution, a certificate of dissolution is issued to the owners. Many individuals incorporate their businesses to avoid liabilities that may arise due to the businesses’ financial failures. The advantages that incorporation may accrue to owners include saving money in terms of taxes, providing business flexibility, and also incorporation makes it easier to access outside investment (Welch and Turezyn 1035).

In deciding to dissolve a corporation a certificate of election to dissolve the corporation must be filed. The election to dissolve the corporation may be initiated by the written assent (of at least half of the outstanding shares of the corporation to be dissolved), in case there are no shares issued, the board of directors may give the nod. The dissolution of a corporation may also be ordered by a state through a court of law.

Saudi Arabia is the Islamic Kingdom governed by laws derived from Sheria laws. The Kingdom uses Sheria as the law of the land. Saudi Arabia’s laws on companies and corporations state that although a company may be formed in Saudi Arabia if it is not completely owned by Saudis then it may not be allowed to enjoy some specific privileges. It is required that the entire commercial and industrial establishment must be taken through the registration process in the commercial register; all the companies and other corporations in the Kingdom of Saudi Arabia must operate under Sheria laws without any exception. The incorporation of a company in the Kingdom of Saudi Arabia is said to be tedious and involving. Having the knowledge of how a business entity can be incorporated, it is also crucial to understand the way the incorporated business can dissolve. The paper will be using this as a thesis around which it develops its arguments on the dissolution of a corporation (Zweigert pp5-22).

On matters relating to bankruptcy, Saudi Arabia’s laws are not extensive. The application of the bankruptcy laws has never even been tested. The laws are not detailed. In most cases, settling bankruptcy issues is left to the parties involved. Mostly it is the Commercial Court that makes the decision on the issue (World Bank 37).

Methods by Which a Company May Be Brought To an End

In the Kingdom of Saudi Arabia, the Commercial Court Law only applies to businesses and companies. One of the creditors (or the bankrupt) can make a bankruptcy announcement. After the declaration, the court then examines the books of account of the company to be declared bankrupt. After the examination, the court decides on the worth of the particular request. Once the court decides on the entity’s bankruptcy, it will order that the bankrupt be imprisoned (and the wealth or assets be seized; this also includes the nullification of any form of action or transaction with regards to the assets of the entity being declared bankrupt). According to Saudi commercial laws, the bankrupt is only released from jail after all the debts are duly paid.

The council that may be assigned to engage with bankruptcy concerns is made up of individuals as per the court’s appointment. The court appointee acts as the secretary to the council. The creditors can then appoint two representatives to the Council. The council has an obligation of forwarding all the assets of the bankrupt entity to the court, total debts owed by the firm as well as the total debts owed to the enterprise. The proceeds are shared amongst the creditors. In cases where a creditor may not accept payment through the assets of the company or entity declared bankrupt, then the creditor’s intended payment is kept with the Council. Up until the time that the creditor agrees to settle the payment or passes on, the total amount will be under the Council’s custody. In a situation where the creditors are not fully paid by the bankrupt company or entity, they can again litigate against the company whenever they realize the company can pay them. The company or commercial entity charged with bankruptcy can be acquitted after 15 years whether it has paid all the debts or not and after it has settled all its debts (Al Malik para1-9).

The Saudi commercial law can also be applied through the application of the Bankruptcy Preventive Settlement Law provision. This provision is for the sole discretion of a company (or any other business entity) to implement the (Preventive Settlement) Law. Unlike in the case of Commercial Court Law where the creditors are the ones to initiate proceedings, it is the prerogative of the company or business facing bankruptcy to order or make a request for the implementation of the Preventive Settlement Law provision. Any company or any other business entity that views itself to be unable to settle its debts is allowed to appeal for the settlement with its creditors. The appeals are submitted to certain specially set committees. These committees are specifically set to carry out such functions at the “Chamber of Commerce and Industry” in line with the setup procedures and regulations as stipulated by the (executive) regulation of the aforementioned provision. In such a situation, the company of business entity that has filed for bankruptcy is given legal protection when the creditors are not cooperative with the special committees (Al Malik para5-12).

If the completion of the settlement becomes problematic and the company or business entity also realizes that its application for the application of Preventive Settlement Law provision will serve its interest, then such an entity is at liberty to approach the Board of Grievance, which in Saudi context changed to Administrative Court. The Administrative Court will then summon the creditors to brief them about the bankruptcy preventive arrangement. The company or any other commercial entity applying for such an arrangement must affirm in the petition the factors that led to the destabilization of its financial status. The firm is as well obligated to state the terms it intends for a concession and the means of implementing such a compromise. A delegate may then be appointed by the Board of Grievances to establish the financial position of the company or business entity. As much as the bankruptcy procedure may still be underway, the Saudi Commercial laws still recognize that the entity filing for the application of Preventive Settlement Law provision may still carry on with its business activities. The only change is that the business or company will be operating under the supervision of a Board of Grievances appointee. However, the arrangement is only binding (to all creditors) if two-thirds of the creditors give it a nod. When the two-thirds support it, all other remaining creditors must comply with the decisions made by the Board of Grievances or the Administrative Court even if they might not have participated or supported the proceeding (Law Updates para 1-8).

There are many reasons a company may decide to wind up. These may include the company has completed its mission and does not find reasons to continue existing, the decision by the stakeholders to have the company wound up or the government may order, through the court, for a company to be wound up. As per the law, liquidation is a legally accepted course through which an organization’s dealings are brought to an end. In such a case the assets (and other of the company’s property) are reallocated as per the documented article of association. Even though dissolution is the last stage of liquidation, in most cases it is used interchangeably with winding up or liquidation. The motive behind this liquidation is to ensure that all the affairs of the firm are suitably and lawfully dealt with. In properly dealing with the company affairs, it is ensured that all the contracts of the company are duly completed included the contracts of the employees. In the process, the company’s businesses are stopped, any legal dispute is settled, all the assets of the company are settled, all the company debts are collected and any creditor of the company is paid and share capital is returned to the shareholders. Any surplus that may remain after all creditors have been paid and shareholders given back their capital is redistributed to shareholders. When all these activities have been done the liquidator will have the responsibility of applying to the relevant authority to remove the name of the liquidated company from the register of companies. In this case, the company will stop existing immediately after the name is removed from the register. Sometimes liquidation takes place in the case where the clients, agency, or custom-duties-collection responsible authority sets up the final calculation of the duties. There are grounds on which the application for the liquidation of a company be applied for (Banker’s Magazine pp1396-1407). These grounds are:

1. When it is found that it would be just and equitable to wind up the company
2. When all the stakeholders of the company have made a decision and arrived at an agreement to dissolve the company
3. If it has not complied with new company legislations and is likely not to comply with such regulations.
4. If the company has been incorporated and no trading certificate issued within the first twelve months of incorporation.
5. When the company has not started operating as a business entity within the stipulated time period.
6. When the company in question is does not have the capacity to pay for its debts whenever they are due.
7. When the company no longer serves the purpose for which it was formed
8. When the company has not renewed its registration after the expiry of its trading license.
9. A company may also be liquidated in order to recover investments put into its operation.
10. Failure to hold statutory meetings or to produce its annual reports and financial returns as may be required.

When a company is being wound up or brought to an end, there are effects that accompany it. Once a company or a corporation has been put under liquidation, the creditors to such a business entity are lost their ability to continue with actions or recoveries against the corporation or company. The directors of the company or the corporation are not able to continue with the management of the operations of the entity. At this point, the only obligation they have is that of furnishing the liquidator with information about the performance position of the company or corporation.

In reference to the Kingdom of Saudi Arabia, the dissolution or liquidation of a company is well described in the Kingdom’s company laws. The laws are not applicable to insolvent companies until the company arrives at an agreement with its creditors or the declaration through the board’s grievances declaring the bankruptcy of the company and thereafter appointing the company’s liquidator. According to Saudi law, a company may be liquidated by an agreement of all the shareholders, or the grievances board may give an order after an application by any creditor or any other person interested. According to the company laws, the board of grievances has the power to invite the shareholders and let them get accept voluntary liquidation or compulsory liquidation.

Voluntary liquidation

This is a liquidation type with huge support from the shareholders. A voluntary liquidation may take place in two forms. The first is where directors of the firm may settle on liquidating it but with the shareholders’ nod. In this case, the directors must declare that the corporation will be able to fulfill all the obligations it has to the creditors within a statutory period. When the company finds itself in this scenario, it is said to be solvent. Creditors’ voluntary liquidation is the other form where the directors choose consulting (insolvency) professionals for assistance in liquidation in a situation where the firm may fail to accomplish its obligation to the creditors. This is the most familiar form of voluntary liquidation method. For a company to be placed for Creditors’ Voluntary Liquidation there must be a meeting by the company or corporation’s directors in which it is resolved that a legal insolvency professional should be consulted to assist in the formation of all shareholders and creditors meeting. The initial meeting is held for the members of the company shareholders. It is during the proceedings of such a meeting that a resolution is passed to place the company under Voluntary Liquidation. The directors and the company shareholders and or members may also decide to appoint the insolvency professional as the liquidator. The liquidator assumes the firm and the control of its assets after the appointment (Clayton 145).

Just as it has been discussed earlier, the liquidator has the responsibility of determining both the debts the corporation owes to creditors and owed to it. It then collects the company debts after which it undertakes to distribute the assets giving top priority to the creditors than any other entity with interest in the company or the corporation.

Compulsory liquidation

Placing a company or corporation under compulsory liquidation is an indication that it has been difficult and almost impossible for the creditors to recover their due from the company. It may also be an indication that a court order has been issued demanding that a company or corporation be placed under liquidation. The procedure of placing a corporation under compulsory liquidation starts after creditors have exhausted all the available legal ways in attempting to recover their dues. In most cases, for this to happen the creditors must have entered into a payment deal with the company or corporation and the latter has failed to honor such a deal. It is in these circumstances that the creditors may choose to seek court intervention through a petition.

The impossibility of the creditors to recover their money from a company or corporation may arise due to insolvency. When a company or business entity becomes insolvent it implies that such an entity cannot pay for its debts every time they are due. The creditors can present a petition (in court) affirming that the company in question is unable to pay them a specified sum of money. Shareholders can as well submit the petition.

In many cases, a winding-up order can still be issued against a corporation even though the corporation may not be having any asset or when it disputes the amount being claimed by the creditors. Nonetheless, it is important that any form of a dispute the company may have with the creditors should be resolved before the court issues a winding up order. In the initial stages of compulsory liquidation, an official receiver is appointed by the court to manage the affairs of the company under liquidation. The duty of the official receiver is to conduct an investigation of the affairs of the company and report to a relevant authority. When the court issues a winding-up order, it notifies the official receiver who in turn informs the company directors. However, the company directors can apply to the court to reverse the order if they have strong and convincing reasons that the company should either not be wound up or when the company is still able to meet its creditors’ obligation. It is important to note that in the process of undertaking compulsory liquidation, all the employees of such a company or corporation will be dismissed and compensated either immediately or later as the company continues to be wound up.

When the official receiver takes over the control of the company, the directors may or relevant company representatives may be asked to attend an interview with the official receiver either immediately or as may be scheduled by the receiver. The interview may take place within the company premises or in the receiver’s office. At the interview, the directors will be required to produce hand over to the receiver all the company books, business documents, and records that are in their possession. They will also be needed to give full details regarding the total company assets and liabilities and also disclose to the official receiver if there is any individual, organization, or any other corporate organization in possession of the company’s assets. In addition to all these, the directors will be required to provide the official receiver with information about the company’s business and failure and also make available the sworn financial statement of the company. Directors from liquidated firms can become directors to other companies. Where the director is statutorily prevented from participating as a director of another company, he or she must apply for the court to grant him or her permission to take part in the promotion of a company, act as a director of another company, or form or manage a new company. On matters relating to bankruptcy, Saudi Arabia’s laws are not extensive. The application of the bankruptcy laws has never even been tested. The laws are not detailed. In most cases, settling bankruptcy issues is left to the parties involved. Mostly it is the Commercial Court that makes the decision on the issue.

When the process of wrapping up a firm is over the official receiver can now apply to be discharged from the liquidator position. This may happen after the receiver has requested in writing for the company to be removed from the register of companies. After the official liquidator makes the application and the firm deregistered, it becomes inexistent. To make notice about the inexistence of a liquidated company, the official receiver may call for a meeting of all the stakeholders and announce the company’s existence. As the company comes to an end, the director may be forced to contribute the total assets of the corporation if in any case, the director misappropriates the funds of the company or when the director has led the company to engage in fraudulent business activities. Should the director be a shareholder (of the insolvent firm), then the director could be requested to make payments for the unpaid shares. Another case where the director may be held personally accountable is the case where the director acted as a guarantor to the company. In such a case the director agrees to pay the debts if the company is not able to. When the creditors demand payment, the director is liable to pay the full amount with regards to the terms and conditions of the guarantee.

In Saudi Arabia, the legislative treatment of the process of liquidation of a corporation is embodied in the Company Law. The laws that relate to the liquidation of companies and corporations in the Kingdom of Saudi Arabia are brief and never extensive. The laws do not take care of the many issues that may arise to lead to liquidation. The laws are inapplicable to insolvent companies and corporations until the corporation gets into an agreement with the creditors or the Board of Grievances on how to handle the insolvency issues. The Saudi’s Commercial court of Law only covers personal insolvency as opposed to corporate insolvency. This makes it unclear the extent to which Commercial Court Law applies to the issues of corporate bankruptcy or insolvency. During proceedings on bankruptcy, the Commercial Court Law tends to rely very much on the principles of the Islamic laws which are the reason it covers personal insolvency as opposed to corporate insolvency (Finch pp375-381).

Priority of payment when winding up a company

It is becoming more popular for business entities and individuals, otherwise known as creditors, to file winding-up petitions in court as a way of collecting the debts owed to them by a company or corporation. Once a winding-up petition is granted, the petitioners may not receive any returns. When the liquidation proceedings are initiated by the court, all the company accounts are immediately frozen and no payment can be made to any creditor without straight permission from the court. The fact that a creditor succeeds in petitioning the court to initiate the winding up of a company or a corporation does not make it to be treated as a priority creditor. The liquidator takes center stage. Nonetheless, when a business entity or company becomes insolvent it is always unlikely that the entity has funds to pay for its debts. This implies that the unsecured creditors may get little payment or no payment depending on the available amount recovered from the company’s assets or debtors (Hicks 621).

Conclusion and Recommendations

Saudi Arabia is the Islamic Kingdom governed by laws derived from Sheria laws. The Kingdom uses Sheria as the law of the land. Saudi Arabia’s laws on companies and corporations state that although a company may be formed in Saudi Arabia if it is not completely owned by Saudis then it may not be allowed to enjoy some specific privileges. It is required that the entire commercial and industrial establishment must be taken through the registration process in the commercial register; all the companies and other corporations in the Kingdom of Saudi Arabia must operate under Sheria laws without any exception. The incorporation of a company in the Kingdom of Saudi Arabia is said to be tedious and involving. Having the knowledge of how a business entity can be incorporated, it is also crucial to understand the way the incorporated business can dissolve.

Incorporation is a legal process through which a company or business body becomes an independent entity. In most cases, corporations are referred to as companies. Certain corporations operate with fictitious names yet they are incorporated. An example of such a company is Microsoft Corporation which instead operates under the name “Microsoft”. An incorporated business venture holds the right to sue as well as to be sued. The firm’s owner is not entirely liable (to the organization’s liabilities). The company becomes a debtor to the owner due to the capital input contributed to its operations by the owners. When a business entity is incorporated, a certificate of incorporation is issued by the relevant authority to the owner. When a company is to be dissolved, the incorporation procedure is reversed. After the dissolution, a certificate of dissolution is issued to the owners. Many individuals incorporate their businesses to avoid liabilities that may arise due to the businesses’ financial failures. The advantages that incorporation may accrue to owners include saving money in terms of taxes, providing business flexibility, and also incorporation makes it easier to access outside investment. Incorporation is seen as the “birth” of a company or corporation and liquidation is its “death”.

Wrapping up a firm is the practice by which a company’s existence is brought to an end. There are several ways through which a company’s operations may be terminated. One of them is voluntary liquidation which is a type of liquidation that has the support of most or all of the shareholders. A voluntary liquidation may take place in two forms. One is when the directors of the company choose to liquidate the firm with the shareholder’s nod. In this case, the directors must declare that the corporation will be able to fulfill all the obligations it has to the creditors within a statutory period. When the company finds itself in this scenario, it is said to be solvent. Creditors’ voluntary liquidation is the other form where the directors choose consulting (insolvency) professionals for assistance in liquidation in a situation where the firm may fail to accomplish its obligation to the creditors.

Compulsory liquidation is another method. Here the creditors may initiate the process of wrapping up through a court petition. Placing a company or corporation under compulsory liquidation is an indication that it has been difficult and almost impossible for the creditors to recover their due from the company. It may also be an indication that a court order has been issued demanding that a company or corporation be placed under liquidation. The procedure of placing a corporation under compulsory liquidation starts after creditors have exhausted all the available legal ways in attempting to recover their dues. In most cases, for this to happen the creditors must have entered into a payment deal with the company or corporation and the latter has failed to honor such a deal. It is in such a scenario that the creditors may try court involvement.

When winding up a company, it is important to seek professional advice before starting the process. In many cases, managers and directors may realize that the corporation is facing a liquidation suit in court. Directors need to be aware of potential factors that may lead to the corporation’s winding-up order or decision. To avoid premature winding up, the company needs to consider reducing the number of debts it owes to creditors. The corporation may stop buying goods and services on credit, it may decide to downsize its human resources reduce operation costs and also focus on paying already existing creditors. A corporation on the verge of liquidation can hire most of its employees on a contract basis. This will ensure it only keeps workers for the period when it has more business activities to undertake thus avoiding unnecessary loss-making as well as disputes.

Works Cited

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Finch, Vanessa. Corporate insolvency law: perspectives and principles. Edinburgh: Cambridge University Press, 2002.

Hicks, Andrew. Cases and materials on company law. New York: Oxford University Press, 2008.

Law Updates. “Commercial Rules for Bankruptcy in The Kingdom of Saudi Arabia.” Newsweaver, 2009. Web.

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Zweigert, Drobnig. International Encyclopedia of Comparative Law/Installment 24. San Marino: Brill Archive, 1988.