insolvency

insolvency

Insolvency in the legal and regulatory concept is: “the state of a debtor whose funds and property are not sufficient to meet his debts due.” In other words, it is a person’s inability to pay off his debts because he does not have the money or assets to cover the value of those debts.

The Saudi regulator has primarily addressed “insolvency” provisions in the enforcement system, to protect debtors found to be genuinely unable to pay, while at the same time preserving the rights of creditors. Below is a detailed explanation of its most important provisions:

How is insolvency proven?

According to Article (Seventy-Seven) of the Enforcement Law, if the debtor does not pay the debt and claims that he is “insolvent,” the enforcement judge shall consider the insolvency lawsuit. The judge shall not prove insolvency until the following measures have been taken:

• Complete the procedures for disclosing and tracking the debtor’s funds to ensure that he does not hide any property.
• Interrogation of the debtor.
• Announcing the insolvency application in a daily newspaper to open the way for creditors or those with information to object.

Implications of proven insolvency

If it is proven to the enforcement judge that the debtor is actually insolvent and an instrument is issued to that effect, several effects will result as stipulated in Article (Eighty-One) of the Enforcement Law:

• Seizure of future funds: The judge issues an order to the responsible authorities to seize any funds that may be returned to this debtor in the future.
• Credit Registration: Credit information registration companies (such as: SIMAH) are notified of the debtor’s insolvency, which affects his credit record and prevents him from borrowing or obtaining financing.
• Preserving the creditor’s right for the future: Proof of insolvency does not cancel the debt. Rather, the creditor has the right, whenever he knows that the insolvent debtor has received money in the future, to submit the same executive document to the enforcement judge to fulfill his right.
• Release: If the debtor is imprisoned for a civil debt and is proven insolvent, he or she will be released due to the futility of imprisoning the incapacitated person.

Insolvency 

Fraudulent insolvency (evasion of payment)

The regime warned against exploiting insolvency claims to evade debt. Article (80) of the Enforcement Law stipulates that if the judge finds that the insolvency lawsuit is “fraudulent” (i.e. that the debtor hid his money, or smuggled it out, or that his inability was due to his deliberate transgression and negligence), the judge shall prove this fact, and order the suspension of the accused debtor and refer his file to the Public Prosecution to file a criminal lawsuit against him and apply penalties against him.

What is the difference between insolvency and bankruptcy?

Many people confuse the two terms, and the fundamental difference between them in the Saudi system is:

• Insolvency: It often applies to a debtor (civilian/natural person) who does not practice a commercial business, and his cases are heard in enforcement courts based on the enforcement system.
• Bankruptcy: It applies to (companies, merchants, and investors) who practice economic activities aimed at profit, and is regulated by the specialized “bankruptcy system”, and aims to restructure or liquidate the merchant’s activity in a way that preserves the rights of creditors and reduces damage to the economy.

For law and legal consultations..Contact the office of lawyer Abdul Majeed Al Rashid.