Debt Collection in Saudi Arabia

• Late payment is quite in Saudi Arabia, as with all the GCC nations. In fact, the statute does not control late payment, while interest on late payment is forbidden, so settlement expenses can not be collected from the debtor unless the parties have reached a specific agreement. As a result, debtors are often tempted to negotiate discounts in return for prompt payment.

• Regional cases are very long, costly and ultimately unpredictable, since the courts are not constrained by a precedent structure and have wide flexibility in implementing Shari'ah principles to specific circumstances. Furthermore, each trial may be split by several weeks or months, so time management standards are rarely fulfilled by the courts.

• Middle East insolvency regulations are not as complex as in other countries, and that is demonstrated by the non-existent corporate rescue system in Saudi Arabia.

1. Summary

1.1. General financial information

1.1.1. Save for companies listed on the stock exchange (Tadawul), financial information on private companies is not available to the public in Saudi Arabia and there are no third-party suppliers able to access those information.

1.1.2. However, record-keeping in Saudi firms is generally poor by international standards and therefore little emphasis should be put on financial information obtained from such businesses, unless they have been checked by a foreign accounting firm as compliant with international accounting standards.

1.2. Key legal structures

1.3.1. Saudi Arabia is a heavily regulated commercial environment where the operation of the company will decide on which mechanism to depend.

1.3.2. Therefore, where one of the parties is a foreign investor, the operation can determine whether the new business can be 100 percent foreign-owned or whether a Saudi partner is needed, while certain practices are completely excluded from foreign investment. According to the above, Saudi Arabia's corporate structures include:

• Limited Liability Companies(LLCs), where the owners 'responsibility is limited to the amount of their initial investment.
• Foreign company branch departments, where the local entity's debts may be levied explicitly against the foreign company.

• Limited liability agreements where all partners are jointly and severally liable to third parties (including professional companies).

• Establishments, which are in effect sole merchants where the establishment's debts may be explicitly levied against the owner.

1.3. Regulatory framework

1.3.1. Saudi Arabia is a Sunni Islamic State which is founded on Sharia law. Significantly, unlike other GCC nations, Saudi Arabia does not have a civil code specifying the rights and obligations regulating parties' relationships in their trade. Hence, these rights and obligations are explicitly defined through comparison to Shari'ah.

1.3.2. Saudi Arabia's rule is derived, in particular, from the main Islamic religious scriptures (the Qur'an and the Sunna) and, to a lesser extent, from readings and subsequent writings on those documents. Four jurisprudence schools can be applied to decide cases before the courts, but Hanbalischool is the most dominant. Parties to commercial contracts will generally be held by this school to the term they have agreed upon, unless such terms offend the principles of Shari'ah.

1.3.3. The legal system is based on first-instance Shari'ah trials, Cassation Trials and a Supreme Judicial Council. Since 2007, changes also created both a Supreme Court and a Specialized Court (Board of Grievances) dealing with government-related cases as well as particular financial, regulatory, insurance and job conflicts. Having said that, the Board will soon lose independence in coping with commercial issues which should come within the authority of the Shari'ah Courts.

1.3.4. Local lawsuits are generally very slow, expensive and uncertain because the courts are not bound by a precedent system and have considerable discretion in applying the Shari'ah principles to specific circumstances.

2. Receiving payments

2.1. DSO - Days Sales Outstanding

2.1.1. Payment terms are on average 30 days, but big secured contracts can reach 60 days, while some sectors would normally work 120 days.

2.1.2. Having said that, as with all GCC states, late payment is common in Saudi Arabia where administrative barriers are often placed in the way of prompt payment (such as requirements for original invoices bearing company stamps, or multiple levels of invoice approval within the debtor's organization).

2.1.3. As a consequence, settlements tend to take place on average within 90 days, and debtors will often try to negotiate debt rebates in return for prompt payment. Constant lender follow-up and dependence on personal relationships are therefore important to control the cash flow.

2.2. Late interests

2.2.1. The very idea of reward contravenes Islamic law (Shari'ah). So interest on late payment in Saudi Arabia is simply prohibited and is not recoverable.

2.3. Costs of debt collection

2.3.1. In Saudi Arabia, legal and other enforcement costs are generally not recoverable, unless otherwise agreed. Such clauses must be drafted with care in order to be enforceable under Sharia law.

2.4. Protecting ownership

2.4.1. Title preservation (RoT) arrangements aimed at retaining possession of property before full payment of the relevant invoice are understood and would therefore not be successful in protecting the interests of creditors.

2.5. Payments

2.5.1. Bank transfers are among the most common means of payment for international transactions since they are quick, safe and supported internationally and domestically by an increasingly integrated banking network. Export sales are typically protected by Export Credit Coverage, which helps minimize the risk of immediate or accidental insolvency of customers.

2.5.2. Additionally, Standby Letters of Credit (a bank guarantees the creditworthiness and repayment ability of the debtor) are often used for export shipping transactions because they provide secure assurances that can be enabled as a 'payment of last resort' if the buyer fails to fulfill a contractual obligation. In fact, the recourse to irrevocable and verified Documentary Letters of Credit (a debtor promises that a certain amount of money will be made available to a recipient through a bank once certain requirements, specifically agreed by the parties, have been met) is gradually becoming depended upon.

2.5.3. Checks are widely used for billing purposes, but the post-dated checks are unconstitutional unlike other GCC nations. In contrast to many countries, checks would also not be considered enforceable in court as debt recognition titles. Exchange bills and promissory notes would be admitted as such however.

2.5.4. Overall, it is advisable to negotiate up to 50 per cent of the amount involved in down payments. Additionally, approximately 20 percent of transactions are paid in advance. Payment by public entities could be subject to significant delays of up to one year.

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3. Collecting payments

3.1. Amicable action

3.1.1. Negotiating. Knowing there is no real conflict over the debt, consultation, and follow-up work performed by professional experts can be a successful way to achieve settlement without going to court.

3.1.2. When negotiating discounts in exchange for prompt payment, care should be taken to ensure that such discounts are conditional upon the effective payment being made on time, otherwise full liability will remain enforceable.

3.2. Legal proceedings

3.2.1. Ordinary proceedings. Only once all amicable settlement opportunities have been exhausted, should formal litigation be considered. The claimant must file a claim with the Grievances Tribunal, which would then call the parties to a trial to evaluate arguments and evidence from the parties before making a decision.

3.2.2. For general debt there are no fast-track proceedings, but where checks have bounced or late payments have been secured by a promissory note, a fast-track procedure is available through the law of enforcement. In this situation, claimants may petition for a settlement immediately to the administrative judge without having to file a lawsuit in the Court of Grievances awaiting a ruling on the grounds of the conflict.

3.2.3. Necessary documents

• Copy of the creditor's and debtor's commercial registration
• Power of attorney
• Contract evidence
• Evidence of the authority of the persons who signed the contract
• Evidence of the debt (e.g. invoices)
• Correspondence relating to the debt (including claims for payment)

3.2.4. Time limitations. There is no statute of limitations applicable to claims gene. There are some time limits on certain particular types of claims (e.g. harm to the cargo), but no such time limits extend to contract-related debts.

3.2.5. Provisional interventions. Arbitral tribunals can not issue orders of this kind.

3.2.6. Appeal lodging.  The first-instance ruling may be challenged against before the Court of Appeal within 30 days. There is also a further appeal, however special leave is required for this and such leave is unlikely to be granted in ordinary disputes.

3.2.7. Enforcing court decisions. Enforcement may be a challenging task, as only relatively recently has the applicable law on enforcement been passed, so it remains largely untested to date.

3.2.8. Duration of a legal action. The Board of Grievances proceedings take at least 12 months to complete and usually longer, whilst enforcement should be completed within six months. Having said that, formal proceedings may be time-consuming in Saudi Arabia because each hearing can be separated by several weeks or months, while the courts hardly comply with the requirements for time management.

3.2.9. Arbitral tribunals should make decisions within a maximum of 18 months but this time limit may be extended with the approval of the parties.

3.2.10. Costs of a legal action. A creditor can ask the court to order the debtor to repay its costs, but a court would not require a debtor to pay the costs of collection or enforcement.

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3. Collecting payments

3.1. Amicable action

3.1.1. Alternate Forms of Dispute Resolution (ADR). The 2012 Saudi Arbitration Act M/34, focused on the UNCITRAL Model Policy, has provided a strong alternative to ordinary legal action. Arbitration is indeed a more straightforward means of settling a dispute insofar as the parties agree to rely on an independent and impartial third party arbitrator, who is given authority to settle their dispute on their behalf.

3.1.2. Arbitration, as an out-of-court mediation process, is very cost-effective, usually eliminates appeals, requires secrecy to be maintained and provides a legal judgment which can then be imposed before the courts if appropriate. Awards awarded under the Saudi Arbitration Act are enforceable instantly.

3.1.3. Foreign forums. Saudi courts will normally assume that any transaction before them which is the topic of a case is subject to Saudi rule. In this circumstance, they will ignore a clause on governing law that refers to any other law. And it would have no effect to try a ruling internationally or circumvent domestic courts.

3.1.4. Enforcement of international awards. Until February 2013 (under Royal Decree M/53 of 2012), compliance cases come within the control of the courts of execution.

3.1.5. Although a foreign court judgment in Saudi Arabia is legally enforceable, in reality international rulings remain difficult to execute in the region. In particular, no foreign judgment will be enforced by domestic courts to the extent that it is incoherent with Shari'ah.

3.1.6. Saudi Arabia is a signatory of the 1958 New York Convention on the Recognition and Compliance of International Arbitral Awards, due to reservation of reciprocity. As such, international arbitral awards received in countries that have also ratified the New York Convention may be applied in Saudi Arabia under the Compliance Act, and a range of national arrangements may also help implement foreign arbitral awards obtained in other GCC nations.

3.1.7. Foreign arbitral awards obtained in countries where no treaty is applicable can also be enforced theoretically, however this will be much more difficult. As for judicial decisions, no international arbitral award will be applied by the Saudi judiciary insofar as it is incompatible with Shari'ah.

4. Managing insolvent debtors

4.1. Insolvency in Saudi Arabia

4.1.1. Traditionally coping with insolvent debtors, Saudi Arabia lacks a clear, detailed insolvency law. Alternatively, there is an ad hoc layering of different sources that is not always straightforward to resolve which leaves some of the most basic issues that insolvency laws appear to be difficult to answer simply (e.g. the lookback time during which a liquidator may question transactions before claiming insolvency and the conditions to do so).

4.1.2. For example, the main guiding principles are Shari'ah ones, as is generally the case in Saudi Arabia. Apart from that, there is a civil law inspired by the 1931 outdated Commercial Court Rule (CCL) concerned with merchants  insolvency.

4.1.3. There are then bankruptcy protection arbitration rules, equivalent in some ways to what English attorneys might term a 'contractual agreement,' although never (if ever) used because, unlike a real voluntary arrangement, these essentially entail turning the business over to the judge–this may be the only thing the claimant and lender may decide they don't want. Additionally, there are other pieces of legislation that influence specific factors, such as the State Revenue Act that changes the slope of insolvency by choosing government loans, and the Companies Code that regulates other forms of company liquidation.

4.2. Insolvency proceedings

4.2.1. Formal insolvency proceedings are very unusual in law. It is complicated to initiate the process; the CCL publishes a combined balance sheet (negative equity) and cash flow check (incapacity to pay debts) to assess insolvency, but to meet that a creditor's examination generally requires acceptance or a final judgment against the debtor.

4.2.2. Therefore, a long and tough court battle will await an indebted borrower to access a process which is then quite unclear in itself. Legal compliance appears to be on a first come, first served basis with investors trying to locate and add properties via the influential enforcement judges in Saudi Arabia. Outside the lawsuits, local banks also have a strong weapon against loan delinquency by, inter alia, the B-listing mechanism of the Saudi Arabia Monetary Agency (SAMA), which can effectively shut down defaulters from the banking system.

4.2.3. The SAMA Committee has shown to be a wise mechanism to settle bank disputes–including for foreign banks–and to get to the pre-enforcement point of the stamped decision (or facts in a notional insolvency), although it takes time.

4.2. Insolvency proceedings

4.2.1. Out-of-Court proceedings may be established, as long as an arrangement requires this to be so, but there is no established position as to what these agreements may include. When mentioned above, the courts may generally hold trading partners to the conditions of their deals, unless such provisions violate the values of Shari'ah. All arrangements should be written cautiously as such.

4.2.2. Debt restructuring: There are no debt restructuring trials.

4.2.3. Winding up proceedings. The debtor or his creditors can commence liquidation proceedings at any time. The court and the creditors select a board to review the cases, classify the properties of the company, auction them and transfer the profits to the creditors.

4.2.4. Priority rules. The rules of priority usually apply when sharing the debtor's wealth proceeds. Housing loans and the representations of workers would be known as favorable debts that supersedes all creditors. Importantly, creditors to whom debt remains due may personally litigate against the debtor for 15 years, until the debt has been paid in full.

4.2.5. Required documents

• Copy of the creditor's and debtor's commercial registration
• Power of Attorney
• Contract evidence
• Contract authority evidence
• Debt evidence (e.g. invoices)
• Debt correspondence (including claims for payment)