New Saudi Bankruptcy Law ... A Boon for SMEs?!

Saudi Arabia's King Salman has approved a new bankruptcy law. {Download Saudi BK final 2-2018} Commentators have heralded this new law as a boost to economic reforms, in particular to the SME sector, but I have some serious doubts about this. A member of the Shura Council, the King's advisory body, is quoted in one report as explaining "[t]he idea is to simplify and institutionalise the process of going out of business so new organisations can come in." That latter part--new businesses coming in--requires individual entrepreneurs, either the one whose business just failed or new ones, to embrace the major risks of starting a new venture. In either event, a crucial aspect of an effective SME insolvency law, and I would argue THE most crucial aspect, is a fresh start for the failed entrepreneur (and a promise of such a fresh start for potential entrepreneurs). This fresh start is promised and delivered most effectively by provision conferring a discharge of unpaid debt. The new Saudi law all but lacks this key provision. Article 125 on the bottom of page 50 is quite clear about this: "The debtor's liability is not discharged ... for remaining debts other than by a special or general release from the creditors." It seems highly unlikely to me that creditors will offer such releases with any frequency. Yes, the new law provides a useful framework for negotiating restructuring plans, and the Kingdom deserves praise and respect for finally adopting such a measure. But the lack of a law- imposed discharge following liquidation when creditors are not willing to agree is not a foundation for a thriving SME recovery (though I understand and respect the reason why the Saudi law lacks an imposed discharge). Most SMEs are not enterprises--they are entrepreneurs; they are people, not businesses. Leaving these people to bear the continuing burden of unpaid debt does not, in my mind, reinvigorate failed entrepreneurship or entice others to join the movement. I'm afraid the effects on the SME sector of this law will be muted at best. I hope I'm wrong. 

Comments

[Abdullah]

Thank you for your article. It also differentiates between bankruptcy and insolvency. In the United States, chapter 13 and 7 regulate individuals' bankruptcy while chapter 11 regulates businesses' bankruptcy. In the Saudi new law, an individual seems not to be protected under the new law since the new law considers that bankruptcy law should only protect businesses not individuals; thus, it considers individuals out of its scope. It do not know if this also seems problematic.

[Jason Kilborn]

Thanks, Abdullah! Though the definitions have been reshuffled a bit from the Ministry's earlier proposal, the law still formally includes within its scope all persons, juridical and natural (companies and individuals), who owe debts. I agree entirely that the law will likely be of little assistance to natural persons (including those who bear liability for the debts of their juridical-entity businesses), as few will successfully engage a negotiation process to release unpaid debt. The notion that this is a law for SMEs thus seems rather obviously inaccurate. It is clearly designed to provide a negotiating platform to large, multinational business actors. It's a nice first step, I guess.