The legal entity is a key economic pillar for the development of societies. The continuity of a company's legal personality is linked to the existence of legal grounds for its continuation. The company shall be liquidated when any legal reason arises for the termination of the company, whether by the end of a specified period, agreement of the partners, shareholders’ agreement on its dissolution, or a judicial ruling for its dissolution. This process involves examining the company's financial position, settling debts, and determining the responsibilities of the partners or shareholders.
The procedures for liquidation and how it is carried out are governed by Royal Decree No. (M/132) dated 1-12-1443 H, which we will discuss further as follows:
Reasons for the termination of a company's legal personality.
Obligations of partners or shareholders upon the dissolution or termination of the company.
Required conditions for liquidating companies under Saudi law.
Liquidation procedures and managing the company during the liquidation period.
Appointment and removal of the liquidator, the duration of liquidation.
Powers of the liquidator.
Inventory of assets and liabilities, settlement of company debts.
Consequences of the completion of the liquidation process.
The legal personality of a company expires for various reasons:
The legal personality ceases to exist either by the lapse of the specified period of the company`s existence or it expires by the agreement of the partners or shareholders on its dissolution. Alternatively, it may be terminated by a final court judgment of dissolution or nullification, taking into account the specific reasons for the termination of the legal personality for each legal form of the company.
Obligations of Partners or Shareholders Upon the Dissolution or Termination of the Company:
- Before deciding to dissolve the company, the company's directors or board members are obliged to prepare a statement examining the company's conditions and financial position. This statement should assess whether the company's assets are sufficient to repay its debts by the end of the specified liquidation period and prevent the company from defaulting according to the bankruptcy law. This statement must be presented within 30 days of its preparation to the partners, general assembly, or shareholders for a decision on the company's dissolution.
- If it is determined that the company's assets are insufficient to cover its debts by the end of the liquidation period or that the company is insolvent according to bankruptcy law, the partners, general assembly, or shareholders are not allowed to decide on the company's dissolution. Otherwise, they will be jointly liable for any debt remaining with the company.
Conditions Required for Liquidating Companies under Saudi Law:
Article 244 of the Saudi regulations stipulates the conditions necessary for the liquidation of companies as follows:
- The company shall be liquidated upon the expiration of its specified duration as determined by Saudi law. The partners or shareholders are responsible for initiating the liquidation process, ensuring that the company retains its legal personality to the extent necessary for the liquidation.
- In the event of the termination of the company's legal personality, whether due to the expiry of the term, agreement of the partners or shareholders, or a judicial ruling for dissolution, partners, shareholders, directors, or board members are obligated to prepare a financial statement and assess the company's financial position and solvency for debt repayment unless prepared previously and not exceeding 30 days from the date of preparation.
- If, upon the company's termination, its assets are insufficient to cover its debts or it is insolvent according to bankruptcy law, the company must seek legal recourse to commence the liquidation process in accordance with the bankruptcy law.
- If the company is liquidated in contravention of the provisions of Saudi law, partners, shareholders, directors, or board members will be jointly responsible for any outstanding debts of the company.
- A non-profit public company cannot be liquidated without obtaining approval from the Saudi Ministry of Commerce.
Liquidation Procedures and Company Management during the Liquidation Period:
Unless otherwise specified in the company's Articles of Association or Memorandum of Association, or unless partners or shareholders have agreed on the liquidation process upon the company's termination, the liquidation shall proceed in accordance with the provisions of Saudi law.
Company Management during the Liquidation Period:
Upon the company's termination, the authority of the company's director or board of directors ceases, but they retain the right to manage the company for the duration of the liquidation process. The liquidator assumes authority in dealing with third parties until a liquidator is appointed.???Please rephrase, not clear
The company's general meetings continue to be operational during the liquidation period, with their role limited to exercising their functions within the scope that does not conflict with the liquidator's responsibilities.
Partners or shareholders have the right to access the company's documents and records during the liquidation period in accordance with Saudi regulations, the company's Articles of Association, or Memorandum of Association.
Appointment of the Liquidator for the Company and Removal, and Duration of Liquidation:
Number of Liquidators and Liquidation Period:
A single or multiple partners, shareholders, or others are responsible for the liquidation process. The liquidation period shall not exceed 3 years in accordance with Saudi regulations, and the duration cannot be extended without a competent judicial order.
Appointment of the Liquidator:
The liquidator is appointed by a decision of the partners, general assembly, or shareholders according to the provisions in the amended Articles of Association or Memorandum of Association of the company within a period not exceeding 60 days from the company's termination. If the liquidator cannot be appointed within that time frame, the appointment will be made by a decision of the competent judicial authority upon a request from one of the partners, shareholders, or any interested party.
Unless the company's termination is a result of dissolution or nullification by a final judicial ruling, the liquidator is appointed by a decision of the relevant judicial authority issuing that ruling.
Before appointing the liquidator, the competent judicial authority requests partners, shareholders, directors, or board members to prepare a detailed financial statement on the company's financial position, solvency for debt repayment, required financial statements, or accounting records, verifying that the company's assets are sufficient to pay its debts and that it is not insolvent according to bankruptcy law within a period not exceeding 30 days from the date of the request. If the judicial authority determines that the company's assets are insufficient and it is insolvent according to bankruptcy law, the competent authority takes necessary steps to initiate the liquidation process under the bankruptcy law.
The appointment of the liquidator decision must specify their authorities, remuneration, any imposed restrictions, and the necessary duration for liquidation.
Registration of the Appointment of the Liquidator: The decision on appointment of the liquidator must be registered with the commercial registry. The appointment and liquidation proceedings are only valid against third parties from the date of registration.
• Removal of the Liquidator:
- The liquidator is removed according to the manner of their appointment. However, the competent judicial authority may, upon a request from any of the partners, shareholders, or creditors of the company and for valid reasons, decide to remove the liquidator.
- The decision or ruling to remove the liquidator must specify the replacement and appoint a successor, outlining their authorities, duties, and remuneration.
• Multiple Liquidators:
In the case of multiple liquidators, they must work collectively, and their actions are valid only through unanimous agreement, unless their appointment decision specifies otherwise or unless authorized by the appointing authority.
• Powers of the Liquidator:
The liquidator must adhere to the limitations specified in the appointment decision. They represent the company in legal proceedings, arbitration, and dealings with third parties. The liquidator performs all tasks required for the liquidation process, especially converting the company's assets into cash, including selling movable or immovable properties through auctions or any other means to ensure the best possible price.
The liquidator may sell the company's assets in bulk or offer them as a share in another company with permission from the appointing authority. The liquidator cannot initiate new activities unless necessary for completing previous tasks.
The company is bound by the actions of the liquidator within the scope of their powers.
The powers of the liquidator expire upon the completion of the liquidation process or the liquidation period unless extended according to Saudi regulations.
• Inventory of Assets, Liabilities, and Repayment of Company Debts:
The company's directors or board members must provide the liquidator, upon their appointment, with the company's records, documents, clarifications, and requested information.
Within 90 days of commencing their duties, the liquidator must conduct an inventory of the company's assets, rights, and obligations, and request the company's auditors to issue a report on the inventory. The appointing authority may extend this period if necessary.
At the end of each financial year, the liquidator prepares financial statements and a report on the liquidation process, including observations, reservations on liquidation activities, any delays, proposals to extend the liquidation period. The liquidator submits a copy of these documents to the commercial registry for approval by partners, general assembly, or shareholders according to the company's Articles of Association or Memorandum of Association.
If the liquidator finds the company's assets insufficient to repay its debts, they must notify the partners, shareholders, and creditors of the company and initiate liquidation proceedings according to the bankruptcy law.
The liquidator is responsible for repaying the company's debts based on a priority order, arranging necessary payments if they are due at a later time or subject to dispute. Debts resulting from liquidation take precedence over other debts.
After repaying debts, the liquidator redistributes the value of shares or stocks to partners or shareholders, and surplus is distributed according to the provisions of the company's Articles of Association or Memorandum of Association. If not specified, surplus distribution is based on their respective shares or stocks.
If the net assets of the company are insufficient to cover the value of partners' shares or shareholders' stocks, losses are distributed among them according to the specified loss-sharing ratios.
Upon liquidating a non-profit company, the liquidation proceeds are allocated to the individuals or non-profit entities designated in the company's Articles of Association or Memorandum of Association. If the net assets are a result of donation, bequest, or endowment, they are allocated as specified by the donor. If not specified, after obtaining ministry approval, the funds are allocated to non-profit entities aiming to achieve similar fields or purposes as indicated for those funds, subject to spending within the designated areas.
Results of the Liquidation Process:
The liquidator is required to submit a detailed financial report on the activities carried out during the liquidation process. The liquidation concludes upon approval of this report by the appointing authority.
The liquidator must register and record the completion of the liquidation process with the commercial registry. The liquidation period is considered concluded only when the company's registration is erased from the commercial registry.
The liquidator is accountable for compensating any damages that affect the company, partners, shareholders, or third parties due to exceeding their authority or errors during their duties.
The liability may either be personal, attached to the liquidator individually, or joint among all liquidators in case of multiple liquidators, provided that the decision was unanimous.
Except in cases of forgery and fraud, claims against the liquidator are not admissible after five years from the date of erasing the company's registration at the commercial registry.
In conclusion, the liquidation process necessitates compliance with the legal and regulatory requirements outlined in Saudi laws, including disclosing the company's financial status during the liquidation, settling debts, distributing asset proceeds to partners or shareholders, and ensuring the liquidator's accountability towards partners or shareholders.
We, as a legal institution with expertise in Saudi laws and regulations, are dedicated to facilitating all aspects related to the liquidation and dissolution of companies within the Kingdom of Saudi Arabia for Arab and foreign investors.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.