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The most commonly utilised form of company in Saudi Arabia is the limited liability company. While other investment mechanisms are available, notably the joint stock company and the foreign company branch office, foreign investors typically prefer the use of the limited liability company for equity investments as it limits the liability of each partner to its capital contribution in the company.
This article describes the process for voluntarily liquidating a limited liability firm. Corporate legislation in Saudi Arabia is governed by the Companies Law of 1965. Issues of insolvency, bankruptcy and creditor rights are governed primarily by the Commission for Commercial Companies Disputes Settlement panel, which can order compulsory liquidation, and the Bankruptcy Preventive Settlement Law of 1996, which is governed by the Board of Grievances. Insolvent and bankrupt firms follow different processes from those outlined here.
Voluntary liquidation in Saudi Arabia requires that a company's partners proactively dissolve the business, which has the effect of minimising the judicial oversight of the process.
Liquidation is the process by which a company is wound up and its assets redistributed. Liquidated assets will be used first to pay off obligations that arise from the firm's liquidation; second, to pay off existing creditors (and set aside sufficient funds for deferred or disputed obligations); third, to reimburse the partners the value of their shares in the capital; and finally, the remaining surplus is to be distributed among the partners in accordance with the governing documents of the company (or pro-rata if not otherwise specified).
Motives for liquidation may vary and could include reasons such as: the firm having achieved its purpose; the completion of a joint venture between partners; a dispute between partners and a desire to go their separate ways; reorganisation of the company for tax/management purposes; an impending merger; or retirement of a key partner.
Additionally, in the event that losses of the firm reach 50 per cent of its capital, its managers are obligated to invite the partners to a meeting to determine whether to continue the company, in which case the partners agree to be personally responsible for its liabilities, and essentially sacrifice their limited liability protections, or dissolve the business prior to its stated term.
In either instance, this decision requires the approval of partners holding at least 75 per cent of the company's capital, unless its Articles of Association state otherwise. Failure to do so or to reach a decision entitles interested parties to request that dissolution be initiated.
Upon commencement of the liquidation process, the company will continue its existence solely to the extent necessary for completion of the liquidation, and the managers involved in this process will be considered liquidators until an official liquidator is appointed.
The essential steps that must be taken in order to voluntarily liquidate and wind up a limited liability company in Saudi Arabia are as follows:
Step 1: Determine the reason for liquidation
A firm does not automatically dissolve if it fails to maintain the required number of partners or is otherwise insolvent, unless specified in its governing documents. Accordingly, article 15 of the Companies Law enumerates certain circumstances under which a company may be terminated, as follows:
• Realisation of the purpose for which the firm has been incorporated, or the impossibility of realising the mentioned purpose.
• Transference of the company's shares to one partner so that it no longer has the minimum number of two partners required by law.
• Expiry of the term specified for the business.
• Merger.
• A waste of all or most of the firm's funds, which renders it impossible to invest the remaining amount in a feasible manner.
• Partners' agreement to dissolve the company prior to the termination of its term, unless the firm's governing documents stipulate otherwise.
• Issuance of a decision of the company dissolution from the Commercial Companies Disputes Settlement Panel based on the application of an interested party (typically a creditor) giving strong evidence for such dissolution.
Step 2: Resolution of partners
In a general assembly or unanimously in writing, the partners must pass a resolution:
Authorising the company to terminate operations in Saudi Arabia and liquidate the entity.
