What are the 3 types of liquidation?

In the present times of fast paced and uncertain world of business, not every company reaches the heights of success. Be it increasing financial pressures, changing market demands or minor missteps, many companies reach a stage where continuing operations become nearly impossible. During those times, liquidation is the next mandatory legal step to formally end a company’s matters, settle debts, and allocate the remaining assets to shareholders and creditors. No matter if you are a local entrepreneur, corporate stakeholder or a foreign investors understanding what liquidation means in Saudi market is crucially important. Liquidation isn’t just about saying goodbye to your business; it’s about closing it right through legally compliant and financially sound ways. We will further elaborate on the three key types of liquidations that are officially recognized in KSA, each with their unique set of procedures, legal complexities, and requirements.

Understanding Liquidation in Saudi Arabia

Liquidation in Saudi Arabia is looked after by the Saudi Bankruptcy Law, which was established in 2018 to ease the insolvency process and build more business-friendly legal environments. The Law provides a clear mechanism for companies going through financial intricacies and creates various options for either restructuring or liquidation. In KSA, it is mainly divided into three types which we will discuss below.

1.    Voluntary Liquidation

Voluntary Liquidation takes place when a company’s shareholders choose to dissolve the business, even if it is solvent. This generally happens when a company has achieved its goals, and the legal owners decide to retire or look for other opportunities. Under the Saudi Regulations Voluntarily liquidation is only allowed if the company is not going through any financial instabilities and all liabilities and disputes are settled. The General Authority for small and medium Enterprises (Monsha’at) and the Ministry of Commerce look after the registration and closure process of companies that fall under this category.

The Legal Procedure:

• Board Resolution: The board of directors submits the liquidation.
• Shareholders’ Approval: the resolution must be approved by a general assembly
• Appointment of Liquidator: A verified and licensed Liquidator is arranged
• Notification: A notification is passed on to the authorities and stakeholders
• Debt Settlement: All debts are cleared
• Distribution of Assets: the leftover balance is shared among shareholders.
• Deregistration: The company is eliminated from the commercial register.

Voluntary Liquidation keeps control within the company which is beneficial to prevent legal courts proceedings that are not just costly but prone to delays and hurdles. Instead, this process is much faster and less complicated. In KSA, mostly family-owned businesses dissolve after achieving their purpose, or the branches of international companies exist in the markets.

2.    Compulsory Liquidation

This type of liquidation takes place on the legal orders of the court, mainly at the request of the creditor if the company fails to pay its debts. This includes a legal process to make sure that the company’s assets are used to fulfil the remaining obligations. The KSA Bankruptcy Law gives the order to the Bankruptcy commission to oversee compulsory liquidation cases. Creditors can file a petition in court if the company has defaulted on payments.

The Legal Procedure

• Petition by Creditor: it is file legally in the bankruptcy court
• Court Hearing: The court officially examines the company’s financial status
• Order for Liquidation: In case of any proof of insolvency, the court orders liquidation
• Liquidator Appointment: The process is done in charge of a court hired Liquidator
• Asset Valuation and Sale: Debt is paid by selling the company’s assets
• Distribution: Proceeds distributed in legal priority order
• Closure: Company’s names is omitted from the register

Compulsory Liquidation is legal in nature with no or low control of the company. This process generally takes long as it is initiated by creditors, and legal proceedings take days and even up to months. This not just damages the company’s reputation, but all transactions are also scrutinized along with investigations from authorities and owners.

3.    Creditors’ Voluntary Liquidation (CVL)

This type of liquidation is started voluntarily by the company’s directors along with the creditors when business is insolvent. It facilitates an organized exit with maximum involvement of the court. CVL is known under the Bankruptcy Law as it keeps the law’s aim to balance interest between debtors and creditors. This process is done with the cooperation of both the company and its creditors by the legal court.

The Legal Procedure

• Directors’ Meeting: goes through the insolvency and proceeds for CVL
• Creditors’ Meeting: A vote from creditor is take for the approval of liquidation
• Appointment of Liquidator: A verified Liquidator that is chosen by the creditor is hired
• Asset Sale: Liquidator sells company assets with the court’s permissions
• Debt Payment: the money is utilized to pay the debts
• Final Report: A final report is submitted by the liquidator
• Closure: Company is formally deregistered

The company has moderate control over this liquidation but more control than compulsory liquidation. It keeps the relationships with creditors preserved with reduced legal costs as it is done by mutual decision without any legal complexity. Mostly this is done by construction companies that are affected by delayed payments, or startups and SMEs that are unable to sustain short cash flow.

Best Practices for a Smooth Liquidation

To handle the liquidation process professionally it demands more than just legal compliance; it needs thoughtful planning, clarity, and disciplined execution. Be it voluntarily shutting down or going through compulsory liquidation, it is essential to execute some of the mentioned best practices that can assist you minimize complications and assure a smooth and legally approved closure.

1. Engage a Licensed Liquidator Early: Hire a skilled professional from day one to make certain that they handle everything gracefully to avoid any legal obstacles.
2. Keep Financial Records Clear: For better evaluation of assets and settlement of debts, keep your documentation up to date and accurate.
3. Communicate with Creditors: To stay away from any risks, delays or disputes, build transparent communication for better trust and credibility.
4. Follow Legal Timelines: To prevent any legal fines, and for hassle free approval, companies must comply with the statutory deadlines.
5. Document Everything: Save the record of each meeting, decision and action that is taken to keep the company protected from legal or financial complexities.
6. Secure Final Clearance: Make sure to clearly exist legally through ZATCA, GOSI deregistration and commercial license cancelation to completely clear everything prior to the final closure
7. Plan for Employee Offboarding: Provide notice, process end of the service benefit promptly, and present all the necessary documentation to the team before waving goodbye for a graceful closure.

Liquidation is not an end; it can be a new start if done rightly. By taking smart decisions that legally guard the company’s interests and those of their stakeholders and with expert guidance, the challenging situation of liquidation can be a strategic move towards a new beginning.

How SS&CO KSA Can Help

At SSCOKSA company liquidation services, we assist business with handling the intricacies of demanding legal and financial landscape of liquidation. Being one of the top local accounting firms operating in KSA our team is well familiar with the legal Saudi Laws and offers:

• Thorough legal advisory solution for all types of liquidations
• Conducting of financial audits and valuation of assets
• Alignment with Saudi Authorities such as MOC, ZATCA and Bankruptcy Commission
• Complete liquidation support from beginning to the end
• Custom-made solutions for group liquidations, holding companies, or multinational exits from Saudi Arabia

SS&CO offers the best advice during the hard times of business closure. Whether you are closing your business voluntarily or facing insolvency, we make sure to understand your situation and stay by your side for a compliant and safe exit solution.