#Legal_recommendation
It is advisable to include a clause in agreements, memoranda of understanding, and partnerships that outlines the mechanism for handling bankruptcy and insolvency issues.
Example of the clause:
"Either party may terminate this agreement if it is proven that a bankruptcy petition has been filed against the other party, or if the other party becomes bankrupt, civilly insolvent, initiates liquidation proceedings, or has a judicial receiver appointed."For more specialized details regarding this clause:
To ensure protection for the non-bankrupt party, conditions such as "termination of the contract with written notice in case of a bankruptcy petition" should be included.
The proposed clause does not specify whether prior notification to the other party is required before termination or if termination is immediate. Often, a condition requiring written notice (e.g., 30 days) is included to ensure fairness. Additionally, some bankruptcy systems worldwide may not permit automatic contract termination if the bankrupt party is under reorganization protection.
Therefore, it is recommended to add a condition addressing this, such as: "Unless prohibited by applicable law." It is also advised to draft clauses that consider judicial liquidation or reorganization procedures, emphasizing court approval in certain cases. The clause also does not account for the specifics of local laws. For example, in some jurisdictions, terminating a contract may require commercial court approval if the bankrupt party is under reorganization procedures (redressement judiciaire).
Compatibility of the Termination Clause with the Saudi Bankruptcy System:
Based on an analysis of the Saudi Bankruptcy System (issued under Royal Decree No. M/50 dated 28/5/1439 AH, with amendments up to 2024), the proposed termination clause—allowing termination of the agreement upon proof of bankruptcy, insolvency, liquidation, or appointment of a judicial receiver—is partially compatible with the system but requires amendments for full compliance.
The system aims to protect creditors and debtors and specifies procedures for managing contracts during bankruptcy, focusing on business continuity as much as possible. Below are the details:General Framework for Contracts under the Saudi Bankruptcy System - Contract Continuity as a Fundamental Rule:
According to Article (37) of the Executive Regulations of the Bankruptcy System, contracts remain in effect, and the debtor (the bankrupt party) must fulfill contractual obligations during financial reorganization or protective settlement procedures. This means immediate termination is only permitted in exceptional cases to avoid disrupting business operations.
Termination Possibility:
The trustee (court-appointed administrator) or the debtor (under the trustee’s supervision) may request contract termination from the commercial court if it serves the interests of creditors or business continuity (e.g., for unprofitable contracts or those causing losses).
The proposed clause aligns with this if termination is conditioned on court approval, but it is vague for not explicitly mentioning this requirement.
Impact on Partnerships and Memoranda of Understanding:
In cases of insolvency (financial distress before full bankruptcy), mutual termination is possible. However, once formal procedures (e.g., liquidation) begin, the court becomes the governing authority.
Is Court Approval Required?
Yes, in most cases:
During reorganization or settlement procedures (covering most early insolvency cases), contracts cannot be terminated without commercial court approval.
The request (from the trustee or the non-bankrupt party) is submitted to the court, which decides based on whether termination protects creditors’ interests or hinders continuity. This aligns with Article (6) of the system, granting the court full supervisory authority over procedures.
In liquidation procedures, the trustee can terminate contracts more easily, but even then, it is subject to court oversight, and notification of creditors and affected parties is required.Exceptions:
If the contract includes an explicit termination clause (like the proposed one), automatic termination may be allowed if it does not conflict with the "moratorium period," which prohibits individual actions against the debtor for up to 180 days (extendable). However, in case of conflict, the system’s provisions take precedence.
Is a Notice Period Required?
The system itself does not specify a mandatory notice period for commercial contracts, unlike labor contracts (which require periods like 30 days under the Labor Law). However, written notification to the parties and the court is required before any termination, especially in reorganization procedures. The Executive Regulations (Article 37) require submitting a termination request to the court with reasons, and the other party is notified immediately.
In liquidation, creditors must be notified within 90 days of the procedure’s start to submit their claims, meaning termination is not immediate.
Recommendation:
To ensure compliance, add a phrase to the clause such as: "With written notice to the other party and the competent court, unless prohibited by the Bankruptcy System.
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