Debt Recovery in Saudi Arabia

Saudi Arabia, along with UAE, is ranked as the most sophisticated country related to the international debt collection surveyed in the debt collection procedure in 50 countries worldwide. Saudi Arabia is an enriched oil-based economy with strong government controls and significant activities in the economy. Saudi Arabia seems to be complex because of the languages, distance, cultural barriers, customs, and foreign laws. All of these factors, along with the factors like poor speed, high cost, general uncertainty of the legal actions in Saudi Arabia, impose a serious challenge when it comes to the collection of debts.
Saudi Arabia judicial system is governed by Islamic law (Shari’ah laws) for both civil and criminal cases. Under the direction of the Hanbali school, the principal, “Al Aqd Shari’at Al Muta’aqdin,” which means “The contract is the law of the parties,” has been accepted. It means the parties are free to agree and choose their terms in the contract. As per GCC, late payment is quite common in Saudi Arabia. But when speaking in the light of reality, the law does not adjust late payment as the interest of late payment is prohibited. Such claims will not be awarded by the Saudi Arabian courts, judicial tribunals, along the Board of grievances. All such transactions are illegal in Saudi Arabia. The cost collection cannot be recovered except with a defined agreement that has been concluded by the parties. However, the debtors will often try to negotiate for discounts in exchange for the one-time payments.
KSA is a part of GCC established in the view of unique relations between the gulf peninsulas with their common objectives and the similar political system related to the Islamic beliefs. KSA has constructed a pre-legal debt collection effort in which the sooner we act, the will have more chances of favorable outcomes. This article will examine the debt collection procedures through banks, the pre-litigation process, and judicial systems for debt collection.


Debt Collection Procedures

The following are the procedures in the bank of Saudi Arabia for debt collection from the debtor:
a) A creditor must set out a date for deduction corresponding to the monthly payday along with specifying such dates in the payment schedules or could be agreed upon with the debtor through any means of authorized communication modes.
b) The creditor can deduct a monthly instalment from the debtor’s account on the agreed date. Suppose the creditor did not go along with the agreed date. In that case, they can extend the finance period to a similar period added at the end of the month without charging any cost or fees and should be notified to the debtors with any authenticated means of communication.
c) A bank must reschedule the debt as per the debtor’s request in cases there are any proved voluntary changes in the situation of the debtor without granting any loans, charging a fee, and changing the cost. Once the debtor provided the required documents, the rescheduling must be done by the bank within 30 days.
d) During the procedure of debt collection, the bank is restricted from doing specific actions, which are as follows:

  1. A bank cannot deduct any amount from the debtor’s account without a judicial order or the debtor’s consent except when provided in the finance contract.
  2. A bank cannot block the debtor’s account or balances even if it is temporarily without a judicial order or ruling.
  3. A bank cannot deduct more than one monthly instalment for each loan within a single pay cycle without a judicial order or the consent of the debtor
  4. A bank cannot deduct the monthly payment before the due date as agreed in the finance contract.
  5. A bank cannot deduct the end of service gratitude of a debtor without judicial order or ruling.


Prelitigation Method

If the debtors fail to repay the debt, then the creditors can initiate the claims against the debtor. But before seeking aid from the competent judicial authorities, the creditor could undergo the prelitigation process to collect the debt for an easy and economically feasible resolution rather than court trials and procedures. A creditor must be very cautious while communicating with the debtor and observe the following things:


How can a creditor reach out to the debtor?

The creditor can only use authenticated means of communication with a debtor, and it is limited to Email, registered mail, national address, SMS messages, and phone calls.


What are the elements included in the communication?

a) The creditor’s name, the area related to the collection of defaulted payments, along with the contact number of the related departments or the third party.
b) Working hours of the related departments or the third party.
c) If a debtor is contacted through the phone call, the employee’s name, third party, and the creditor.


What are the essential elements to which the creditor gives attention?

a) The creditor must attempt to reach out to the debtor through a phone call, and the attempts could not exceed up to 10 times within 30 days. The debtor must also have the ability to reach the creditor in the same number used by the creditor to call the debtor.
b) The call made to the debtor, and the rate of satisfaction of the debtor through the phone call should be recorded and documented for not less than ten years.
c) The creditors are entitled to give standard information regarding the current default status of the debtor and the legal actions that a creditor can pursue against the debtor in case of the default payment, and the creditors should not give false information on the consequences.
d) The envelope phrases used to reach the debtor must not include any matter related to the debt collection. All the information of a debtor regarding the financial and personal information must be kept confidential except for professional and legal purposes with the debtor’s consent. No contacts should be saved other than to the debtor, not even to their guarantor.


What if the debtor objected to the due amount of payment?

a) Such objections should be documented, and a complaint should be submitted against the debtor following the instructions of SAMA (The Saudi Central Bank). An estimated period should be given to the debtor for the resolution of the complaint. The time limit should not exceed the statutory period. The creditors must keep in mind that they cannot contact debtors to remind the debtor of their default payment until it has been resolved.
b) The debtor should be advised about the escalation mechanism. If the debtor is not satisfied with the resolution result or if they want to escalate any complaint, they should be directed to the relevant entity.
c) The creditor must examine the root which causes of such complaints by developing a policy for analyzing the pattern of such objections. These reports of complaints should be documented by the concerned departments and must frequently measure the efficiency in resolving them.
d) A compliance department must be developed to cover all the service level agreements and escalation mechanisms to ensure that the objectives and the complaints of debtors are resolved within the statutory period and documented electronically.
e) The internal audit and the compliance department at banks or the finance company must review and audit the debt collection department along with the communication department on a regular interval to check whether the procedures are correctly followed.


Court Proceedings in Saudi Arabia

Usually, the follow-up work and negotiation conducted by the local specialists and making deductions in the prompt payment helps to get an effective and amicable solution in the dispute concerning the debts. If the disputes are not settled, the creditors could go for formal litigation or ordinary proceedings.


Regular Court Proceedings

The creditors are entitled to take legal actions against any debtor who are causing any default in the debt payment at the competent judicial authorities. Such defaulted retail debtors should be notified if they have defaulted for more than three consecutive months or five separate months throughout the finance period. The formal litigation settlement is considered final, and the other amicable settlement opportunities have been exhausted.
Usually, there are no fast-track proceedings for the general category of debts. Still, in cases of bounced cheques and late payments secured by a promissory note, the fast-track procedure could be available established through the Enforcement Law. In such circumstances, creditors could directly apply to the enforcement judge for remedy. It is possible without filing the claim to seek a decision on the merits of the dispute in the Board of Grievances.


What are the necessary documents needed to initiate a claim?

  1. Copy of both the creditor’s and debtor’s commercial registration.
  2. Power of attorney.
  3. The proof of the contract between the parties.
  4. Evidence of the authority of the individual that has signed the contract.
  5. Invoices or the evidence of the debt.
  6. Correspondence is related to the debt, including the demands for payment.


What is the time limitation for the claims?

There is no time limitation or statutes generally for the claims. But in some exceptional cases like claims like cargo, time limitations are imposed. Ergo, such limits do not apply to debts arising from the contracts. An appeal could be lodged within 30 days with the Court of Appeal at the first instance after the decision. A further appeal is also available. But in such cases, special leaves are required, while no such leaves will be granted for ordinary cases.


What is the time frame for the legal action, and how much will it cost?

Procedure in the Board of Grievances will usually take up to 12 months to complete, while the enforcement will only take up to six months. In Saudi Arabia, formal procedures are time-consuming because each hearing will take separate weeks and months while the court barely abides by the time management with the party’s consent. Arbitral tribunals render decisions within 18 months. The time limit can be extended with the approval of both parties. A creditor can claim to repay its costs to the court from the debtor. But there is no need for the debtor to pay the collection in case of the enforcement costs.


Enforcement Court Proceedings

Collection of debt related to the trade instruments such as cheques and promissory notes are performed in the enforcement courts. Like regular Courts, the enforcement court does not set any hearing dates. The judge directly issues an order to the debtor to pay within 21 days of filing the case. The summons is either published in the newspaper or sent by post. Usually, the procedures in the Enforcement Court are stringent. Hence the nonpayment by the debtor and the denial to appear may cause any one of the following consequences;
i. Seizing the commercial registration certificate of the debtor.
ii. Restraining of business operations of the debtor.
iii. Issuance of an arrest warrant against the debtor.
iv. Freezing of debtor’s bank account.
v. Imposing travel bans over the debtor.
vi. Giving notification to the labour office to stop giving services to the debtor and his company.
vii. Confiscating the movable and immovable assets of the debtor.
viii. The Court can also issue an order to liquidate the company to recover the claim amount.


Dealing with the Insolvent Debtors

Traditionally Saudi Arabia doesn’t have a single and comprehensive code for insolvency. Instead, there are different layers from different sources, which are very difficult to unite together. It often causes difficulty to give complete answers to some of the fundamental questions in insolvency law. The basic guiding principles for insolvency law are Shari’ah laws. For dealing with the insolvency traders, there is a civil law which is influenced by the archaic Commercial Court of Law (CCL) of 1931, and for covering the areas of a corporate liquidation, there is some part of the legislation from the State Revenue Act. There are also some bankruptcy settlement regulations called ‘voluntary arrangement,’ which involves handing over to the company court, which both the creditor and the debtor cannot agree. Thus, the process of insolvency is very rare.


How do the out-of-court proceedings work in insolvent debts?

With a consent agreement, we can set up the out-of-court workouts while no specific establishments say the agreement’s content. As stated above, the court will hold up on the commercial parties to their contracts unless the terms offend the Islamic principles (Shari’ah). Hence the excellent care should be taken when drafting the agreement.


What are the procedures for winding up?

Usually, the liquidation process is always started by the debtor or its creditors. To list the claims, identify the company assets, sell them, and distribute the profits to the creditors, the court or the creditors appoint a council. While distributing the profits of the debtor’s assets, the priority rule is applied. In the priority rule, house debts and employee claims are given more priority and easily replace other creditors. If it is due to creditors’ debt, the creditors can litigate against the debtors for 15 years until the debt is fully paid.


What are the necessary documents needed?

(same documents which are needed for the ordinary legal proceedings)


Alternative to Legal Actions

Based on the UNCITRAL Model Law, the Saudi Arbitration Law M/34 OF 2012 introduced a vital substitute called Alternative Dispute Resolution Methods (ADR) to ordinary legal proceedings. Arbitration is way more straightforward. The parties rely upon an independent and impartial third-party arbitrator who has given authority to settle the disputes between the parties. As it is an out-of-court settlement, it is very cost-effective and reduces unwanted delays. It ensures confidentiality and enforces a binding decision that is enforceable before the courts. All the awards that are issued under Saudi Arbitration Law are enforceable immediately.
Lately, the ministry of commerce in Saudi Arabia has decided that the debt collectors will be no longer need a license to work in Saudi Arabia. It was a move to facilitate debt collection and to improve the business environment by analyzing all the challenges in debt collection in Saudi Arabia. The abolishing of the license requirement for the debt collectors will promote and enhance the economic business environment in the kingdom and uplift it with international best practices.