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).

The management of the firm has to submit all company documents requested by the liquidator

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.
• Appointing and specifying one or more liquidators (or the partners may choose to act as liquidators, in which case this must be specified in the resolution).
• Specifying the authorities of the liquidator.
• The resolution should be notarised before a Notary Public and then published in the official Saudi newspaper, Um al-Qura.

Step 3: Liquidator

• Once the partners choose a liquidator, a power of attorney should be issued authorising it to conduct a comprehensive audit of assets and liabilities of the company and to marshal and distribute its assets to satisfy debts and to allocate surpluses, if any.
• If there is more than one liquidator, they will be considered jointly liable for any wrongdoing. However, the liquidator typically has broad authority and the firm will be committed to the liquidator’s transactions done within the bounds of its authority. While a full analysis will be required by the liquidator, some of the more obvious potential liabilities are as follows:
• Existing contracting obligations: This refers to ongoing agreements and any outstanding offers. It will be necessary to conclude, settle or transfer any existing agreements and to ensure all outstanding offers (even if not formally accepted) are resolved.
• Building leases and office equipment.
• Employment issues: Saudi labour law is typically employee-friendly with regard to the termination of existing employment contracts, so this is often a significant liability because it may be necessary to pay employees until the end of their contracts and/or to pay applicable end-of-service benefits. Resolution of employment issues also involves the transfer of sponsorship and/or cancellation of work visas for expatriate employees, which can be time-consuming.

Step 4: Dealing with government entities

The company must do the following:

• Issue a power of attorney allowing the liquidator to act on its behalf. 
• Write a letter using the company letterhead, which must then be authenticated by the Chamber of Commerce declaring that the company owes no debts to the Department of Zakat and Income Tax.
• After settlement of all employment contract issues, including transfer of sponsorships and/or cancellation of all visas, obtain a printout/letter from the Ministry of Foreign Affairs stating that all employee visas have been cancelled.
• Using the printout/letter obtained from the Ministry of Foreign Affairs stating that all employee visas have been cancelled, cancel the firm’s Labour Office file.
• The company should submit a file to the Saudi Arabian General Investment Authority (Sagia), the entity that provides licences to foreign investors, with all of the firm’s original governmental licences, requesting termination of its operations and deletion of its licences. (This provision applies only to Sagia-licensed entities and businesses with some foreign ownership. Wholly Saudi-owned companies are not subject to this requirement.)
• Cancel its General Organisation of Social Insurance file. 
• Cancel its municipality licence.
• Cancel its Chamber of Commerce membership.
• Cancel its commercial registration.

Step 5: Inventory of assets and liabilities

Within three months of being appointed, the liquidator, in cooperation with the company’s auditor, will conduct an inventory of all assets and liabilities, and the management of the firm will submit all business documents requested by the liquidator.

Step 6: End of fiscal year

At the end of the fiscal year, the liquidator and auditor will prepare the company’s financial statements, along with a report on the liquidation process. These documents will be presented to the partners at a general assembly, or in accordance with the firm’s governing documents.

Step 7: Order of distribution

• Upon liquidation, distribution of the company’s assets will be in the following order:
• Expenses and fees relating to liquidation;
• Creditors (subject to preference as prescribed by law);
• Payment to the partners for their paid-in capital;
• Payment of any surplus to the partners in accordance with the governing documents of the firm. If no such stipulations are set forth in the governing documents, payment is pro rata.

Step 8: Final report

After completing the liquidation, the partners will approve the final report and the liquidators will declare completion of the liquidation according to the requirements set forth in the company’s governing documents and the initial resolution authorising the liquidators to act.

Step 9: Publication of resolution

Completion of the liquidation should be declared and the partners’ approval to the liquidation should be published in Um al-Qura. This approval does not need to be notarised in the same manner as the initial resolution referenced in Step 2.

Step 10: Time limit for lawsuit

After declaring completion of the liquidation, a suit may be filed against the liquidators regarding transactions of the liquidation for a period of three years. Additionally, claims may be filed against the partners, managers and auditor during this three-year period.