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Losses in LLCs - Old Companies Law and New Companies Law

08 November 2022

On the 28th June 2022, the Kingdom of Saudi Arabia ("KSA") approved a new Companies Law, endorsed by Saudi Arabia Cabinet Decision No. 678/1443 on the approval of the Companies Law that will come into force 180 days from Friday 22nd July 2022, the date upon which it was published in the Official Gazette.

The new Companies Law amendments seek to bring a number of changes, this publication sets out our analysis on the new provisions to LLCs in regards to treatment of losses and how it is being introduced by the New Law.

Dissolution of LLCs by force of law due to triggering Article (181)

Under Article (181) of the old Companies Law, in the event the LLC losses reached or exceeded half its capital, the company’s manager shall record such incident in the commercial register and call the shareholders for a meeting within ninety (90) days from the date of being aware of such loses to consider the continuation or dissolution of the company.

The shareholders' decision to continue or dissolve the company shall be published in the manner prescribed by the law.

Lastly, the company shall be deemed terminated by the force of law if the company's manager fail to call the shareholders for a meeting or if the shareholders fail to issue a decision relating to the company's continuation or dissolution.

The implementation of this above article was misinterpreted, namely in relation to the element of considering a company terminated by force of law. In practice, we understood it involved the Ministry of Commerce's Compliance Department whereby such violation is floated from the latter department to the competent MoC committee for further action. Such decision of terminating a company by force of law takes its path to being an enforceable judgement.

Brief Observation on Key Change

The New Companies Law, specifically in Article (182) has stated if the losses of a LLC reach half of its capital, the company's manager shall call the general assembly to hold a meeting not later than sixty (60) days from the date being aware of such losses in order to consider the continuation or dissolution of the company and take any necessary actions to address such losses and resolve them or the decision liquidate the company. The threshold of being aware of losses is not yet confirmed by the Ministry of Commerce, however we believe this will either be based on a company's audited financials or by relying on a company's internal unaudited financial statements whenever losses reach or exceed 50% of the company's share capital. Previously, the Ministry of Commerce relied on audited financials being the notification point, but there could be a shift in this approach given proactivity expected from shareholders to help protect their company's interest, needless to mention the impact it could have on its employees and creditors.

Key takeaways

The new Companies Law has removed the provision of dissolution of LLCs by force of law in the event the shareholders fail in taking a decision to continue or liquidate the company should its losses reach or exceed 50% of the company's share capital. In addition, the new Companies Law has reduced the period required for convening the shareholder meeting from ninety (90) days to sixty (60) days, which resonates with the shareholders' and company's interest as to minimising any delays that could turn into an avalanche should that period remain extensive.

This article was drafted in collaboration with Abdulrahman Al-Ohaly.

Further Reading