The primary duty of a trustee in bankruptcy is to maximize the value of the debtor’s assets for the benefit of its stakeholders. Many provisions of the current Saudi bankruptcy law (the “bankruptcy law”) emphasize the importance of this duty. Section 5(c) of the Bankruptcy Act sets out one of the main purposes of bankruptcy proceedings, the maximization of the debtor’s assets. As part of the Financial Reorganization Procedures (“FRP), section 50(3) requires the trustee to “exercise the duty of care necessary to protect the interests of creditors”. In addition, the Code of Professional Conduct promulgated by the Saudi Bankruptcy Commission directs trustees to exercise skill and due diligence in carrying out their duties. Together, these statutory and regulatory provisions impose a duty on trustees to exercise due diligence to maximize the value of a debtor’s assets.
Many debtors enter insolvency proceedings with a jumble of messy records, decentralized assets and uncooperative actors. While the debtor’s management is obligated to act as an honest steward of the estate’s assets, it is fundamentally the trustee’s duty to bring order to the chaos, preserve the debtor’s strategic options, oversee the decisions important management tasks and to ensure that the debtor’s assets are managed in a way that generates the best possible return for creditors.
The facts of each case will be different and each liquidation or rehabilitation strategy will require careful consideration. But here are some basic ways a trustee can maximize the value of the bankruptcy estate:
Determine if financing is an option. Often the most immediate concern is meeting the payroll and keeping the business running. Bankruptcy financing can be the difference between operating a business as a going concern and a liquidation sale for scrap. Bank lenders before insolvency may be motivated to invest funds to keep the business going and avoid the loss in value that a liquidation sale would cause. Keeping the doors open will also often preserve the debtor’s options for a reorganization proposal that pays creditors from transaction proceeds. This may require the use of financial advisers and lawyers with specialized experience in restructuring. But the financing option only works if the moratorium available under the bankruptcy law is respected by all Saudi courts, especially enforcement courts. The current practice of freezing debtors’ bank accounts when issuing enforcement decisions (which goes against the principles of the creditors’ moratorium) prevents debtors from accessing much-needed working capital. Trustees must therefore ensure beforehand that the debtor has accounts that are not subject to blocking orders or that are effectively protected by a commercial court order.
Investigate claims against third parties. Chapter Thirteen of the Bankruptcy Act provides a wide range of claims against parties who have abused the debtor by transferring his assets for less than they were worth, abusing corporate powers, acting negligently or by preferring preferred creditors to others. Under Sections 203 and 205 of the Bankruptcy Act, penalties range from fines and imprisonment for perpetrators to recovery of transferred assets and payment of compensation. Recovery (also called “recovery”) Legal proceedings may constitute a source of assets for the debtor when the debtor’s assets have been transferred under agreements of favor to insiders or third parties. This litigation can be costly, especially when the debtor’s business is inactive and does not receive any income. In these cases, law firms that will take on a trustee’s case on a contingency fee basis, or litigation finance companies that advance legal costs in exchange for participation in recovery, can prove useful.
Scrub the list of complaints. Although asset maximization increases the size of the estate pie, a trustee must also carefully consider the claims that the pie must support. Often, creditors exaggerate the amounts owed by the debtor, sometimes intentionally, and other times because the creditors and the debtor have an honest disagreement about the amounts owed. Although Section 202 of the Bankruptcy Act makes it a criminal offense to file a false bankruptcy petition, it is the trustee’s responsibility to ensure that the list of claims is accurate. In significant cases, hiring a financial advisor or auditor can ensure that the list of receivables is “cleaned up” effectively and efficiently.