Questions on directors' liability, audit & liquidation

1. 01What are a company manager's core legal duties?

   Duties of care and loyalty. The manager must act within their powers, work in the company's interest and promote its success, take decisions independently, and exercise reasonable care and skill. They must also avoid conflicts of interest, disclose any direct or indirect interest in the company's business and contracts, and refuse any benefit from third parties connected with their role.

   SourceCompanies Law, Art. 26 (Umm Al-Qura official gazette)Implementing Regulations of the Companies Law, Art. 11 (Umm Al-Qura official gazette)

2. 02Can a company manager enter into a contract in which they have a personal interest?

   Not as a rule. A manager may not have any direct or indirect interest in the company's business or contracts without authorisation from the partners, the general assembly or whoever they delegate. The exceptions are dealings made through public competition, transactions meeting the manager's personal needs on the same terms the company offers all its customers in its ordinary business, and others specified in the Implementing Regulations. If the rule is breached, the company may ask the court to annul the contract and order the manager to hand over any profit or benefit gained.

   SourceCompanies Law, Art. 27 (Umm Al-Qura official gazette)

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3. 03Can a manager set up a business that competes with the company?

   Not as a rule. A manager may not take part in any business that competes with the company, or compete with it in any of its lines of activity, without authorisation from the partners, the general assembly or whoever they delegate. If the manager does so, the company may claim appropriate compensation before the competent judicial authority.

   SourceCompanies Law, Art. 27 (Umm Al-Qura official gazette)

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4. 04What are the consequences if a manager takes a business opportunity that belongs to the company?

   It is a breach of duty that can make the manager liable. A manager may not use the company's assets or information, or investment opportunities offered to them as manager or offered to the company, for their own direct or indirect benefit. Under the Implementing Regulations, an opportunity belongs to the company if it falls within its ordinary activities or if the company wants, or is expected, to benefit from it. The manager is liable to compensate the resulting harm.

   SourceCompanies Law, Arts. 27 and 28 (Umm Al-Qura official gazette)Implementing Regulations of the Companies Law, Art. 12 (Umm Al-Qura official gazette)

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5. 05Can a manager be sued personally for mistakes in running the company?

   Yes. A manager is liable to compensate the company, the partners or third parties for harm caused by breaching the law or the memorandum of association, or by error, negligence or failure in performing their duties, and any clause excluding that liability is void. But the mere fact that the company has debts does not prove the manager was at fault. A manager is treated as having done their duty in a decision taken in good faith if they had no interest in it, were reasonably informed about it, and rationally believed it served the company's interests; the claimant bears the burden of proving otherwise.

   SourceCompanies Law, Arts. 28 and 31 (Umm Al-Qura official gazette)

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6. 06Is a board member liable for a decision they opposed?

   No, if the objection is expressly recorded in the minutes. Under Article 28 of the Companies Law, where a decision is passed by majority, the managers or board members who opposed it are not liable provided their objection is expressly recorded in the minutes. Absence from the meeting is no defence unless the member did not know of the decision or could not object to it after learning of it.

   SourceCompanies Law, Art. 28 (Umm Al-Qura official gazette)

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7. 07Can a minority partner bring a liability claim on the company's behalf?

   Yes, with at least 5% of the capital. One or more partners holding 5% of the capital, or a lower percentage set by the memorandum, may bring the company's liability claim if the company does not. Under Article 29, the main aim must be the company's interest, the claim must rest on a sound basis, and the claimant must act in good faith and be a partner when filing. On the partner's request, the court may order the company to bear the costs of the claim, whatever its outcome, if it was brought in good faith and in the company's interest.

   SourceCompanies Law, Arts. 29 and 32 (Umm Al-Qura official gazette)

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8. 08Must management be notified before a partner sues on the company's behalf?

   Yes. Under Article 29 of the Companies Law, the manager or the board members, as the case may be, must be notified of the intention to sue at least 14 days before the claim is filed.

   SourceCompanies Law, Art. 29 (Umm Al-Qura official gazette)

   Read moreA commercial claim: what to prepare before registration, and when it is too late to plead

9. 09Can a partner sue the manager personally for harm suffered by that partner alone?

   Yes. Article 29 allows a partner or shareholder to bring their own claim against the manager or board members where their fault caused that partner a particular harm. That personal harm must be distinguished from harm suffered by the company itself.

   SourceCompanies Law, Art. 29 (Umm Al-Qura official gazette)

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10. 10Does releasing a manager from liability prevent suing them later?

    No. Under Article 30 of the Companies Law, approval by the partners or general assembly of a release for the manager or board members does not prevent liability claims under Article 29. Except in cases of forgery or fraud, a liability claim cannot be heard after five years from the end of the financial year in which the harmful act occurred, or three years from the end of the manager's term, whichever is later.

    SourceCompanies Law, Arts. 29 and 30 (Umm Al-Qura official gazette)

    Read moreA commercial claim: what to prepare before registration, and when it is too late to plead

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11. 11Can a partner be excluded from all profits or exempted from all losses?

    No. Partners share profits and losses in proportion to their shares in the capital, and any agreement denying a partner all profit or exempting them from all loss is treated as never made. The memorandum may, however, set unequal profit and loss ratios. It may also be agreed that a partner who contributed only work will not bear losses, provided no wage was set for that work.

    SourceCompanies Law, Art. 23 (Umm Al-Qura official gazette)

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12. 12Can partners be made to return profits already distributed to them?

    Yes, if the distribution breached the law. In that case the company's creditors may claim against the company, and the company may require every partner to return what they received, even one who acted in good faith. Profits lawfully distributed out of distributable profits need not be returned, even if the company later makes losses.

    SourceCompanies Law, Art. 22 (Umm Al-Qura official gazette)

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13. 13Does every company have to appoint an auditor?

    No. Micro and small companies are exempt from the mandatory auditor requirement. A company counts as micro or small for a financial year if it meets two of three criteria: annual revenue of no more than SAR 10 million, assets of no more than SAR 10 million, and no more than 49 employees. It must qualify in its first financial year after registration or in two consecutive financial years. An auditor is still required if the memorandum or articles call for one, if the company is listed, if it issues tradable debt instruments or sukuk or preferred or redeemable shares, if another law requires it, if it is a foreign company, or if it owns or is owned by another company (unless every company concerned qualifies). A general partnership needs an auditor only in specified cases. Calling a business “small” is therefore not enough to conclude it is exempt.

    SourceCompanies Law, Art. 19 (Umm Al-Qura official gazette)Implementing Regulations of the Companies Law, Art. 7 (Umm Al-Qura official gazette)

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14. 14Can minority partners require an auditor even if the company is exempt?

    Yes. One or more partners or shareholders holding at least 10% of the voting shares may ask an exempt company in writing to appoint an auditor. The request goes to the manager or board at least 30 days before the end of the financial year, and the manager must then call the partners or the general assembly to vote on the appointment.

    SourceCompanies Law, Art. 19 (Umm Al-Qura official gazette)Implementing Regulations of the Companies Law, Art. 8 (Umm Al-Qura official gazette)

15. 15Can an auditor leave material information out of the report on a company's financial statements?

    No. The auditor's report must state whether management gave the auditor the information and explanations requested, any breaches of the law or the memorandum or articles found within the scope of the work, and the auditor's opinion on whether the financial statements are fairly presented. The auditor is responsible for the report's contents and for any harm their errors cause the company, the partners or third parties.

    SourceCompanies Law, Art. 20 (Umm Al-Qura official gazette)

16. 16Must a company keep accounting records and file its financial statements?

    Yes. A company must keep its accounting records and supporting documents and prepare financial statements at the end of each financial year under the accounting standards approved in Saudi Arabia. The statements must be filed within six months of the year-end, subject to the rules for each company form. Under the Implementing Regulations they are filed electronically with the Saudi Business Center, together with the auditor's report if there is one.

    SourceCompanies Law, Art. 17 (Umm Al-Qura official gazette)Implementing Regulations of the Companies Law, Art. 5 (Umm Al-Qura official gazette)

17. 17Can a company be voluntarily dissolved and wound up if its assets cannot cover its debts?

    No. Before any dissolution decision, the managers must prepare a statement confirming that the company's assets will cover its debts by the end of the proposed liquidation period and that it is not in default under the Bankruptcy Law (that is, it has not stopped paying debts when due). If the statement shows the assets are insufficient or the company is in default, the partners may not resolve to dissolve it; if they do, they become jointly liable for any debt left unpaid. The proper course is then to apply to the competent court to open one of the liquidation procedures under the Bankruptcy Law.

    SourceCompanies Law, Arts. 242 and 244 (Umm Al-Qura official gazette)Bankruptcy Law, Arts. 1 and 2 (Ministry of Justice legal portal)

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18. 18Are partners or managers liable for a company's remaining debts if it was liquidated unlawfully?

    Yes. Article 244 of the Companies Law provides that if a company is liquidated in breach of its requirements, the partners, shareholders, manager or board members, as the case may be, are jointly liable for any debt left outstanding. This is exceptional liability and does not arise merely because a debt went unpaid.

    SourceCompanies Law, Arts. 242 and 244 (Umm Al-Qura official gazette)

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19. 19Does a company lose its legal personality as soon as it is dissolved?

    No. Once dissolved, the company enters liquidation and keeps its legal personality to the extent needed for the liquidation. During that period the words “under liquidation” are added to its name on its documents.

    SourceCompanies Law, Arts. 12 and 244 (Umm Al-Qura official gazette)

20. 20Does the manager's authority continue after the company ends and before a liquidator is appointed?

    Not in its original form. The manager's authority ends when the company is dissolved, but the managers continue to run it and, as far as third parties are concerned, are treated as the liquidator until one is appointed. The company's assemblies also continue during liquidation, limited to powers that do not conflict with the liquidator's.

    SourceCompanies Law, Art. 246 (Umm Al-Qura official gazette)

21. 21Who appoints the liquidator if the partners cannot agree on one?

    The competent court. The partners appoint the liquidator, by the majority needed to amend the memorandum, within 60 days of the company's dissolution. If that cannot be done, the competent judicial authority appoints one at the request of any partner or interested party. Before doing so, it asks for evidence that the company's assets cover its debts and that it is not in default; if the assets fall short, it takes the steps needed to open a liquidation procedure under the Bankruptcy Law.

    SourceCompanies Law, Art. 248 (Umm Al-Qura official gazette)

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22. 22Can a liquidation run for more than three years?

    Only with a court order. A liquidation under the Companies Law must not exceed three years, and it can be extended only by order of the competent judicial authority.

    SourceCompanies Law, Art. 247 (Umm Al-Qura official gazette)

23. 23Can the liquidator bring lawsuits and collect the company's debts?

    Yes. Within the limits of the appointment decision, the liquidator represents the company before the courts, arbitral tribunals and third parties and carries out everything the liquidation requires, including collecting what is owed to the company and turning its assets into cash. The appointment can be relied on against third parties only once it has been registered and published in the commercial register.

    SourceCompanies Law, Arts. 249 and 252 (Umm Al-Qura official gazette)

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24. 24Can a liquidator start new business in the company's name?

    Not as a rule. A liquidator may not start new business unless it is needed to complete existing business. The purpose of liquidation is to wind up the company's rights and obligations, not to carry on new activity.

    SourceCompanies Law, Art. 252 (Umm Al-Qura official gazette)

25. 25What must a liquidator do on discovering the company's assets will not cover its debts?

    Notify at once and turn to the Bankruptcy Law. The liquidator must immediately inform the partners or shareholders and the company's creditors, and apply to the competent court to open one of the Bankruptcy Law's liquidation procedures: liquidation, small-debtor liquidation or administrative liquidation.

    SourceCompanies Law, Art. 254 (Umm Al-Qura official gazette)Bankruptcy Law, Art. 2 (Ministry of Justice legal portal)

26. 26Can company funds be paid out to partners before creditors are paid during liquidation?

    No. The liquidator must pay the company's due debts in order of priority and set aside what is needed for debts not yet due or in dispute; debts arising from the liquidation itself rank ahead of the others. Only after the debts are paid are the partners repaid the value of their shares, and any surplus is then distributed under the memorandum or, if it is silent, in proportion to the shares.

    SourceCompanies Law, Art. 255 (Umm Al-Qura official gazette)

These answers are brief general information. They are no substitute for a review of the facts and documents of a particular matter.