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Nowadays, the economic condition of Saudi Arabia is not very good. One can say, we are going through a phase of recession. Oil prices are very low as compare to previous years and an annual budget of Saudi Arabia is in heavy deficit. Government, Banks and other financial institutions are very prudent in releasing funds to companies as well as the general public.
Many companies are running short of cash and hence the payment of salaries and benefits to employees is also delayed. If a company is unable to pay off its debt, it is called a bankrupt company. Ultimately, it will be dissolved or liquated. Now a question is raised, when will employees be paid in case a company is dissolved in Saudi Arabia? We have answered below.
The priority of Payment in Liquidation
Saudi Law sets a priority of payment in case a company ceases to operate, dissolves and liquidated. Creditors who are in the first priority are paid first and so on.
These are creditors whose debt is secured by the companies’ assets. There are further two types of secured creditors;
Fixed Charge Security
When a debt is released after mortgaging a specific fixed asset, it is called fixed charge security. A company cannot sell this particular asset to anyone until the debt is paid off or permission is received from the lender. In case a company is dissolved, the proceeds of the sale of this asset will be paid 100% to the lender. For example, land, financed vehicles, etc.
Floating Charge Security
Sometimes debt is issued over assets that keep on changing in quantity and value over time. For example, it is a floating charge on stock, receivables or cash in the bank. In case a company is dissolved, the lender will get all the proceeds from the sale of a security.
After making payments to the secured creditors from the sale proceeds of the secured assets, next creditors in the list are unsecured creditors. For example, if a bank has issued SR 100 million secured loan to the company but sale proceeds of the security is only SR 92 million. Remaining SR 8 million will be treated unsecured credit. Moreover, suppliers and employees who don’t have any charge of security are also treated, unsecured creditors. There are two types of unsecured creditors.
Payment to Government
Payment to government institutions always has priority over other payments. A company needs to clear the dues to government including the Department of Zakat and Income Tax, GOSI Municipality, and others before making payments to any other unsecured creditor.
All the benefits payable to the employees of the company are preferential credit. In case a company dissolves, employees will be paid after secured creditors. In this way, you are reasonably secured over your unpaid salaries and other benefits.
However, in case the sale proceeds of the company assets don’t cover the entire payment to be made to preferential creditors, they are paid on a prorate basis. For example, if proceeds from the sale of company assets are SR 100 out of which SR 40 is related to secured creditors, the remaining amount is 60.
Let’s say, payment to be made to preferential creditors is 80, now every employee will be paid 75% of his claim.
All other creditors are treated in this category. They are unsecured and non-preferred. They will get paid only if some money is left after making payments to preferred and secured creditors e.g. supplier of services and raw material.