ARTICLES & UPDATES

Financial distress is a phase that even the largest companies may experience. It is neither a defect nor does it necessarily indicate bankruptcy; rather, it is often a liquidity issue that can be managed and resolved. It does not, in itself, mean the cessation of business activities. Bankruptcy, on the other hand, represents an actual inability to meet payment obligations and involves comprehensive legal intervention.

The Bankruptcy Law clearly distinguishes between these two situations and provides legal mechanisms aimed at rescuing companies. In practice, creditors are primarily concerned with recovering their funds rather than forcing their debtors into bankruptcy. Therefore, negotiation can be an effective solution before the crisis escalates, such as requesting debt rescheduling, grace periods, or reduction of interest.

The law has also introduced important tools such as financial restructuring, preventive settlement, and temporary suspension of claims. These mechanisms represent a smart legal management of financial crises, allowing companies to reorganize their debts without losing control of their operations, all under judicial supervision.

The real risk does not lie in financial distress itself, but rather in improper legal conduct during such distress. The law does not penalize loss or financial difficulty; however, it may impose liability for mismanagement. This includes actions that harm creditors, concealment of the true financial position, transferring company assets to nominal or fictitious entities to evade creditors, or preferring one creditor over another. Such actions may be legally void and can result in civil and even criminal liability.

Furthermore, continuing to enter into contracts despite knowing the inability to fulfill payment obligations, or failing to maintain proper accounting records and financial documentation, may fall within the scope of commercial fraud or tortious liability.

From a creditor’s perspective, it is crucial to seek legal protection at the appropriate time. The law obliges traders and companies, upon cessation of payment, to promptly initiate procedures such as settlement or restructuring. Unjustified delay may be considered evidence of mismanagement or bad faith. Initiating restructuring proceedings can suspend lawsuits, halt enforcement actions, and prevent asset seizures.

Failure to take appropriate measures during a financial crisis may expose those responsible for management to liability, including personal liability for the company’s debts. This may arise from acts of mismanagement or gross negligence that harm creditors, such as preferring certain creditors, maintaining inadequate or absent accounting records, commingling company assets with personal assets, unjustified withdrawals or dissipation of funds, or concealing and transferring assets.

Where conduct demonstrates bad faith or intent to harm creditors, it may give rise to personal civil or criminal liability.

Upon entering a stage of financial distress, the correct legal approach is to refrain from unjustified unilateral decisions, assess the situation from a legal standpoint, and proceed with the mechanisms provided by law.

Financial distress is not, in itself, a crime; however, mismanaging it may be. Proper legal understanding during such periods protects against personal exposure to company debts.

The principles established by the Court of Cassation confirm that legal protection afforded to a company is not absolute. The separate legal personality of a company does not prevent holding a manager personally liable for their own fault or mismanagement. In certain cases, company debts may even be converted into personal liabilities of the manager. The closer the conduct comes to harming creditors, the greater the likelihood of personal liability.

This article was recently published in Arabic in Al-Jarida newspaper. You can view the original newspaper clipping here-https://www.aljarida.com/article/127537

Lawyer / Abdulrazzaq Abdullah E-mail: azq@arazzaqlaw.com