Article 197 of the Saudi Bankruptcy Law

المادة 197 من نظام الإفلاس · الفصل الثاني عشر: أولوية الديون

The article requires any surplus from selling an asset securing a debt to be deposited in the estate's account, and treats the part of the secured debt the sale proceeds do not cover as an unsecured debt.

Official text (Arabic)

This article has not been amended since the law was issued.

إذا نتج عن بيع أصل من أصول التفليسة ضامن لدين حصيلة تزيد على مقدار الدين المضمون بهذا الأصل، فيودع أمين الإفلاس المبلغ الزائد في الحساب البنكي المخصص لأصول التفليسة، أما إذا كانت حصيلة البيع لا تكفي لسداد كامل الدين المضمون بهذا الأصل، فيعد المقدار المتبقي من ذلك الدين الذي لم تكف حصيلة البيع لتغطيته ديناً غير مضمون.

This is the official Arabic wording, the only legally binding version. We do not translate the law itself; the explanation below is ours. Official source: Bureau of Experts at the Council of Ministers

Article 197 explained in plain English

This article deals with what happens when an asset of the bankruptcy estate that secures a debt is sold (such as mortgaged real estate or equipment). There are two cases:

If the proceeds exceed the debt: the bankruptcy trustee deposits the excess in the bank account designated for the estate's assets, so it becomes part of the assets available to the other creditors and the secured creditor does not take it.
If the proceeds do not cover the whole debt: the remaining part of the debt that the sale proceeds did not cover is treated as an unsecured debt.

The second case matters most when read with Article 196, which sets the order of priority of debts in liquidation and liquidation for small debtors. Debts secured by a security interest in property come first, while unsecured debts come later, after other claims including the amount equal to 30 days' wages for workers, family maintenance and workers' earlier wages. So a secured creditor has priority only up to the value of the securing asset, and for the rest of the debt competes with the other unsecured creditors.

Article 198 then explains how the proceeds are distributed among creditors of the same priority, and that if the proceeds are not enough to pay their debts they are distributed among them by pro rata sharing (qismat al-ghuramaa). For an assessment of a specific situation, consult a lawyer specializing in bankruptcy and commercial cases.

Practical example

A bank is owed SAR 3,000,000 by a company in liquidation in Jeddah, secured by a mortgage on a building, and the building is sold for SAR 2,200,000. The bank collects this amount, and the remaining SAR 800,000 is treated as an unsecured debt. Had the building sold for SAR 3,500,000, the trustee would have deposited the SAR 500,000 surplus in the estate's account.

Translated from our Arabic explanation with machine assistance. For guidance only; it does not replace advice from a lawyer on your situation.

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