Everything you need to know about directors' and partners' liability claims under the Saudi Companies Law.

A liability claim is a legal action requiring managers or partners to bear responsibility for their actions that caused damages and losses resulting from irresponsible actions, negligence, and failure to comply with legal duties. The person responsible for these actions and damages is required to bear financial and legal costs. Therefore, there must be conclusive evidence proving the wrongful conduct and negligence that negatively impacted the financial interests of the company, shareholders, and certain other parties, which we will discuss in this article.

The concept of a liability claim:
A legal action taken by a person to demand that another person be held responsible for their actions or negligence that caused harm to the plaintiff. Liability claims include several types, such as civil, criminal, administrative, and others. The laws and procedures followed in each type of claim vary depending on the legal system of the country in question. However, we will limit this matter to civil liability claims resulting from defects in the establishment of companies or errors by managers or shareholders, in accordance with the new Saudi law issued by Royal Decree No. (M/132) dated 1-12-1443 AH.

Who has the right to file a liability lawsuit?

1- The Company
The company may file a liability lawsuit against the person responsible for the error or negligence through its representatives, whether managers or board members, or through a procedural representative who will file the liability lawsuit against the manager or board member who caused the error. In addition, the lawsuit may be filed by those who own 5% of the company's shares, unless the articles of association stipulate a lower percentage for filing the lawsuit. Partners holding this percentage must retain their shares until the lawsuit is filed, and they may transfer them thereafter; the determining factor is their ownership of the shares at the time the lawsuit is filed.

2- The Partner
The partner who has suffered harm may file a liability lawsuit against the manager or board member who caused the error that justifies the lawsuit.

3- Third Parties
Third parties may file a liability lawsuit in two ways:

Either they may file it against the manager or board member who caused the harm personally.
Or they may file it against the company as a whole.

In any case, all directors or board members are liable if one of them makes a mistake in making a decision related to the management of the company. They are jointly and severally liable unless one of them proves that they objected to the erroneous decision in writing, or that they were not present, were unaware of the decision, and had an excuse preventing them from attending and expressing their opinion at the meeting in which the decision was made.

Cases of Liability of the Director, Partner, or Board Member to Their Own Financial Assets
Saudi law has identified cases in which the liability of the director, partner, or board member is absolute and joint to the extent of all their assets, as follows:

First:
From the text of Article 9 of the new Saudi Companies Law, paragraph three, it is clear that:

In the event that the incorporation procedures are not completed as legally prescribed, the persons who dealt or acted in the name of the company or on its behalf shall be jointly and severally liable to third parties for all their actions and conduct during the incorporation period.

Second:
Article 35 of the Saudi Companies Law defines the different legal nature of a general partnership:

The partners are jointly liable for their actions related to the company towards third parties. This liability is not limited to their assets in the company, but extends to all their assets.

Third:
Article 64, paragraph two, of the Saudi Companies Law states:

For joint-stock companies listed on the stock market, if the company is not registered in the commercial register, subscribers shall have the right to reclaim the amounts they paid. If the subscription is made through banks, the bank shall be obligated to return these amounts to the subscribers. The founders shall be jointly liable for fulfilling this obligation and for compensation, if applicable. In addition, the founders shall bear all expenses incurred during the incorporation period, and they shall be jointly liable towards third parties for all their actions and deeds related to the incorporation.

Fourth:
If several people own a share in a joint-stock company, these people are jointly liable for the obligations arising from their ownership of that share, as stipulated in Article 103 of the Saudi Companies Law.

Fifth:
The Saudi law requires that if an in-kind contribution is provided upon incorporation or capital increase, it must be appraised by an accredited appraiser if the in-kind contribution exceeds half the capital. However, if it does not exceed this limit, it is not required to be appraised by an accredited appraiser. In any case, if this in-kind contribution is not appraised by an accredited appraiser or is appraised by another method, the founders or shareholders are jointly liable to the extent of their assets for the fairness of this appraisal towards third parties and must pay the difference in cash to the company.

Sixth:
Before deciding to dissolve the company, the managers and board members are obligated to examine the company's situation to ensure that the company's assets will be sufficient to repay its debts and that it is not insolvent. Therefore, if an examination of the company's circumstances reveals that the company's assets are insufficient to pay its debts or that the company is insolvent, the managers or board members cannot decide to dissolve the company. Otherwise, they will be jointly and severally liable to the extent of their assets for any remaining debt owed by the company.

Seventh:
Article 244 of the Saudi Companies Law specifies the procedures to be followed when liquidating companies:

The company's circumstances must be examined to determine whether the company's assets will be sufficient to pay its debts. Partners and shareholders must be notified of the company's circumstances to decide whether to dissolve it. If the company's circumstances worsen or become insolvent, and its assets are insufficient to pay its debts, the company must be approached by the competent judicial authority to take any of the liquidation procedures in accordance with the bankruptcy law.

Statute of Limitation for Liability Claims
The statute of limitations for liability claims is calculated in one of two ways:

Five years from the end of the fiscal year in which the decision causing the error was made, not from the date of the error.

Three years from the date of termination of the director or member's service at fault, whichever is later, except in cases of fraud or forgery.

Discharging the Board of Directors from Liability
According to Article 31 of the Saudi Companies Law:

A director or member of the board of directors may be discharged from any liability and deemed null and void. They shall be deemed to have fulfilled their duty in the decision they made or voted on in good faith, provided that the following conditions are met:

They have no interest in the subject matter of the decision.

They have been informed and verified the subject matter of the decision before issuing or voting on it.

They have a firm belief that this decision is in the best interest of the company.

In all cases, the burden of proof lies with the plaintiff, as human beings are inherently good faith. Proving otherwise falls on the plaintiff.

In conclusion, liability claims under the Saudi Companies Law appear to be an important legal mechanism for ensuring justice and protecting the rights of third parties and institutions. This is achieved through clear legal regulation to define liability and protect all investment parties, creating a legal environment that promotes investment, and ensuring the provision of all possible legal mechanisms to protect these investments.

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