Buying a Company with Debts in Saudi Arabia: Who Pays Them?

The owner of a car repair workshop offers to sell you his whole company for SAR 400,000 and says: “It has small debts to suppliers, and I will take care of them.” The price is attractive because the workshop has workers and contracts with car rental companies. Before you transfer a single riyal, ask: what exactly am I buying? The shares, or the equipment and contracts, or the whole entity with its history? The answer decides which debts follow you and which stay with the seller.

The short answer: if you buy the shares of a limited liability company, you get a company with all its debts, and the company pays them from its own assets, not you from your personal money. If you buy specific assets, the debts stay with the selling company unless the creditor accepts their transfer to you. If the business passes to you with its workers, the seller and the buyer are jointly liable for the workers' rights for the earlier period.

Is buying shares different from buying assets in Saudi Arabia?

Yes. If you buy the shares of a limited liability company (LLC), you become the owner of an existing entity with all its debts. Article 156 of the Companies Law makes the company's assets separate from the partners' assets: the company alone is liable for its debts, and a partner is liable only up to his share. So the debt does not move to your personal assets, but it stays on the company you now own and reduces its value.

If you buy specific assets, such as equipment and stock, the debts as a rule stay with the selling company. No debt passes to you without an agreement. Even if you agree with the seller to take on a specific debt, Article 249 of the Civil Transactions Law states that a transfer of debt (hawalat al-dayn) has no effect against the creditor unless he accepts it.

A merger is a third case. When the merger decision takes effect, all the rights, obligations, assets and contracts of the merged company pass to the absorbing company, which becomes its successor (Article 229). A creditor of the merged company may object within fifteen days of the merger announcement, and the company must then pay his due debt or give sufficient security for a debt not yet due (Article 227).

When are you personally liable for earlier debts?

It depends on the company form. In a general partnership (sharikat tadamun), the partners are jointly liable for its debts with all their assets (Article 35). If a partner transfers his share in it to you, Article 45 makes you liable to creditors for the company's debts both before and after you joined. The partner who transferred the share is released only if the creditors do not object to his release within thirty days of being notified.

In a limited liability company, you are not personally liable just because you bought the share. But watch out for guarantees: if the bank asks you for a personal guarantee to keep the company's credit facilities, or you sign a promissory note in your personal name, that is a new obligation on you personally, unrelated to the partner's limited liability.

Workers: a debt that does not disappear with a new owner

Article 18 of the Labor Law states that a transfer of the business to a new owner, or a change in its legal form by merger or otherwise, does not end the employment contracts, and service is treated as continuous. The previous owner and the new owner are jointly liable for the workers' rights for the earlier period, including wages and end of service awards.

In practice, in a workshop with ten workers who have years of service, their accumulated end of service awards are a real part of the price, even if they do not appear in the list of debts the seller gave you.

What should you check before buying a company in Saudi Arabia?

Compare the financial statements with documents, not with what the seller says. Equipment worth SAR 200,000 is worth nothing to you if it is under a finance lease, and an amount owed by a struggling customer is not cash in the bank.

Your agreement with the seller does not cancel the creditor's right

A clause saying “all previous debts are on the seller” governs only the relationship between you and the seller. The creditor still claims from the company, the company is now yours, and you then go back to the seller under the contract. So link the seller's promise to a mechanism that ensures it is carried out: paying specific debts from the price at completion, or holding back part of the price long enough for claims to appear, with a disclosed list of debts and the seller bearing anything outside it.

Remember that a transfer of shares in a limited liability company has effect against the company and third parties only from the date it is entered in the commercial register (Article 25). If you are not already a partner, each existing partner has a right to claim the share (pre-emption) within thirty days of the manager's notice of the sale (Article 178).

The workshop is offered for SAR 400,000 for all its shares. The seller's list shows SAR 70,000 owed to suppliers, but checks reveal another SAR 45,000 of overdue rent for the site, and the accountant estimates the accumulated end of service awards for the ten workers at about SAR 150,000.

The buyer agreed that the supplier debts and rent are paid directly from the price at completion, that an amount matching the workers' awards is deducted from the price, and that SAR 60,000 is held back for six months to cover any claim not listed in the debt schedule attached to the contract.

If, three months later, a supplier claims SAR 20,000 from the company that was not in the list, the company pays him, and the buyer deducts the amount from the held-back sum instead of suing the seller.

This is general information based on the official Arabic texts of Saudi laws, which prevail over any translation. It is not legal advice for your specific case.

Practical solutions for both sides

If you are the buyer:

• State in the contract whether you are buying shares or assets, because the effect on debts is completely different.
• Calculate the workers' accumulated end of service awards and deduct them from the price.
• Hold back part of the price for a period long enough for undisclosed claims to appear.
• Do not sign a personal guarantee for a creditor of the company before you understand that it binds you personally.
• Make sure the share transfer is entered in the commercial register before paying the last instalment.

If you are the seller:

• Disclose the debts in writing in a list attached to the contract; what you disclose reduces later disputes.
• If you are a partner with unlimited liability, notify the creditors of the transfer so that the thirty-day objection period starts.
• Ask creditors to accept the transfer of any debt the buyer agreed to take on, so that you are released from it.
• Offer the other partners their pre-emption rights before selling to an outsider, as the articles of association require.

If you are about to buy or sell a company, send us the commercial registration, the financial statements and the list of debts on WhatsApp, and we will review with you where the risk lies before you sign.