When talking about institutions and companies, and the financial liabilities of both of them, the vision of the difference between them is often blurry for some, and we will show in this article the difference between them, and the fate of the obligations of the owner of the institution after his institution turns into a company under the new corporate system. A company is defined as a legal entity established in accordance with the provisions of the law, based on a memorandum or articles of association, and it has a legal personality and financial liability independent of the liabilities of the partners, but the institution owes it to its owner – that is, all the financial rights and obligations of the institution belong to its owner in his personal capacity.

It was not clear before the issuance of the new companies law the fate of the obligations of the institution prior to its transformation into a company, does the owner of the institution remain responsible for the obligations that the institution had before its transformation into a company Or does the company assume all the obligations that were incurred by the Enterprise before its transfer After the issuance of the law, we believe that it has addressed this ambiguity, as it states in its article (220/3) that: “the owners of individual institutions may transfer their assets to any form of companies established based on the provisions of the law. Such incorporation does not entail the discharge of the owners of individual enterprises from their responsibilities for the debts and obligations of individual enterprises prior to the establishment of the company, unless the creditors expressly accept this

We see that the legislator meant when he said that the transformation of the institution into a company does not entail the discharge of the owners of the institutions: that the new company and the owner of the institution their responsibility towards the obligations prior to the establishment of the company is a joint responsibility, and the liability of the owner of the institution is discharged from the implementation of these obligations only if the right holder-the creditor – agrees to discharge the owner of the institution from the obligation, and keep the company busy fulfilling his right.

In this regard, and in order to protect the rights of third parties and creditors, the trade names Law in its ninth article stipulates a similar situation by making the predecessor and successor of the trade name jointly liable for any obligations incurred under the trade name before transferring its ownership to others, and the text of the article: However, the predecessor remains jointly liable with the successor for the implementation of these obligations, and no contrary agreement applies to third parties unless it is registered in the commercial register and notified to third parties by a registered letter, published in the Official Gazette and another Saudi newspaper, and no one objected to it within thirty days from the date of receipt of the notification, or transfer of ownership of the business.


Legal consultant specializing in the business sector


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