Upstream Loan Guarantees Under Saudi Law

In the current financial market, creditors like banks and other lenders are demanding guarantees i.e. security when giving loans or any type of funding to corporate clients. It is more likely when creditors deal with a low grade borrower, a comprehensive security (loan guarantees) package, including shares, cash, flows, assets, etc. provided by corporate group subsidiaries or parent company are mentioned in the loan deal. The loan securities in the context of intragroup of a flagship company borrowing can be upstream, downstream, and cross-stream guarantees: 

Loan Guarantees Under Saudi Law

Upstream Loan Guarantee: It is loan security the parent company receives from a subsidiary or multiple subsidiaries at the time of borrowing from a creditor or lender.

Downstream Loan Guarantee: It is a guarantee a subsidiary receives from the parent company when borrowing funding from a lender.

Cross-stream Loan Guarantee: It is a guarantee when two or more related companies or subsidiaries of a parent company guarantee each other’s loan security or obligations. 

How Upstream Loan Guarantees Work 

Upstream loan guarantee, also known as subsidiary guarantee, refers to financial transactions where a subsidiary company provides loan guarantees to its parent company or another related entity located higher in the corporate ownership chain. These transactions can raise concerns about financial risk and capital movement within a corporate group.

The upstream loan guarantees work in the following contexts:

Parent Company Backed by Subsidiaries: An upstream guarantee involves one or more subsidiaries providing assurance for the debt or obligations of their parent company.

Lender’s Requirement: Lenders may demand an upstream guarantee when the parent company’s primary asset base primarily consists of its ownership in the subsidiary itself.

Used in Leveraged Buyouts: Upstream guarantees are also used in leveraged buyouts, especially when the parent company lacks sufficient assets to support the buyout of syndicate’s debt-financed purchase to control it. 

Upstream Loan Guarantees Under Saudi Law

The issue of upstream loan guarantees, which involves subsidiaries providing guarantees for the financial borrowing (loan) of the parent company, is a matter of debate in accordance with Saudi law. The Article 10 of Companies Law 2015 specifies that only profits from distributable profits are allowed to be distributed to shareholders, seems to be applied to loan guarantees. 

Likewise, Article 22 of Saudi New Company Law 2022 states that only dividends may be distributed from distributable dividends to partners or shareholders of the company. However, there are conflicting interpretations by different law firms in the market regarding whether this provision applies to guarantees or not.

Article 10 of Saudi Companies Law 2015

The Article 10 of the Companies Law 2015 provides that only distributable profits may be distributed to partners. This article further says that if fictitious i.e. unearned (un-distributable) profits are distributed to partners, the company’s lenders may request each partner, including a bona fide partner, to return such profits.  However, a partner shall not be obligated to return the actual dividends he has received, even if the company incurs losses in subsequent years.

Article 22 of Saudi New Companies Law 2022

Article 22 of the New Companies Law 2022 further provides that annual or interim dividends of the company may be distributed from distributable dividends to partners or shareholders. According to paragraph (2) of this Article, if dividends are distributed to shareholders in violation of said provision (paragraph -1) of this Article, the company’s creditors may demand repayment of their debts from the company, and the company may demand each partner (shareholder), including a bona fide shareholder, to return any dividends he received. 

But a shareholder shall not be obligated to return dividends he received as per the provision of this Article (as given in paragraph -3) , even if the company incurs losses in subsequent periods. 

Challenging Views on Upstream Guarantees in KSA

The upstream loan guarantees and the extent to which these are permitted, is a controversial issue under the Saudi law. There  are two views as to whether Article 10 of Companies Law 2015 and Article 22 of New Companies Law 2022, these both laws state that only profits from distributable profits may be distributed to the parties, apply  to upstream guarantees. 

It is therefore essential for lenders to be aware that there are two differing perspectives on upstream guarantees matter. The more restrictive view suggests that if payments under guarantees do not come from net profits (distributable profits), it could be seen as an impermissible distribution of dividends. 

The restrictive view is somehow supported by the Saudi Ministry of Commerce and Industry (MoCI) which has been seen in its Legal Memo No. 283/11 dated 3/4/1400H. It is cited in the MoCI’s “ the guidelines regulating the procedures of companies” dated 1415H (i.e. Gregorian 1994) states that the shareholders of LLCs may not take loans by withdrawing funds from the company’s capital and if they do that, they must return the funds to the company otherwise such act will be considered as violation of law.

On the other hand, the liberal view  (alternative to restrictive view) is that such payments may not be considered as prohibited distributions if they serve a legitimate purpose and offer demonstrable corporate benefits to the guaranteeing subsidiary. Since this remains a grey area, lenders should carefully consider the implications of including an upstream guarantee in a security package at the time of giving loan to the corporate sector in Saudi Arabia.

The supporters of liberal view argue that the provision in the Saudi Companies Act appears similar to provisions in many civil codes/companies laws in other jurisdictions like in the UK and France. But these countries’  equivalent provision is not taken to constitute an overall prohibition on upstream loans or guarantees in those jurisdictions. 

Furthermore, the above Article of the Companies Law is not believed to prohibit cross-stream guarantees, which involve providing guarantees to affiliated companies (i.e. from one sister company to another). If the same necessarily indicates that there is a corporate benefit for such guarantees. Likewise, the downstream guarantees, wherein the parent company provides guarantees to their subsidiaries, are not affected by this provision under the above article. 

Courts and Regulation on Upstream Loan Guarantees in KSA

It’s important to note that Saudi Arabia’s legal system is based on Islamic law (Shari’ah), and Islamic principles may influence many aspects of business and finance. Therefore, any financial transaction, including upstream loans and guarantees, may need to adhere to Islamic finance principles.

In the Kingdom of Saudi Arabia courts prohibit interest bearing loans. For this reason the Saudi courts and other judicial authorities have a traditional stand of not recognizing the choice of foreign law in the matter of upstream loan guarantees regardless of any agreement between parties concerning jurisdiction and applicable laws. 

Therefore, corporate financiers or lenders have to understand that the Saudi courts may not be bound by the selection of foreign law to govern a guarantee, nor by the consent of parties to foreign court jurisdiction. Instead, the courts may exercise their discretion to apply Saudi law, which does not acknowledge the doctrine of conflict of laws.

However, the lenders giving loans to business sectors and seeking to enforce a foreign law judgement in the Kingdom of Saudi Arabia, it is important for them to note that the Saudi courts have rarely recognized and enforced judgments from courts in jurisdictions other than, in some cases, countries that are members of the League of Arab States. Consequently, lenders are advised to be prepared to enforce an upstream loan guarantee provided by a Saudi company within the legal jurisdiction of the Kingdom.

Though the Companies Law in Saudi Arabia does not specifically address upstream loan guarantees, it generally prohibits transactions that could harm the interests of the company or its shareholders. If an upstream loan guarantee is deemed harmful to the subsidiary’s interests, the Ministry of Commerce and Industry (MoCI) may intervene and take appropriate actions.

As the MoCI in KSA has the authority to conduct audits and investigations into companies’ financial activities. If the MoCI identifies any violations of the Companies Law or financial regulations, it may take enforcement actions against the company or its directors.


It is highly recommended that businesses seeking to engage in upstream loan guarantees in Saudi Arabia seek professional legal advice to ensure compliance with the latest regulations and to understand any specific requirements or restrictions that may apply. Additionally, they should consult relevant legal experts to ensure that they are adhering to the most up-to-date companies laws and regulations.

FAQs on Upstream Loan Guarantees under Saudi Law

Q.1. What are upstream loan guarantees under Saudi Law?

Ans. Upstream loan guarantees under Saudi Law are financial arrangements where a subsidiary company provides a guarantee for the loans taken by its parent company. 

Q.2. How do upstream loan guarantees differ from traditional guarantees?

Ans. Unlike traditional guarantees, where a third party (unrelated to the primary borrower) provides the guarantee, upstream guarantees involve a subsidiary providing the guarantee for the obligations of its parent company. 

Q.3. What legal implications should lenders consider when dealing with upstream loan guarantees in Saudi Arabia?

Ans. Lenders should be aware of the legal complexities surrounding the enforceability of upstream guarantees in the event of default. They must ensure that the guarantee is in compliance with Saudi Law and meets the necessary formalities for enforceability.

Q.4. Can a foreign law be chosen to govern upstream loan guarantees in the KSA?

Ans. While parties may prefer a foreign law to govern upstream guarantees, it’s important to note that Saudi courts may exercise their discretion to apply Saudi Law, irrespective of the parties’ choice of foreign law.

Q.5. How do Saudi courts typically handle disputes related to upstream loan guarantees?

Ans. Saudi courts will generally review the terms of the guarantee contract, applicable laws, and the relationship between the parent and subsidiary before making a judgement. The courts will prioritise enforcing valid guarantees in accordance with Saudi legal principles.

Q.6. What are the key provisions that should be included in an upstream loan guarantee contract under Saudi Law?

Ans. Key provisions should include a clear description of the guaranteed obligations, the extent of liability, governing law and jurisdiction, and mechanisms for dispute resolution.

Q.7. How can lenders enforce upstream loan guarantees in the event of default?

Ans. In case of default, lenders can follow a legal process involving notice to the guarantor, demand for payment, and, if necessary, initiating legal proceedings to enforce the guarantee in Saudi courts.

Q.8. What potential risks should subsidiaries be aware of when providing upstream loan guarantees in Saudi Arabia?Ans. Subsidiaries should understand that upstream guarantees can expose their assets to risk in case of the parent company’s default. They should carefully assess the implications before providing such guarantees.