23 Dec 2025

Why Do Courts Reject Corporate Compensation Claims on Procedural Grounds?

In the city of Riyadh, a Saudi limited liability company was established in late 2018. The partnership consisted of two parties: the “Plaintiff” (a 49% partner) and the “Defendant” (the managing partner who contributed capital). On 19/03/1442H, a serious dispute arose, prompting the Plaintiff to file a case before the Commercial Court.

The essence of the claim was the Plaintiff’s request for inspection and accounting of the company’s activities during the period from 2018 to 2020. The Plaintiff accused his partner (the manager) of breach of trust, misuse of the company’s resources for personal benefit, and withdrawal of substantial sums of money, which reduced the company’s balance to zero. The Defendant allegedly removed himself from management without authorization, leaving the company burdened with losses.

Plaintiff’s Arguments

The Defendant managed the company for two years with gross negligence, in violation of the duties of care and loyalty, causing significant losses instead of the promised profits.
The Defendant exploited the company’s employees and resources to serve his other private businesses (a technology company and hotels), assigning them to work on his own software projects without compensation to the company in dispute.
The Defendant sold and operated a proprietary medical technology program owned by the company for a pharmacy chain (40 branches) and collected the proceeds personally without depositing any amounts into the company’s account.
He evaded convening general assemblies and refused to submit the financial statements for 2019 and 2020 in order to conceal the company’s financial position.
He withdrew large cash amounts (approximately SAR 1.1 million) through checks issued to himself, his brother, and another individual, thereby completely depleting the company’s funds.
He secretly amended the commercial registration and removed himself from management, and even changed the contact number in government platforms to prevent the Plaintiff from receiving notifications.

Defendant’s Arguments

The Defendant alleged that the partnership originated from a fraudulent scheme, claiming that the Plaintiff had misled him prior to the partnership by asserting ownership of a successful company and technology programs generating millions in revenue (projected revenues of SAR 510 million), which induced him to acquire 51% of the shares for SAR 5 million, only to later discover that the projects were fictitious.
He argued that although he was the manager in name, the Plaintiff was the de facto manager, exercising control over employees and operations (supported by WhatsApp conversations), while the Defendant’s role was limited to providing funding.
With respect to the alleged “theft,” he stated that the company generated no revenue at all, and that he personally paid salaries and expenses from his own funds as an interest-free loan to the company (approximately SAR 2 million). Upon discovering that the company was illusory, he merely recovered what remained of the funds he had advanced, without committing any misappropriation.
He denied selling the software, asserting that the Plaintiff himself requested that it be tested at the pharmacy branches to identify defects, and that no sale or profit occurred.
He contended that the lawsuit was malicious and retaliatory, filed in response to a prior financial fraud complaint that the Defendant had lodged against the Plaintiff before the Public Prosecution, and was intended to exert pressure and cause disruption.

The Judgment

Despite the merits of the Plaintiff’s position, the court ruled non-acceptance of the claim.

Grounds for the Judgment

The court held that partners’ oversight of a company’s accounts is not absolute, but rather regulated by statutory provisions and the articles of association. Such oversight begins with the preparation of financial statements by the manager, followed by their review by an external licensed auditor, and then their submission to the general assembly of partners for approval or objection. Since the Plaintiff acknowledged the absence of approved financial statements, the court could not adjudicate the dispute before exhaustion of these internal procedures.
The court affirmed a fundamental principle: the court is not an accounting body tasked with creating rights or uncovering them from scratch. Partners may not resort to the judiciary to request a comprehensive inspection and accounting in search of potential violations, as this would compromise judicial neutrality and transform the court into an administrative or accounting authority rather than an adjudicative body.
The court rejected the request for “inspection” based on Article (102) of the Companies Law, reasoning that this right—under its specific judicial mechanism—is exclusively prescribed for joint-stock companies and does not apply to limited liability companies, given the differences in their legal and regulatory nature.
The court concluded that the proper course would be either a claim for annulment of general assembly resolutions (after their issuance) or a liability (compensation) claim based on specific and proven errors, rather than a request to appoint an expert to perform the duties of the company’s manager or external auditor.

Legal Takeaways

Do not rush to court seeking accounting or inspection before activating the company’s internal governance mechanisms (appointing an external auditor, convening a general assembly, and compelling the manager to prepare financial statements).
Commercial courts do not entertain general or exploratory claims (e.g., “inspect the company to see whether theft occurred”). Claims must be based on defined facts and quantified damages supported by documents, such as contested financial statements.
Legal mechanisms available to joint-stock companies (such as judicial inspection) may not be available to limited liability companies, requiring the lawyer to select the correct statutory route based on the company’s legal form.

Opinion of Al-Salamah Law Firm and Legal Consultations

Why did the Plaintiff lose despite “having the right”?

The loss of this case does not constitute a loss of the substantive right (the court did not rule that the manager was free from liability); rather, it is a procedural loss. In essence, the court told the Plaintiff: “You approached the wrong door, at the wrong time.”

Requesting the appointment of an expert for accounting and inspection in a limited liability company in the absence of prior financial statements constitutes an attempt to compel the court to assume the role of company management, which courts reject due to lack of jurisdiction, as their role is to resolve disputes, not to manage companies.

The Proper Alternative Course of Action

Given that the Plaintiff holds 49% of the shares (or even as a minority partner), he should have first called for a general assembly meeting—or compelled the manager to convene one through the Ministry of Commerce if the manager refused. At the assembly, an external auditor would be appointed to prepare a financial report. Once the report is issued and reveals misappropriation or lack of supporting documentation, the Plaintiff would then possess concrete evidence to file a directors’ liability (compensation) claim pursuant to Article (167) and subsequent provisions, seeking to compel the manager to pay the specific amounts identified in the auditor’s report.