Wednesday, December 9, 2009

Funding the Capital Requirements for Companies in Oman: Payment in Kind

It is legally permissible to make a contribution in-kind to the share capital of a locally organized company. The contribution can be a non-cash input, such as goods, commodities, services, machinery and property rights, whose value can be determined. A debt owed to a shareholder that is represented by a negotiable instrument also can be used for capitalising a company. A contribution of property rights will be deemed to include a guarantee of a marketable title to the property.

The value of a contribution in-kind must be confirmed by one or more Government appraisers who are legally obliged to submit their reports within thirty days of an application being made by the shareholders. If the appraiser finds the value to be less than the valuation initially made by the shareholders of the company, then the contributing shareholder must pay the difference.

If the General Meeting rejects a proposed contribution in-kind, then the corresponding shares may be subscribed for in cash, or the company may reduce its capital to the extent of the rejected contribution provided that the capital does not fall below the minimum stipulated by the law. The resolutions relating to contribution in-kind must be passed by shareholders representing at least two-thirds of the capital with the abstention of the subscriber seeking to pay capital in-kind. The subscriber must transfer the ownership of the evaluated contribution in-kind to the company soon after the approval of the shareholders.

Given the high borrowing rates prevailing in the market, entrepreneurs may feel encouraged to offer non-cash contributions to the capital of start-up businesses over borrowed monies. However, as the evaluation of an in-kind contribution must precede the incorporation of a company, there are potential pitfalls of which shareholders should be aware. Valuation formalities can be time-consuming, and an appraiser’s disagreement with a value estimation could lead to delay in getting the business up and running.

Another potential issue relates to obstacles to successfully importing the in-kind contribution. Foreign shareholders wishing to contribute in-kind will have to rely on the local partner or a third party to assist with the importation of equipment or machinery until the company is registered. This extra layer of complexity can result in customs clearance and security issues. Any third party who is not the owner or registered agent or user will have to establish his interest in the equipment for customs clearance.

Lastly, issues may arise if the business plan is shelved before the company is registered but after the contribution has been imported. Consequently, a business-specific cost benefit analysis should be undertaken in order to ensure the advisability of making a contribution in-kind.