Monday, January 2, 2017

Guarantees and Indemnities in the Sultanate of Oman


Guarantees are a form of security commonly used to secure the performance of a physical or monetary obligation by another party. Rules concerning guarantees are prescribed in various Omani laws including Sultani Decree 04/1974 promulgating the Commercial Companies Law (the “CCL”) (as amended), Sultani Decree 55/1990 promulgating the Law of Commerce (the “CL”) (as amended), and Sultani Decree 29/2013 promulgating the Omani Civil Transactions Law (the “Code”) (as amended).

Shareholder approval

A company or government entity may guarantee the obligations of its parent, subsidiary or, as the case may be, government-owned company.  However, before a guarantee can be given by a company, it is essential that the necessary internal approvals are obtained from the shareholders.  There are certain restrictions placed on partners, managers and directors of a guarantor company. Article 8 of the CCL stipulates that these individuals cannot, without the prior consent of the members of the company, or in the case of a joint stock company its consent at a general meeting, use the company’s property for the benefit of third parties.  In other words, shareholder consent is required if a company wishes to provide a guarantee.

Additionally, to guarantee third-party debts outside the ordinary course of business, or to mortgage company assets for matters other than securing company debts, express authorisation is required by the articles of association of a joint stock company, or by resolution of the company’s members at a general meeting, in accordance with Articles 102(c) – (d) of the CCL.

Notification

Article 758 of the Code stipulates that if a debt becomes due and the beneficiary under a guarantee does not claim the same from the debtor, the guarantor is entitled to notify the beneficiary that legal proceedings are necessary against the debtor to settle the debt.  If the beneficiary fails to initiate proceedings within six months of the date of such notification, and the debtor does not make the requested payment, the guarantor is discharged from his liability towards the guarantee, save where the debtor provides adequate security in respect of the guaranteed obligation.

Accordingly, from a lender’s perspective, it is advisable to add wording to the guarantee agreement explicitly excluding and dis-applying Article 758 of the Code.

Joint and several liability

Guarantors are jointly and severally liable together with the debtor under Article 238 of the CL.  As such, the beneficiary of a guarantee can claim against the debtor, the guarantor or both at his option, and does not forfeit his right to claim against the other, until he has received full satisfaction of the debt owed and covered by the guarantee.  Notwithstanding this, it is advisable that, when drafting a guarantee, the beneficiary requests the inclusion of a clause that allows him to make a claim directly against the guarantor under the guarantee in the event of default of the debtor, without first having to exhaust all claims against the debtor.

Obligations of the beneficiary

If a beneficiary receives any property (i.e., security) from the guarantor securing the guarantee, Article 241 of the CL imposes on the beneficiary an obligation to safeguard this property and, in doing so, take account of the interests of the guarantor.  If the beneficiary does not fulfil his obligation and the guarantor suffers a loss to the property as a result, the guarantor is released from his obligation to the extent of the loss suffered.

If the debtor becomes bankrupt, the beneficiary of a monetary guarantee must make a claim for the debt in bankruptcy.  If he does not, as stipulated by Article 242 of the CL, his right of recourse against the guarantor will be barred to the extent that the guarantor suffers loss as a consequence of the creditor being at fault.

The beneficiary is further under an obligation to seek the approval of the guarantor prior to granting the debtor an additional period of time in which to fulfil his obligation.  In the event that the beneficiary does not obtain the consent of the guarantor, the guarantor may be ‘release[ed] [from] his liability for the guarantee’ under Article 246 of the CL.

Obtaining a release of guarantee

The most common way to be released from a guarantee is through performance of the guaranteed obligation, or to receive the consent of the parties to the guarantee.  If a party in the latter case does not consent, and the debtor’s obligation is deferred, the guarantor’s obligation must also be deferred in accordance with Article 235 of the CL.

Indemnities

The courts of the Sultanate of Oman have not drawn a clear distinction between the two concepts. Whilst the CL specifically provides for guarantees, it is silent on the issue of indemnities.  However, if an indemnity has been agreed in contract, in principle there is no reason such agreement should not be recognised by the courts of Oman.  The contract would have to make explicitly clear that the beneficiary has the right to claim directly against the guarantor for a fixed amount without having to prove his losses were caused by the default of the debtor; and without any duty to mitigate his losses.