Commercial Guarantor Liability

The basic element of a guarantee as recognised under Omani law is the existence of “offer” and “acceptance” between the guarantor and the creditor. A guarantee is characterised as a commercial guarantee if the underlying debt is commercial in relation to the debtor.

Under the Oman Commercial Code, the guarantors are jointly and severally liable among themselves and with the principal debtor and the creditor may choose to proceed directly against the guarantor or simultaneously against both the guarantor and the principal debtor regardless of whether or not the principal debtor is solvent.

It must be noted, however, that if the creditor brings an action against the guarantor, it is incumbent upon the latter to join in the debtor as a party. Failure to implead the debtor in the suit could leave the guarantor with no right of recourse against the debtor if the debtor has already discharged the debt or if the debtor is able to establish that the claim is a nullity or is time-barred. Similarly, the guarantor is obliged to put the debtor on notice before paying off the debt.

Upon discharging the debt, the guarantor is subrogated to the rights of the creditor and the guarantor will be entitled to ‘step into the shoes’ of the creditor and exercise the creditor’s rights against the debtor. At the time of payment of the debt, the creditor is obliged to deliver all the necessary documents to the guarantor to enable him to enforce the right of recourse against the debtor. If the debt is secured by a mortgage then the creditor must relinquish the mortgage rights in favour of the guarantor. The creditor has a duty to safeguard the securities held to cover a guaranteed debt and the guarantor would be released from the guarantee to the extent any damage or loss has been caused to the collateral due to the creditor’s fault.

The Commercial Companies Law requires explicit authorisation by the Articles of Association or by a shareholders resolution of a company for guaranteeing the debts of third parties that are not granted in the ordinary course of the company’s business. It is always prudent to obtain the shareholders approval before granting corporate guarantees.