Declaring Bankruptcy in Oman: What to Expect

The Law of Commerce issued by Royal Decree 55/1990 and the Civil Transactions Law issued by Royal Decree 29/2013 set out various provisions relating to insolvency and bankruptcy in Oman. Under the laws of Oman, bankruptcy of a person must be declared by the Court. An application for bankruptcy may be made by the insolvent person him or herself, or by a creditor of the insolvent person.

Following the declaration of bankruptcy of an insolvent person, interest will cease to accrue on the debts of the bankrupt person. On declaration of bankruptcy, debts shall be settled in the following order of priority:

(i) salaries of employees;
(ii) government dues and taxes;
(iii) preferred or secured creditors; and
(iv) unsecured creditors.

Under the provisions of the Law of Commerce, upon being declared bankrupt, the bankrupt is required to relinquish, in favour of the appointed administrator in bankruptcy, the management of all his or her assets. The fact that a person has been declared bankrupt does not have the effect of vitiating, or automatically terminating, those contracts that were entered into by the bankrupt person prior to his or her declaration of bankruptcy. Any contract entered into by the bankrupt prior to the date of declaration of bankruptcy remains valid and continues to exist although certain obligations under those contacts may become suspended by reason of bankruptcy. It is common for commercial contracts to include a right of termination for a party in the event the other party under the contract is declared bankrupt.

Effect of bankruptcy on a company 

The Commercial Companies Law issued pursuant to Royal Decree 4/1974 sets out the various grounds for dissolution or liquidation of a company. The declaration of bankruptcy of a company is one of the grounds for its dissolution. As a result of being declared bankrupt, a company is liable to be liquidated and struck off the Commercial Register.

Effect of bankruptcy on employees 

Under the provisions of the Oman Labour Law issued by Royal Decree 35/2003, an employer is responsible for all obligations towards its employees arising under the contract of employment and the Labour Law. Article 47 of the Labour Law states that the liquidation, insolvency or bankruptcy and final authorised closure of an employer is valid ground for termination of the employment contract by that employer. To the extent that the employer terminates its employees on the ground of its insolvency, that would be considered a valid ground for termination of those employees.

Effect of bankruptcy on parties to a contract and third parties 

As a general rule, a contract counterparty is not responsible or liable to third parties, including employees of the other party, if the other party to the contract becomes insolvent or bankrupt. Any obligation of the bankrupt or insolvent party towards its employees remains with that party. Nonetheless, it is important to consider the scenario in which the contract with the bankrupt party is terminated and the counterparty would like to replace the bankrupt party with another contractor (the “Replacement Contractor”).

Under Article 48 bis of the Labour Law, a Replacement Contractor is required to employ the national manpower which was employed on the same project that has passed, either in whole or in part, to that Replacement Contractor. Accordingly, when a contract comes to an end and the remaining scope under that contract passes to a Replacement Contractor, in that case the Replacement Contractor is required by law to take over the Omani employees of the last contractor who were involved in performing that contract. Furthermore, the Replacement Contractor is required by law to provide those employees with the same benefits and financial incentives they were receiving earlier as long as their work exists and continues.

Conclusion 

The insolvency and bankruptcy of a contract counterparty can potentially affect other parties to the contract and third parties. The recent slump in oil prices has affected the economy as a whole. This has the effect of rendering various businesses and companies insolvent and potentially liable to be declared bankrupt. It is important to consider the risks involved in dealing with companies that are potentially liable to be declared bankrupt or projects that are taken over from those companies. This also signifies the need for proper due diligence of contract counterparties and companies from whom projects are being taken over and having in place a strategy to mitigate the risks involved.