Monday, January 29, 2018

Taking and Enforcing Security under Omani Law

Most financing transactions will involve the grant of a security or collateral by the borrower to secure the finance amount.  This involves the execution, registration, perfection and enforcement of security. Generally speaking, tangible and intangible assets, moveable and immoveable property, shares, securities and bank accounts are capable of forming collateral under Omani law.  The concept of a floating corporate charge comparable to the English system does not exist as such under Omani law.  Nonetheless it is possible to create a hypothecated charge over a company and its assets by way of a commercial mortgage excluding real estate rights and assets.  The difference between a commercial mortgage and a floating charge is that the corporate assets forming the subject matter of the charge must be identified.  It is also possible to provide real estate rights and assets as collateral to secure financing by creating a separate charge over those rights and assets.  Real estate assets owned or leased, including usufruct rights, can be charged as security by creating a legal mortgage over them.

Under Omani law, a commercial mortgage would be registered in the commercial register of the Ministry of Commerce and Industry (the “MOCI”).  A noting of the charge appears on its commercial registration information print-out.  A legal mortgage is registered with the Ministry of Housing (the “MOH”).  Accordingly, a noting of the charge will be marked on the title document of the real estate asset or the instrument establishing the right in rem.

In addition, banks and financial institutions may require the borrower to assign certain rights in their favour as part of the security package.  It is also possible to provide bank accounts as security.  The usual form of providing security over bank accounts is by assignment or creating a pledge.  A pledge may also be created over securities comprising shares in a company.  A share pledge in respect of a closed or public joint stock company is capable of registration with the Muscat Clearing and Depository Company (the “MCDC”).  Under Omani law, security cannot be created by granting a power of attorney.

As stated above, a commercial mortgage or a legal mortgage must be registered with the MOCI or the MOH, respectively, in order for it to be valid and enforceable.  A share pledge in relation to a joint stock company must be registered with the MCDC.  The MOCI, MOH and MCDC would require that the charge documents are signed before their designated officials, in addition to filing of prescribed forms and payment of fees.  In order to register a commercial mortgage, a fee of OMR 130 is payable.  A commercial mortgage is registered for a period of five years and is renewable for further periods on payment of a renewal fee.  A legal mortgage is subject to payment of a registration fee of 0.5% of the mortgage value subject to a cap of OMR 100,000.

Under the laws of Oman, if a particular charge is required to be registered in order to constitute valid security, that security must be registered in order for it to be enforceable as security.  An unregistered charge does not amount to creation of valid security.  It is hence unlikely that an unregistered charge would be enforced by the courts as security.

In order to enforce the collateral, the lenders would firstly be required to make a formal demand with the borrower.  The borrower’s failure to answer the demand would require the lenders to obtain an order or judgment from the court by filing a lawsuit.  Once a judgment has been obtained on the debt, the lenders would be required to seek the enforcement or execution of the judgment.  In respect of the collateral, the judgment would be executed by carrying out a sale of the charged asset or property by public auction.  Under the provisions of the Law of Commerce of Oman, issued pursuant to Royal Decree 55/1990 (as amended), an agreement between a creditor entitling the creditor to acquire the ownership or to dispose of the collateral without the intervention of the courts is null and void.  Accordingly, self-help remedies are not available under the law and are unenforceable.  The lender may not make recourse without the intervention of the court notwithstanding the fact that the borrower has granted a power of attorney to the lender to unconditionally enforce the collateral.