Monday, December 17, 2018

Guarantees and Indemnities in the Sultanate of Oman

Guarantees are instrumental in providing a means of security to the beneficiary of a guarantee by the person giving the guarantee (i.e., the guarantor) for the performance of a physical or monetary obligation by another party.  This concept has been recognised by law of the Sultanate of Oman in Sultani Decree 04/1974 promulgating the Commercial Companies Law (the “CCL”) (as amended), in Sultani Decree 55/1990 promulgating the Law of Commerce (the “CL”) (as amended), and in Sultani Decree 29/2013 promulgating the Omani Civil Transactions Law (the “Code”) (as amended).

Guarantee

A company or government entity may guarantee the obligations of its parent, subsidiary or, as the case may be, a government-owned company.  However, before a guarantee is given, it is essential that the shareholders of the guarantor give the necessary internal approvals to bind the company.  It is also necessary to be aware of the limitations placed on partners, managers and directors of a company.  Article 8 of the CCL stipulates that the aforementioned individuals cannot without the prior consent of the members of the company, or in the case of a joint stock company, its consent at general meeting, use the company’s property for the benefit of third parties.

Additionally, to guarantee third-party debts outside the ordinary course of business, or to mortgage company assets for matters other than securing company debts, requires express authorisation 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.

Receiving a guarantee

It is worth noting that 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.

From a lender’s perspective it is advisable to add wording to the guarantee agreement explicitly excluding and disapplying Article 758 of the Code.

Claiming on a guarantee

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 the above legal provision, it is advisable that when drafting a guarantee, the beneficiary requests the inclusion of a clause which will allow 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

In the case that a beneficiary receives any property (i.e., security) from the guarantor to secure the guarantee, Article 241 of the CL imposes on the beneficiary an obligation to safeguard this property and, in so doing, 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.

In case 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 creditor will be barred to the extent that the guarantor suffers a loss as a consequence of the beneficiary 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 as clear a 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 had 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.

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Monday, December 10, 2018

The Maritime Law of Oman

The Maritime Law pursuant to Oman Sultani Decree 35/1981 (the “Maritime Law”) is the main source of law for matters relating to shipping and maritime in Oman. It is anticipated that a new maritime law shall be issued next year which may, among other matters, include updated provisions relating to vessel registration, vessel management and the arrest of vessels in case of abandonment. Until such time as a new maritime law is effective, some key aspects of the Maritime Law are as follows:

Nationality of a vessel 

A vessel shall acquire the nationality of Oman if it is owned by an Omani national or an Omani company, in accordance with Omani laws.[1] Vessels adrift at sea that are picked up by Omani vessels, as well as vessels which are confiscated for violating Omani laws, shall also be deemed to have Omani nationality.[2] Vessels with Omani nationality are required to be registered in Oman, fly the Omani flag and adopt a name pre‐approved by the competent maritime authority. Particulars such as the name of the vessel, the number and port of registration and the net tonnage must also be written in Arabic together with Latin characters in specified places on the vessel.

Port authorities 

The Omani port authorities carry out all of the inspections of a vessel, for example, ports regulate the arrival and departure of vessels as well as pilotage and towage together with berthing and the shifting of vessels.

Ports are also concerned as to safety and conduct of berthing and will ensure that adequate fire and safety precautions are taken. The port authorities also regulate port operations including licensing and permitting, communications and the handling, storage and delivery of cargo. The port authorities aim to ensure the prevention of accidents and ensure general safety within its ports.

The Maritime Inspection Department of the Ministry of Transport and Communication may carry out inspections in relation to Omani national vessels wherever they are located, and on foreign vessels at the ports or passing through Omani territorial waters.[3] In respect of national vessels, inspections will include verification that the ship is registered, that it has the documents required under the Maritime Law on board, and that compulsory conditions under the Maritime Law are complied with.

Inspectors of foreign vessels must be able to verify that the conditions laid down in international agreements relating to safety at sea and shipping lanes are being complied with.

The head of the competent maritime authority or his deputy may prevent a vessel from sailing if it has not passed its applicable inspections conducted pursuant to Article 28 of the Maritime Law.

Removal of a wreck 

In jurisdictions with a developed maritime legal system, a central authority is usually responsible for arranging the removal of wrecks in territorial waters. A central authority either has the power to order the removal of a wreck by a vessel owner or to remove the wreck itself and recover the cost of doing so from the vessel owner.

The applicable port authority shall have the right to seise the wreck of a ship by way of security for the costs of removing the wreck.[4] It may sell the wreck administratively by public auction and recover the debt due from the proceeds and in that regard it shall have priority over other creditors. The balance of the proceeds shall be retained in its treasury department for distribution to such creditors, if any.

Vessel operator’s responsibilities 

The Maritime Law contains detailed provisions relating to the crew and the regulation of marine employment. The operator of a vessel is obliged to pay wages in full, despite injury or sickness on the voyage, though certain exceptions apply. The operator, during the period of the voyage, is obliged to feed and accommodate the crew of a vessel without requiring payment from them and in addition the operator is bound to provide medical treatment free of charge to a crew member if he is injured in the service of the vessel or falls ill during a voyage.

The Maritime Law sets out detailed provisions relating to the powers and responsibilities of the master (otherwise referred as commander of the vessel). Among these, the master has the following powers:

  • Command of the vessel;
  • Maintain order;
  • Right to impose disciplinary penalties; and
  • Act on behalf of and represent the operator. 

  • The master’s responsibilities include the following:

  • To observe the technical principles of maritime navigation, agreements, maritime custom and provisions in effect at the Omani ports where the vessel is located;
  • To arrange the manning of the vessel, conclude the necessary contracts and take beneficial measures for the voyage;
  • To carry out the investigation of crimes committed on board the vessel and, if necessary, to order the arrest of the accused, conduct searches and take the necessary measures to prove the crime;
  • To carry out the instructions of the operator and keep him notified on matters relating to the vessel or the cargo;
  • To maintain on board the vessel documents required by law; and
  • To take necessary steps to protect the interests of the owner, operator, crew and passengers. Further to the provisions above, our June 2018 article “Arresting a Vessel in Oman” sets out the key steps to arresting a vessel in Oman.
[1] Article 10 of the Maritime Law
[2] Article 11 of the Maritime Law
[3] Article 28 of the Maritime Law
[4] Article 170 of the Maritime Law

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Monday, December 3, 2018

Key Considerations for Analysing Management Fee Provisions

The sponsor of a closed-ended fund, such as a private equity fund, typically receives a management fee to cover the basic overhead expenses of operating the fund and managing its investment activities, including salaries of the investment professionals and administrative staff, rent, utilities and travel. In the course of conducting due diligence on a prospective investment in a fund, investors should pay attention to the fund documentation and reporting by sponsors, and carefully review the provisions relating to the calculation of the management fee and allocation of expenses to the fund and its investors. Regulatory agencies, such as the U.S. Securities and Exchange Commission (“SEC”), have reviewed the business practices of many private equity firms and found that they pass on fees and expenses that should be covered by the management fee to clients without their knowledge. For example, Andrew Bowden, the former director of the SEC’s Office of Compliance Inspections and Examinations, said at a private equity conference in 2014 that “[b]y far, the most common observation our examiners have made when examining private equity firms has to do with the adviser’s collection of fees and allocation of expenses. When we have examined how fees and expenses are handled by advisers to private equity funds, we have identified what we believe are violations of law or material weaknesses in controls over 50% of the time.”[1] Prospective investors may wish to consider the following questions when evaluating an investment in a closed-ended fund and the determination of the management fee:

  • What is the applicable rate of the management fee? Generally, the rate of the management fee is in the range of 1% to 2% per annum, though we have seen instances where the applicable rate has been higher or lower than this range.
  • Are there any discounts available on the rate? With increased competition to attract capital commitments and an escalating pressure to raise larger funds, it is becoming more commonplace for sponsors to offer discounts on the stated rate. Discounts may be offered in circumstances where (i) an investor’s commitment exceeds a stated minimum threshold (a size-based discount), (ii) an investor has invested in prior funds raised by the sponsor (a loyalty discount), or (iii) an investor participates at the first closing (an early closing discount).
  • What is the base on which the management fee is calculated? During a fund’s investment period, the management fee should be expressed as a percentage of capital committed to the fund by investors unaffiliated with the sponsor. It would be unusual for the sponsor to charge a management fee for managing its own committed capital (or the committed capital of its affiliates). To the extent it does, however, the investor should ensure that the management fee is also being charged to the sponsor and its affiliates such that they bear their proportionate share of the management fee.
  • Is the management fee subject to any offsets? Generally, sponsors agree to offset or reduce the management fee by amounts of any placement fees or organisational expenses incurred by the fund as well as certain transaction fees that may be received by the sponsor, its affiliates and their respective members and employees in respect of any portfolio investment. These transaction fees may include monitoring fees, director fees, commitment fees, break-up fees, investment banking or similar services and topping fees. The management fee will typically be offset and reduced by a specified percentage of these transaction fees. Normally, the percentage is in the range of 50% to 100%, and it is now viewed as market for the management fee to be offset by 100% of these transaction fees.
  • When does the management fee start to accrue? Historically, the management fee started to accrue from the fund’s first closing date as the sponsor effectively begins to manage the committed capital from that date. As sponsors tend to focus the first 12 to 18 months on raising additional capital and having subsequent closings, it is becoming more commonplace to see the management fee start to accrue from a later date, such as the fund’s final closing date, a “commencement date” or “effective date” which is a date determined by the sponsor, or the date on which the fund makes its first investment.
  • Who is responsible for paying the management fee? It is important to determine whether the management fee is paid by the fund rather than by the investors directly. In other words, is the management fee included within an investor’s capital commitment or is it expected to be paid on top of the investor’s capital commitment? An investor typically expects that its capital commitment represents its entire obligation to contribute capital to the fund and that it will not be expected to make further contributions in addition to its capital commitments to fund the management fee.
  • When does the management fee “step down”? Generally, the management fee should “step down” when the sponsor is no longer actively managing committed capital and/or devoting all of its time to the fund. This “step down” usually occurs at the end of the investment period where investors are, subject to certain limited exceptions, released from their obligations to make further contributions to the fund or once a successor fund starts to accrue fees.
  • When the management fee steps down, what adjustments are made to the base on which the management fee is calculated? Following the expiration of a fund’s investment period (or other event that gives rise to the stepping down of the management fee), the management fee should be expressed as a percentage of invested capital. Sponsors may, however, seek to have other amounts included in this calculation, such as amounts reserved and committed for investments or follow-in investments and outstanding indebtedness and borrowings. Further, to the extent that the fund makes acquisitions or dispositions of investments, or otherwise undertakes a write-down or write-up of an investment, such events may affect the base on which the management fee is calculated.
  • When does the sponsor stop earning the management fee? Generally, the management fee will continue to accrue during the fund’s term for so long as their remains invested capital. Where the sponsor seeks to extend the fund’s term or the investors elect for an early termination of the fund’s term, the investors (or the limited partner advisory committee) may be faced with negotiating an appropriate management fee for the sponsor to continue to manage the fund for the duration of the extended term and/or through its winding up and dissolution.

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