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.
