Set-off Provisions in Loan Agreements

Where two parties owe each other money, it often makes sense for one of the parties to employ the concept of ‘set-off’ to reduce or eliminate its liability to the other party.

For example, assume that Party A owes OMR 100 to Party B under a loan agreement; but that Party B also owes OMR 60 to Party A under a separate (and perhaps unrelated) arrangement.  In this scenario, Party A could in theory ‘set-off’ the OMR 60 that Party B owes to him against the OMR 100 that he owes to Party B – with the result that Party A now owes OMR 40 to Party B (original debt of OMR 100 minus set-off of OMR 60 equals remaining debt of OMR 40) and Party B no longer owes anything to Party A (original debt of OMR 60 minus set-off of OMR 60 equals zero).

Of course, for this to work in practice, Party A also must have the legal right to employ such a set-off mechanism.  Such a right can arise by force of law, or by contract.

In England and Wales, and in certain other jurisdictions, there is detailed legislation and case law specifying various types of set-off available, for example:

• Legal set-off – a defence to a court action where more than one claim and cross-claim is being contested;
• Banker’s set-off – where a customer has more than one account with a bank, at least one of which is in debit and one in credit;
• Equitable set-off – available to a debtor where his cross-claim arises from the same or a closely related transaction;
• Insolvency set-off – often triggered by a party’s entry into liquidation; and
• Contractual set-off – where set-off is included as a provision of a contract.

In Oman, while the Law of Commerce (Sultani Decree 55/90) does contemplate the set-off concept, as a practical matter set-off rights frequently arise as contractual rights – e.g., via set-off clauses in loan agreements governed by English law, or by the laws of another foreign jurisdiction.

The contractual set-off rights often found in loan agreements typically will allow the lender to set off a matured obligation due from a borrower against any matured obligation owed by the lender to that borrower, regardless of the place of payment or currency of either obligation. If the obligations are in different currencies, the lender often may negotiate the right to convert either obligation at a market rate of exchange in its usual course of business for the purpose of the set-off.

The result of exercising a contractual right of set-off is similar to enforcing security.  However, set-off is a personal right rather than a proprietary right; unlike a security right, it does not grant an interest in the counterparty’s property.

It should also be noted the Omani courts are unlikely to apply a set-off unless a contractual set-off scenario exists.

Finally, it is important to note that set-off provisions in loan agreements often favour the lender over the borrower.  While set-off clauses in commercial contracts often will apply symmetrically (e.g., permit or prohibit set-off altogether), in many loan agreements the right of set-off is accorded only the lender, with the borrower prohibited from setting off any amounts owed to it by the lender.

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Family Businesses in the GCC States

Family businesses in the Gulf Cooperation Council (“GCC”) region are profoundly aware of the dangers they face.  Most do not make it beyond the second generation.  Power battles between successors and the distribution of wealth and control commonly can lead to the fall of a dynasty.

As a family’s third generation of leaders come of age, many want to put in place rules for its interaction with business.  Many of the family businesses within the GCC are discussing options to modernise themselves by partly separating management from ownership.  A common solution is to develop a family constitution outlining the values, principles and procedures that the family agrees to follow.  Family businesses that generally thrive one generation to the next do so because they have in place a sound governance structure in the form of a family constitution or charter which provides a road map for managing wealth, business and legacy transitions over time.

Generally family constitutions are not meant to be legally binding.  Typically, a constitution will set out the family’s values and vision, criteria for selecting leaders and the rights and responsibilities for family members.  They differ in detail but are designed to ensure that the wealth and the portfolio stay together.  Families that do not have a clear mission or set of values to follow face real risks of internal conflicts and potentially damaging private and public disputes over the governance of the family wealth.  At its centre will be the mission statement for the family and a clear statement of its hopes and aspirations for future generations.  It is important, however, that families choose the forum of dispute resolution they want to use in cases of dispute and that such dispute resolution mechanism is respected and implemented in any disputes across the family’s businesses.

A business must be able to deal with sudden and unexpected events which can do damage to it, challenge management and cause uncertainty among family members who are owners of the business.  For example, a key family member may die or become incapacitated.  Similarly, a divorce or a serious dispute between family members may arise or a third party may seek to bring a substantial claim against one or more of the family-owned entities.  In such situations, it is useful to have protocols or a process in place to deal with such events such as the formation of a family committee to deal with such matters or putting restrictions on incurring any further liabilities until the issue is resolved.  Provisions along these lines can be included in the family constitution.  The constitution should govern the inevitable generational change and provide a vision to manage that change.  A provision establishing criteria for the recruitment and remuneration of family members employed in the business should be included.  Rules for the disclosure and exchange of information between family members and the confidentiality of that information are vital.  Confidentiality promotes trust and it is a key element of any family protocol.  Mention should also be made of a periodic summary of the division of assets between family members and how those assets should be shared.

It will be helpful to have provisions within the constitution which deal with issues such as dividends, the role of new generations, remuneration, ownership, succession, conflicts of interest and exit.  Other issues to address include how the owners are to be represented on the board of directors and how they will set objectives and challenge management.  Likewise, the constitution should identify the key issues on which management should consult the business’s board of directors.  Consideration should also be given to the process for share valuation and payout for all family members on exits.  Other important points to cover are the allocation and conditions for ownership and voting rights which allow the family constitution to be implemented.

Overall, a family’s philosophy and core values should be the cornerstone of the constitution.  A family must take the time to articulate its values.  The constitution is not meant to create binding rules, but rather set out a framework and guiding principles for making future decisions.  The constitution usually deals with many areas of the management structure such as an advisory board, management succession, profit distribution and the process of selling shares.  Naturally, a family constitution should be reviewed and adjusted regularly to be fit for purpose.  If it is done right, the constitution should embody the wishes of the founder of the business, the current generations of the family, the family office and the trustees.  It should then become a guide for the parties and, if required, the courts to interpret the conduct of the parties and the decisions that have been taken.

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In the Pipeline - May 2019

The appointment of Oman Human Rights Commission members is promulgated by Sultani Decree 29/2019.  Article 1 appoints 14 individuals including Shaikh Abdullah bin Shuwain Al Hosni as the Chairman and Dr. Sulaiman bin Hamad Al Alawi as Deputy Chairman and the remaining 12 persons as members.  The Sultani Decree is to be published in the Official Gazette and implemented from the date it is issued.

Sultani Decree 26/2019 amends provisions of The Law on Classification of State Records and Regularization of Sanctuaries which is promulgated by Sultani Decree 118/2011.  All that contradicts the new law will be repealed.  The Sultani Decree is to be published in the Official Gazette and implemented from the day following publication.

Scholarly zones and other specialised zones are promulgated under Sultani Decree 27/2019.  Scholarly zones that are affiliated to The Research Council or any scientific or specialised zone will be established upon the approval of the Council of Ministers.  The establishments that will operate in this zone shall enjoy exemptions and incentives.  All that contradicts the new law will be repealed. 
The Sultani Decree is to be published in the Official Gazette and implemented from the day following publication.

The Paris Accord has been ratified by Sultani Decree 28/2019.  It was issued in Paris in 2015 and signed by the Sultanate of Oman in 2016 after the Accord was presented to the Omani Council.  The Sultani Decree is to be published in the Official Gazette and implemented from the date it is issued.

Please contact us if you would like more detailed advice on the above.

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New Mining Law Issued - Achievement of Major Milestone in Strategic Sector

Introduction

Oman is enriched by a variety of mineral resources including metallic minerals (such as copper, gold, zinc, chromites, cobalt and iron ores) and non-metallic minerals (such as dolomite, limestone, gypsum, silica and ornamental stones).  Indeed, the National Program for Enhancing Diversification (TANFEEDH) recognises that the diversity of Oman’s natural resources “presents the Sultanate a unique competitive advantage in regional and global markets as well as an opportunity to achieve its diversification objectives.”  In addition to well-established companies, four new companies have recently been granted exploration licences for developing copper mining projects at the Al-Batinah coast.

With this in mind, it is not surprising that the mining sector is one of five economic sectors (the others being manufacturing, transport & logistics, tourism and fisheries) which are the focus and key drivers of the Sultanate’s economic diversification ambitions.  TANFEEDH also recognises the importance of local as well as foreign investment to achieve its overall objectives.

It is only a logical step on the diversification journey to assess existing legislation and pass new legislation that aims to facilitate further investment into identified priority sectors.  Accordingly, the Mineral Wealth Law promulgated by Sultani Decree 19/2019 on 13 February 2019 (“New Mining Law”) represents an achievement of a major milestone in the mining sector.  In this article we take a closer look at the New Mining Law to highlight, and provide commentary on, its key provisions.

New Mining Law – what you need to know

Whilst passed on 13 February 2019, the New Mining Law came into effect on 14 March 2019.  The New Mining Law cancelled the mining law promulgated under Sultani Decree 27/2003.

The New Mining Law recognises the Public Authority for Mining (“PAM” or “Authority”) as the competent authority for mining activities.  Article 2 of the New Mining Law states:

“Subject to the provisions of the Economic Zone of Duqm Law, the Authority shall without exception, conclude concession agreements, issue licences related to the exploration, excavation and utilization of raw materials, or carry out any activity related thereto….The Authority also regulates the process of exploration, excavation and utilization of raw materials and exercises control and supervision over everything related thereto to ensure its preservation and good utilization.…”

To perform its functions, the PAM is granted a wide range of powers under the New Mining Law which include:

1. expropriation of property;
2. approving exports of raw materials;
3. inspection rights and right to access sites and obtain samples; and
4. revocation of licences under certain circumstances such as:
• delay in commencement of works by licensee;
• suspension of works by licensee;
• delay in payment of fees, etc.;
• failure by licensee to provide reports;
• obstruction by licensee of employees of PAM;
• violation of terms of licence;
• engaging in unauthorised activities;
• not maintaining books and records by licensee; and
• change of status of licensee (legal form, change of shareholders, merger, etc.)

Under the New Mining Law, the licence periods for exploration and excavation shall be one year, renewable but not exceeding three years, whereas the licence period for utilisation/exploitation is five years (renewable).  The period for concession agreements is between 20 and 30 years.

The New Mining Law also sets out some parameters in terms of royalty and rent payments, such as:

1. financial guarantee of not less than 1% of the value of the cost of the project;
2. annual rental value of not less than 5% of the total production of the raw material used by the licensee; and
3. payment of not less than 1% of the total annual production of raw materials for the development of the local community.

Commentary & conclusions

The introduction of the New Mining Law is a very positive step and enhances legal certainty in the mining sector.  Overall the New Mining Law should encourage investments.  It also provides the PAM with significant powers to ensure that progress is being made and that licence holders carry out their obligations under their licences.  It is often difficult to create the balancing act between facilitation of investments and appropriate oversight from the relevant competent authority (in this case the PAM).  The New Mining Law also anticipates the issuance of secondary/implementing regulations and these are expected to be introduced in the coming months.  Given that the New Mining Law was only recently introduced, the effect and impact it has remains to be seen, but in our view it is a very solid step in the right direction.

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