Tuesday, October 8, 2019

The New Oman Bankruptcy Law

(This article by Zainab Aziz, counsel in Curtis' Muscat office, appeared in the Lexis Nexis Middle East Legal Insight on 16 September 2019)


Prior to the issuance of Oman Sultani Decree No. 53/2019 (the “Bankruptcy Law”), Oman Sultani Decree No. 29/2013 promulgating the Civil Transactions Law (the “Civil Code”) set out various provisions relating to insolvency and bankruptcy in Oman. In addition, Oman Sultani Decree No. 18/2019 on the Issuance of the Commercial Companies Law (the “Commercial Companies Law”) also sets forth provisions with respect to the liquidation of companies. Under the aforementioned laws, bankruptcy must be declared by the relevant competent court with jurisdiction over the bankrupt person. An application for bankruptcy may be made by the insolvent person or by a creditor of the insolvent person.

Although the Bankruptcy Law repeals the provisions of Book 5 of Oman Law No. 55/1990 (the “Law of Commerce”), Article 2 of the Bankruptcy Law states that for all matters not specifically provided for under the Bankruptcy Law, the provisions of the Commercial Companies Law, Oman Sultani Decree No. 68/2008 on the Promulgation of the Law of Evidence in Civil and Commercial Transactions, and Oman Sultani Decree No. 29/2002 Promulgating the Law on Civil and Commercial Procedures will continue to apply. In addition, the Bankruptcy Law states that regulations and decisions may be introduced by the Minister of Commerce and Industry in conjunction with the competent authorities to implement the legislation.

Applicability

The provisions of the Bankruptcy Law will apply to traders. The term “trader” is defined in the Law of Commerce as any person who effects a commercial act in their own name, is qualified in the requisite manner and who makes such commercial transactions an occupation. In addition, commercial companies are also considered traders. The Bankruptcy Law also applies to foreign agencies and branches of foreign companies established in Oman, even if the parent company has not been adjudicated to be bankrupt in a relevant foreign jurisdiction and is not subject to the jurisdiction of the Omani courts.

Entities licensed by the Central Bank of Oman and insurance companies licensed under Royal Decree No. 12/1970 Promulgating the Insurance Law are excluded from the applicability of the Bankruptcy Law.


Main provisions of the Bankruptcy Law

Roll of experts

The Bankruptcy Law prescribes that a roll of experts be established. The roll of experts will include individuals and companies specialising in restructuring, the management of assets during a bankruptcy proceeding, valuators, and all other experts as may be needed in connection with the provisions of the Bankruptcy Law.

Restructuring

The Bankruptcy Law introduces the concept of restructuring, which aims to assist traders to overcome financial and administrative challenges in settling debts by restructuring the traders’ outstanding obligations in accordance with a restructuring plan prepared by a restructuring committee comprising of experts registered on the roll of experts. Restructuring the debts will allow the trader to avoid liquidation, by reaching a compromise with its creditors. The Bankruptcy Law also provides timelines within which the restructuring plan needs to be prepared, and the time within which the court must decide on an appeal in order to make the process expeditious. Unlike in the case of preventive composition, traders are permitted to submit a petition for restructuring prior to reaching a position where they are unable to pay their debts – only a showing of financial and administrative disorder is required to submit a restructuring petition. The term “financial and administrative disorder” is not defined in the Bankruptcy Law, and it remains to be seen how it will be interpreted by the courts.

The petition for restructuring may be submitted by a trader who has been continuously engaged in business for the two years that precede the filing of the petition, provided that such trader has not committed any fraud. In addition, a petition for restructuring cannot be submitted until 3 years have lapsed from the date of refusal or stay of the previous petition. In the case of companies applying for a restructuring, the approval of a majority of the shareholders will be required.

The petition is required to be submitted to the Control and Inspection Department of Commercial Establishments at the Ministry of Commerce and Industry (the “Department”). Filing a petition for restructuring will result in the stay of a petition in bankruptcy and preventive composition, until the final adjudication of the petition for restructuring.

The petition for restructuring is required to include the reasons for the financial and administrative disorder, the date of the disorder, the steps taken by the trader to overcome or remedy such disorder, as well as the steps the trader deems necessary to overcome such disorder. The petition for restructuring is required to be submitted within six months from the date of the financial and administrative disorder.

The Department will hold meetings with all the concerned parties to mediate and the settle the issues detailed in the petition. The Department will also appoint a restructuring committee comprising of members of the roll of experts to review the petition, determine the reason of the disorder, and manage and assess the assets of the petitioner. The restructuring committee is required to a prepare a report including the reasons for the disorder, a restructuring feasibility study, and a restructuring plan to be submitted to the Department or the relevant court, as the case may be, within three months of the restructuring committee being appointed. Any proposed restructuring plan must be capable of being implemented within five years.

If the creditors agree to a settlement or the restructuring plan, the trader and the creditors will execute the settlement agreement or restructuring plan, which will then be submitted to the court and will be binding on all the signatories.

If the parties are unable to reach a settlement or agree to the restructuring plan, the petition for restructuring will be considered to be rejected. The petitioner is entitled to appeal such rejection before the court within 15 days of notification of rejection of the petition. The court is required to decide on such appeal within seven days of the date of referral, and such decision will be final.

If the parties agree on a restructuring plan, the court may appointment a person from the roll of experts to assist the trader in implementing the restructuring plan. Such person will be required to prepare a report every three months in respect of the implementation and compliance with restructuring plan and submit such report to the Department and the signatories to the restructuring plan.

During the implementation of the restructuring plan, unlike in the case of an insolvency proceeding, the trader will continue to administer its property, and will remain liable in respect of obligations that are not included in the restructuring plan, are subsequent to the accreditation date of the restructuring plan, or that are contrary to the terms of the restructuring plan.

Preventive composition

The concept of preventive composition under the Bankruptcy Law is similar to provisions in respect of preventive composition set forth in Book 5 of the Law of Commerce. By applying for a preventive composition, a trader seeks to achieve a settlement with creditors and avoid bankruptcy.

A trader is entitled to apply for a preventive composition if the trader is likely to cease payment of the trader’s debts. In order to be eligible to apply for preventive composition, the trader should have been engaged in business in the preceding two years and must not have committed any act of fraud or gross fault. All companies except for joint ventures are entitled to apply for preventive composition provided that they comply with the aforementioned requirements and obtain the approval of a majority of the shareholders. Unlike in bankruptcy proceedings, creditors cannot make an application for preventive composition.

Following the submission of a petition for a preventive composition that is accepted by the relevant court, all bankruptcy proceedings and other claims and enforcement actions relating to the trader are automatically stayed, which includes proceedings in respect of both secure and unsecured debts. The stay against secured claims is distinct from bankruptcy proceedings, where only unsecured claims are stayed. The court may also decide to take precautionary measures in order to preserve the trader’s assets. By preserving the assets of the trader, both from secure creditors and potentially from the trader, it is anticipated that the trader will be able to achieve a resolution whereby the business is preserved and able to settle the debts, as opposed to liquidating the business. During this time, the trader can continue to administer the property and undertake acts in the ordinary course of business.

A composition trustee is appointed by the court, and the trustee must, within five days of being notified of his appointment, notify the Commercial Registry of the commencement of the composition proceedings and publish the initial consent to commence composition proceedings in the Commercial Register and invite all creditors of the trader to a meeting. Such invitation is required to be published in a well-known daily newspaper or any other publication specified by the court. Within 15 days of such publication, all creditors of the trader are required to provide details in respect of their debts to the composition trustee to enable the composition trustee to prepare list of debts and creditors and submit the same to the relevant court within 40 days of the date of issuance of the decision opening the preventive composition proceedings. Once the list of creditors has been verified, the court will set a time within which the creditors are required to meet to decide on the terms of the preventive composition. Five days prior to such meeting of the creditors, the composition trustee is required to submit their report including their opinion on the terms of the preventive composition proposed by the trader.

A judge of the relevant competent court will preside over such meeting of creditors and an approval of a majority of the creditors whose debts have been accepted is required to approve the preventive composition, provided that such majority of creditors also holds two-thirds of the verified debts. In the case of a company that has issued bonds or sukuks, where the value of the outstanding bonds or sukuks exceeds one-third of the total outstanding debts, the composition will require the approval of a general assembly of the holders of such bonds or sukuks. Secured creditors are prevented from participating in voting unless they waive their rights as secured creditors.

Once the preventive composition is approved by the requisite majority and is ratified by the court, the terms of the composition will apply to all unsecured creditors, including those who voted against it.

The rights of secured creditors are not impacted by the preventive composition, and they remain entitled to enforce their securities against the trader.

A preventive composition may be annulled by the court after ratification if it is later discovered that the trader acted in a fraudulent or misleading way, such as by concealing assets or over estimating debts etc.

Bankruptcy

The provisions relating to insolvency proceedings under the Bankruptcy Law are similar to provisions previously set forth in Book 5 of the Law of Commerce.

A trader may submit a bankruptcy petition if the trader has suspended payment of commercial debts due to a disruption in the trader’s business. The petition is required to be submitted within 15 days from the date of cessation of payment. Unlike in the case of preventive compositions, creditors owed commercial debts are also entitled to submit a bankruptcy petition to declare a debtor trader bankrupt.
In addition, a court may, on its own initiative, adjudicate a trader bankrupt. With respect to companies, submission of a bankruptcy petition by the trader company requires the approval of majority of its shareholders.

Bankruptcy claims will be examined by the court on a summary basis and the court may order precautionary measures against the assets of the trader debtors to preserve the assets of the trader prior to the adjudication of bankruptcy. The court will also determine a date for the cessation of payments by the trader, and appoint a liquidator and appoint a judge as the official receiver to oversee the insolvency proceedings. The liquidator takes over the management of the assets of the bankrupt person and acts on behalf of the bankrupt person during the liquidation process. The fees and expenses of the liquidator are determined by the official receiver.

Following the adjudication of bankruptcy by the court, the liquidator will enter the adjudication in the Commercial Register and publish a summary of the adjudication in the official gazette, which should include an invitation to creditors to submit details of their debts. The bankrupt person will no longer be entitled to administer, dispose of any property, pay any debts or recover any amounts owed to him. The management of the assets and liabilities of the bankrupt person rests with the liquidator.

If a partnership is adjudicated to be bankrupt, all the partners will also be declared bankrupt, regardless of whether the court adjudicating the bankruptcy has jurisdiction over such partners. In addition, former partners of a partnership who withdrew from the partnership after the cessation of payment of debts but prior to the adjudication of bankruptcy will also be declared bankrupt when the partnership is declared bankrupt.

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 the declaration of bankruptcy. Any contract entered into by the bankrupt person prior to the date of declaration of bankruptcy remains valid and continues to exist although certain obligations under those contracts may become suspended by reason of bankruptcy.

Following the declaration of bankruptcy of an insolvent person, interest will cease to accrue on the debts of the bankrupt person and creditors will not be entitled to initiate or continue any legal proceedings against the bankrupt person. Secured creditors may however, continue or initiate proceedings against the liquidator for the sale of the securities securing the amounts owed to the secured creditors.

Upon the declaration of bankruptcy, the bankrupt person’s debts will be settled in the following order of priority:

  • salaries of employees;
  • government dues and taxes;
  • preferred or secured creditors; and
  • unsecured creditors.

In the event that the assets of a company adjudicated bankrupt are not sufficient to settle at least 20% of the debts, the court may, at the request of the liquidator, oblige all or some members of the board of directors of the company to jointly or severally settle the debts of the company, unless the directors are able to prove that they exercised due care and diligence in the management of the company. The liquidator may also request that the bankruptcy judge require shareholders to settle outstanding debts of the bankrupt company from their shares in the company or the remainder of the value of their shares in the company.

Pursuant to the Commercial Companies Law, insolvency of a company is one of the reasons for which it may be dissolved and be struck off from the Commercial Register. The Bankruptcy Law states that a company may be dissolved if it is established that the remaining assets after liquidation are not sufficient to proceed with its activities.

Under the provisions of Oman Sultani Decree No. 35/2003 on the Promulgation of the Labour Law, an employer is responsible for all obligations towards its employees arising under the contract of employment and Oman Sultani Decree No. 35/2003. Article 47 of Oman Sultani Decree No. 35/2003 states that the liquidation, insolvency or bankruptcy and final authorised closure of an employer are valid grounds for termination of an 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 such employees.

Judicial composition

A judicial composition may be initiated by a bankruptcy judge after a declaration of bankruptcy at the request of an interested party. The liquidator will be asked to provide an opinion on the terms of the proposed composition, and similar to a preventive composition, approval of a majority of creditors (whose debts have been approved in the bankruptcy) is required, provided that the amounts owed to such creditors comprise of two-thirds of the total outstanding amount.

Once the creditors and the bankrupt person have agreed the terms of the judicial composition, it will be ratified by the judge and all effects of the person being adjudicated bankrupt will be removed. Upon ratification of the judicial composition, the liquidator must resign and the bankrupt person will be entitled to manage their assets.

A bankrupt person will not be entitled to enter into a judicial composition if they have been sentenced for committing fraud during the bankruptcy proceedings, and a ratified judicial composition may be annulled if the bankrupt person is later convicted a committing fraud during the bankruptcy proceeding.

Creditors’ union

If a bankrupt person does not apply for a judicial composition or the composition is rejected or annulled, the creditors will be ipso jure in a state of union.

Following the establishment of the union of creditors, the bankruptcy judge will convene a meeting of the union of creditors to appoint a trustee of the union of creditors and to determine whether to retain or change the liquidator, as may be determined by a majority of the creditors.

The trustee is not entitled to continue the business of the bankrupt person without the prior approval of three-quarters of the total number of creditors forming the union and the bankruptcy judge. The trustee may, however, be entitled to sell moveable and immoveable assets of the bankrupt person, the amount of which may be deposited into a designated bank account. The fees associated with the bankruptcy proceeding, the cost of administration of the estate, and any amounts to be paid to the bankrupt individual will be deducted from amounts realized from the insolvency, followed by amounts due to secured creditors. The remaining amount will be distributed amongst the unsecured creditors on a pro-rata basis based on the debts verified by the liquidator.

The official receiver may terminate the bankruptcy proceedings under the following conditions:


  • no debts were accepted in the bankruptcy proceedings or debts were owed to one creditor; 
  • the payment of all debts accepted under the bankruptcy proceedings; 
  • entering into a composition with creditors;
  • non-availability of property belonging to the bankrupt person that may be subject to the execution; and 
  • liquidating all the property of the bankrupt person and ratifying the final accounts.

Rehabilitation

A bankrupt debtor may be rehabilitated if such person has paid all due amounts and expenses owed to the creditors. In any event, all rights extinguished by virtue of a person being declared bankrupt will be restored three years from the date of the termination of the bankruptcy proceedings.

A bankrupt debtor who has been sentenced for fraudulent or negligent bankruptcies may not be rehabilitated unless in accordance with the provisions of Royal Decree No. 97/1999 on the Penal Procedures Law.

Penalties

If a trader submits a bankruptcy petition that it rejected by the court, and if the court believes that the trader had deliberately alleged bankruptcy, the court may sentence the trader to a fine of no less than OMR 200 and not exceeding OMR 500. A court may impose a similar fine on a creditor whose bankruptcy petition in respect of a trader is rejected by the court.

The Bankruptcy Law provides that a trader will be sentenced to imprisonment for a period of not less than six months and not exceeding three years, or a fine of not less than OMR 1,000 and not more than OMR 5000, or both, in the event that a trader:

  • in bad faith conceals all or some their property with the aim of achieving a restructuring or a preventive composition;
  • induces or enables a creditor to unlawfully participate in a restructuring or preventive composition; or
  • in bad faith neglects to include the name of certain creditors in the list of creditors.
Similarly, any creditor who takes part in a composition fraudulently or has conspired with the trader to vote for a composition in return for a benefit will be sentenced to imprisonment for a period of not less than three months and not exceeding two years or to a fine of not less than OMR 500 and not exceeding OMR 2000, or both. The composition trustee may be sentenced to the same penalty if they have provided, in bad faith, false information about the debtor.

The Bankruptcy Law prescribes penalties for experts, supervisors and liquidators who act in bad faith, and any person who provides false information in connection with the procedures set out in the Bankruptcy Law.

Conclusion

The Bankruptcy Law is part of the Omani government’s ongoing efforts to encourage investment in the Sultanate and to provide comfort to both foreign and domestic investors. The introduction of the concept of restructuring, as well the inclusion of strict time lines within which procedures are required to be completed will hopefully be beneficial both to businesses and investors in avoiding liquidation, and in the event a liquidation is required, managing the liquidation in a timely manner.

Given that the Bankruptcy Law will go into force in July 2020, it is hoped that the interim time will be used to identify the experts who will be listed in the roll of experts and that proper training is provided to all the relevant stakeholders for smooth implementation once the law goes into force. In addition, the Bankruptcy Law mentions that implementing regulations will be issued.

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