An Overview of the Insolvency Regime under Omani Law

Key Legislation Governing Insolvency in Oman

As a general principle, in the Oman Civil Code, promulgated by RD 29/13, Article 277 provides that a restriction may be placed on a debtor by order of the court if his debts due exceed his assets. A restriction order has the following consequences:

• any debts due from the debtor shall become payable; and

• any disposal of his property by the debtor shall be void as against his creditors after the restriction order is issued and from the date the statement of claim is registered.

 

However, it is Book Five of the Oman Commercial Law issued by RD 55/90 (“OCL”) that contains the more detailed provisions governing bankruptcy and insolvency in the Sultanate of Oman.

Penalties for Directors or Business Owners Who Knowingly Trade While their Business is Insolvent

Article 604 of the OCL provides that a bankrupt entity may not dispose of any assets, nor make or receive any payment save where such receipt of payment is for a bona fide commercial purpose.

Article 614 of the OCL, however, permits a bankrupt entity to conduct a new trade with assets other than those of the estate in bankruptcy, provided that the creditors do not suffer detriment as a consequence.

Pursuant to Article 590 of the OCL, the Commercial Court will specify in a judgement the date on which the bankrupt is deemed to have ceased making payments. Under Article 609 of the OCL, creditors may petition the Commercial Court to avoid transactions made by the bankrupt after the cessation date (a) if such a transaction is considered to be detrimental to them; and (b) where the third party to such a transaction is aware at the time that the bankrupt has ceased payment.

The following transactions may be avoided if carried out by the bankrupt after the cessation date:

• all donations, except customary small gifts;

• settlement of debts before their due date;

• settlement of debts by means other than those agreed upon; and

• creation of any security interest.

 

Any application to have a transaction declared void by the receiver must be made within twelve months of the declaration of bankruptcy. Creditors may in any event bring an action for restitution.

What Options Does a Business in Distress Have?

The only option available to a business in distress is to apply to the Commercial Court for a declaration of bankruptcy. On the adjudication of bankruptcy, the Commercial Court appoints a receiver to administer the bankrupt’s estate (Article 589).

What Options Do the Creditors of a Business in Distress Have?

Pursuant to Article 589 of the OCL, creditors may file an insolvency petition at the Commercial Court. As noted above, under Article 609 of the OCL, creditors may ask the Commercial Court to avoid transactions made by the bankrupt after the cessation date (a) if such a transaction is considered to be detrimental to them; and (b) where the third party to such a transaction is aware at the time that the bankrupt has ceased payment.

Priority of Creditors

On declaration of bankruptcy there is constituted, by operation of law, a group of creditors whose claims against the bankrupt were validly established before the declaration of bankruptcy. Secured creditors with mortgages do not form part of the group of creditors until they participate in the bankruptcy for the recovery of any amounts that have remained unpaid after the sale of the secured assets.

The Government has priority under RD 32/94 for sums it is owed, whether by way of taxation or otherwise. Such decree provides that debts owed to certain Government bodies have priority claim over all debts, secured or otherwise, owed by that debtor to any other person, and sets out specific mechanisms for precautionary attachment and execution of the debtor’s assets.

The Oman Labour Law safeguards employees’ rights to receive any salary and other benefits still owed to them upon the bankruptcy of a business and, accordingly, their dues will rank higher in priority to payments due to other creditors.

Restructuring the Debt

There is provision for judicial composition (akin to a restructuring or a scheme of settlement) in Chapter Two of Book Five of the OCL.

The commissioner in bankruptcy notifies the creditors whose debts have been finally or provisionally admitted to attend the deliberations on composition.

Where the debts are not contested, such notice is sent within the seven days following the drawing up of the final list of the debts, and, where the debts are contested, within fifteen days following the expiry of the time for appeal against the last decision of the judge commissioner in bankruptcy as to whether the debts are to be admitted or rejected.

No composition shall take place without the approval of a majority of the creditors whose debts were finally or provisionally admitted, and provided that they hold two thirds of such debts.

Article 708 (in Chapter Two of Book Five of the OCL) provides that the composition may grant additional time for the debtor to discharge its debts and may provide for the release of the debtor from part of the debt.

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Focus on Employment Law: Probation Periods

Probation periods are a well-known and basic feature of many employment arrangements in Oman. Sometimes, however, the Omani law provisions relating to probation periods can cause problems for companies.

Typically, an employer has the right to terminate an employee during the probation period and, in such circumstances, the employee is only paid for the actual days he or she has worked. Under Article 24 of the Omani Labor Law, the duration of probation cannot be longer than three months for those workers paid monthly, and cannot be longer than one month for employees paid other than monthly.

What is less commonly known is that Article 24 of the Labor Law also requires the giving of seven days notice for the termination in probation to be valid.

Companies that are unaware of this requirement often delay making a decision until too late in the probation period. In the past, Omani courts have had to consider the situation in which written notice was given four days before the end of a three-month probation period. The court held that the notice was invalid as, under the law, the seven-day notice period must expire before the end of the three-month period.

Similarly, in another case, an Omani court decided that a termination was unlawful even though Article 24 had been complied with in full. In that case, the court said it was unfair to terminate someone within the first week of a probation period. The judicial view was that the worker deserved a greater length of time in probation before it could be determined that he was not good enough at the work.

Another problem can arise in the situation in which a probation period is not detailed in the employment contract. There is a tendency for Omani courts to rule that the worker has a right to believe that there is no period of probation if the contract is silent about probation.

Finally, Article 24 also states that no employee can be subjected to more than one probationary period by the same employer. Therefore, an additional probation period cannot be imposed upon renewal of an employee’s employment contract or upon the employee’s change in position or status within the company.

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Prescription under Omani Law

For persons debating whether to bring a claim under Omani law, it is important to know that, for some matters, Courts will not permit the claim if too much time has elapsed since the event giving rise to the claim occurred. Similarly, companies that are concerned about potential litigation over an event may wonder at what point they can finally lay the matter to rest and be certain that no litigation will ensue.

The legal concept dealing with when a claim must be brought is known as “prescription” in civil law jurisdictions such as Oman. Prescription sets forth a maximum period of time after an offense occurs within which legal proceedings may be initiated. If the claim is not brought within the prescription period, the Court is unlikely to accept the case regardless of how strong it may be. This concept also is recognized in common law jurisdictions such as England and the United States under the term “statute of limitations”.

Prescription periods vary from case to case based on several factors such as the severity of the alleged offence. For example, in severe criminal matters there often is no prescription period and a person may be prosecuted no matter how much time has elapsed since the crime occurred. In contrast, for simple commercial matters the prescription period may be much shorter. In a commercial context, short prescription periods encourage parties to raise complaints in a timely fashion, which promotes certainty in commercial dealings.

Some typical examples of prescription in Omani law include:

• Article 7 of the Oman Labor Law states that employee rights shall lapse after one year of becoming due. The Courts, however, have ruled that such rights shall lapse after one year of the termination date of the employment relationship.


• Article 11 of the Consumer Protection Law states that consumers shall have the right within a period of ten days from the date of purchase of any commodity to have the commodity replaced or returned or to recover its value if it is defective.


• Article 16 of the Law Regulating Engineering Consultancy Offices states that the owner of a consultancy office shall be jointly responsible with the contractor for the faults and flaws that may occur in the project designed by or executed under the supervision of his office for ten years from the date of the handing over of such installations.


• Article 16 of the Law Regulating Engineering Consultancy Offices also states that claims filed after the lapse of three years from the date of discovering the fault or flaw without instituting an action within the aforesaid period shall not be considered by the Courts. This is an interesting example of prescription in which it is the discovery of a condition on which one wishes to initiate a legal claim, rather than a particular event, that starts the prescription clock ticking.

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