Oman has undergone a change within the Bankruptcy regime with the introduction of Royal Decree 53/2019 promulgating the Bankruptcy Law (Bankruptcy Law) which comes into effect on 7 July 2020. The Bankruptcy law repeals Book 5 of the Civil Transactions Law (Commercial Code).
The Bankruptcy Law sets out to:
- achieve a clear and strong legal framework for insolvency;
- counter slow growth and an inability to restructure;
- enhance foreign direct investment and domestic investment;
- reduce the stigma of business failure; and
- encourage entrepreneurship.
This article sets out the key procedural steps envisaged by the Bankruptcy Law.
Preamble: who is concerned and what is the Bankruptcy Law?
Pursuant to article two of the Bankruptcy Law, the law applies to traders as defined in the Commercial Code. Any person who has the requisite capacity and who adopts such transactions as a business will be considered a trader. In short then, the law applies to any person engaging in commercial activities, companies and branches of foreign companies. Banks and insurance companies are excluded from the Bankruptcy Law.
The Bankruptcy Law is separated into four separate chapters. They are: restructuring (which is a new concept for Oman), preventive composition, bankruptcy and rehabilitation of the bankrupt. Article 5 of the Bankruptcy Law also requires the establishment of a roll of bankruptcy experts which shall include individuals and companies specialised in the field of restructuring, asset management, bankruptcy and other industry specialists.
Chapter 1: Restructuring
The first chapter of the Bankruptcy Law sets out the new concept to Omani legislation of restructuring. It is a consensual compromise between debtors and creditors made with the aim of helping the debtor to overcome financial challenges and to avoid liquidation. A debtor may apply for a petition for restructuring provided that it has not committed fraud and it must have traded for at least two years.
A debtor must show financial and administrative hardship prior to the non-payment of debts. Hardship is not defined in the Bankruptcy Law. It is possible that clarity will be provided in subsequent implementing regulations. A debtor must apply within 6 months of the hardship and must include in the application the reasons which caused the hardship, the steps taken to overcome the hardship and the steps deemed necessary to be taken to resolve the hardship.
Following the application for restructuring, a committee from the official roll of experts will be formed to consider the application. The committee will develop a restructuring plan with the debtor taking into account the reasons for the hardship. The plan must be implemented within 5 years. The Ministry of Commerce and Industry will mediate between the debtor and its creditors with regard to the restructuring plan. If the parties agree to the restructuring plan then the competent authority will refer the application to the court for approval and it will be binding on all parties.
The advantages of a restructuring application are considerable: namely that it gives the debtor 'room to breath' and stays bankruptcy proceedings that would otherwise have been effective. Furthermore, the business in question can remain under the purview of the owners with support from experts and creates a potentially non-confrontational environment to explore a consensual deleverage of a debtors balance sheet.
A potential disadvantage here is the possibility of a lack of local expertise to meet the needs of the roll of experts and critically that the restructuring plan requires the consent of all the debtors creditors to succeed. This, however, is all to be seen in the fullness of time after the Bankruptcy Law comes into effect.
Chapter 2: Preventative Composition
Preventative composition (PC) is similar to that which was set out in book 5 of the Commercial Code. Similar to restructuring, a trader may file an application for preventative composition if the trader has been engaged in business for a minimum of two years and has not committed fraud or is grossly at fault. Similarly to restructuring only the debtor may apply for this relief.
Every company, after obtaining the consent from the majority of the shareholders, may apply except for joint venture entities. A debtor may apply if there is such hardship that a continuation of the business in its present circumstances would lead to the inability to repay debts. The court considering the application may order precautionary measures on the funds of the debtor and take such measures to enquire as to the financial situation of the debtor.
PC allows for the debtor to reach agreement with its creditors in relation to its financial obligations. It does not require the agreement of all the creditors of the debtor for any composition to be approved. A majority of creditors by number and two-thirds by value can approve a PC which will bind all creditors including dissenting creditors as part of a cramdown process. Unlike restructuring applications a PC application will result in a comprehensive stay of proceedings against the debtor (for clarity: bankruptcy proceeding, debt claims and execution proceedings, whether secured or unsecured, are automatically stayed). Preservation of assets is a key element of PC and assets stay with the debtors business. The debtor, as a result, is able to continue the ordinary course of dealings under the supervision of a court appointed trustee.
Chapter 3: Bankruptcy
The provisions in respect of declaring bankruptcy are again largely similar to those provisions in book 5 of the Commercial Code but the procedure is slightly updated.
A trader, within 15 days of cessation of payments, may apply for bankruptcy. Unlike with restructuring or PC, a creditor who has been unpaid and can prove the debt may also apply for bankruptcy of a trader.
The court may also on its own declare a trader bankrupt. In considering the bankruptcy, a court may order precautionary measures against the funds of the debtor or its management for a renewable period until the case has been settled. The court may also take such measures as required in order to have comprehensive knowledge of the financial situation of the debtor and the reasons for its suspension of payments.
Following the relevant order by the court, a liquidator shall be appointed and is obliged to publish the summary of the judgement in the Official Gazette and include an invitation to creditors to submit details of outstanding debts. The liquidator is to also register the summary in the Omani company register.
The effects of bankruptcy on a creditor are various and include, but are not limited to, interest no longer accruing on outstanding sums, and a restriction on proceedings being started against the trader (although secured creditors will still be able to start proceedings for the sale of the secured assets for the amounts owed to the secured creditor).
Chapter 4: Judicial Composition
The bankruptcy judge, upon a request from any interested party, and at any stage of proceedings, may commence mediation procedures to reach a judicial composition (JC). In order to do that, he may order the court secretariat to invite creditors whose debts have been finally or provisionally admitted to attend the deliberation on the JC request.
A liquidator or the trustee of the creditors' union shall submit a report to the creditors' union including the state of the bankruptcy, the procedures taken concerning it, and its opinion concerning the proposals of the bankrupt for JC. The Bankruptcy Law specifies that JC will only take place if majority of the creditors whose debts are admitted agree, provided they own two thirds of debt by value.
All effects of bankruptcy shall cease to exist upon the issuance of a judgement endorsing the JC, including any expenditure determined on the bankruptcy funds. The liquidator shall then provide the bankrupt with a closing account, which shall be discussed in the presence of the bankruptcy judge.
Rehabilitation
If all debts and expenses are repaid to creditors all rights of a debtor will be restored. In any event, all rights shall be restored after the 3 years from the date of termination of bankruptcy proceedings.
What next for the Bankruptcy Law?
The Bankruptcy Law aims to encourage investment in Oman and to remove the stigma of business failure, exemplified by the new options made available to both creditors and debtors. The Bankruptcy Law has introduced the concept of restructuring and preventative compositions to save a failing business and has also added expert input to better manage the procedures. The law will come into force in July 2020 and the full effect of the changes encouraged by it should quite quickly be experienced across the jurisdiction.
