As the Gulf states begin to emerge from the wide-ranging restrictions imposed in response to the Covid-19 pandemic, attention is turning to recovery. However, many businesses have struggled through the crisis, and this is expected to lead to an increase in use of the relatively untried insolvency regimes around the region.

In Oman, a new insolvency regime underwent a major change last year, with the introduction of a Bankruptcy Law (Royal Decree 53/2019). The new law comes into effect on 7 July 2020 and there are significant issues provisions that companies and lenders should be aware of.

The new law puts in place an insolvency regime that is more in line with international norms. The law applies to any individual engaging in commercial activities, partnerships, companies and branches of foreign companies, with the ex banks and insurance companies notably excluded. Of particular note is the risk for directors whom a judge may find personally liable if they are found to have not exercised proper care and attention.

There are three options for restructuring a business under the new Bankruptcy Law: restructuring, preventative composition or judicial composition.

The advantages of a restructuring application are considerable: firstly it gives the debtor room to breathe, by staying bankruptcy proceedings (but not other proceedings), and the business in question can remain under the control of the owners

Restructuring

This is a consensual compromise between a debtor and its creditors, made with the aim of helping the debtor to overcome financial challenges and to avoid liquidation.

A debtor may apply for a restructuring petition as long as it has traded for at least two years and has not committed fraud. It must show it has suffered financial and administrative hardship prior to the non-payment of debts along with the steps it has taken to overcome the hardship.

Upon a successful application for restructuring, bankruptcy proceedings must be stayed and 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 that must be implemented within five years.

The Ministry of Commerce & Industry will mediate between the debtor and its creditors with regard to the restructuring plan.  If the creditors agree to the restructuring plan, it will be referred to the court for approval and it will be binding on all parties.

The advantages of a restructuring application are considerable: firstly it gives the debtor room to breathe, by staying bankruptcy proceedings (but not other proceedings), and the business in question can remain under the control of the owners.

Preservation of assets is a key element of a preventative composition and assets stay with the debtor’s business while the settlement agreement is prepared and voted upon

Preventive composition

A debtor may file an application for preventative composition if the debtor has been engaged in business for a minimum of two years and has not committed fraud or been grossly mismanaged.  As with 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 it can show that it is suffering such hardship that a continuation of the business in its present circumstances would lead to an inability to repay debts. 

It is important to note that the tests in Oman are not the usual insolvency tests that apply in other countries – the balance sheet test and the cash flow test, but refer specifically to hardship.

Preventative composition allows a debtor to propose a settlement agreement with its creditors in relation to its financial obligations. It does not require the agreement of all its creditors to be approved. A majority of creditors by number and two-thirds by value can approve a preventative composition that would then bind all creditors, including dissenting creditors. 

Unlike restructuring applications, a successful application for a preventative composition results in a comprehensive stay of all proceedings against the debtor (including debt claims and execution proceedings, whether secured or unsecured, not just bankruptcy proceedings).

Preservation of assets is a key element of a preventative composition and assets stay with the debtor’s business while the settlement agreement is prepared and voted upon. The debtor, as a result, is able to continue with its business, during this period, under the supervision of a court appointed trustee.

Judicial composition is an arrangement whereby the creditors agree a settlement agreement with the debtor, under which the debts are crammed down, in order for the debtor to emerge from the threat of bankruptcy

Judicial composition

In an existing bankruptcy proceeding, the bankruptcy judge may, upon a request from any interested party, and at any stage of the proceedings, commence mediation procedures to reach a judicial composition. 

Judicial composition is an arrangement whereby the creditors agree a settlement agreement with the debtor, under which the debts are crammed down, in order for the debtor to emerge from the threat of bankruptcy.

In order to hear an application, the judge may order the court secretariat to invite creditors, whose debts have been finally or provisionally admitted, to attend the deliberation on the judicial composition request.

The new law specifies that a judicial composition will only take place if a majority of the creditors whose debts are admitted agree, provided that they own at least two thirds of debt by value.

In the event of a positive vote, all effects of bankruptcy shall cease to exist and all creditors will be bound, whether they voted in favour or not, upon the issuance of a judgement endorsing the judicial composition. 

Directors and management

Once the changes come into effect, directors, managers and officers of pre-distressed or distressed companies may be called upon to make a difficult choice from restructuring options that may ultimately limit creditor recoveries and dilute or eradicate their owner's equity interests.

Where companies face financial difficulties, directors and managers could be held personally liable or face penalties for their actions, under both the Bankruptcy Law and the Commercial Companies Law (Royal Decree 18/2019).

(a) Directors or managers may be held liable and required to pay all or part of the company's debts if there are not enough assets in the company to repay at least 20 per cent of the company's debts, unless they prove that they have exerted due diligence in managing the company's affairs.

(b) Directors of joint stock companies also have an express duty to take actions towards preserving the company's capital under the Companies Law which does not apply to managers of limited liability companies. If the share capital of the company is eroded by over 25 per cent, the directors must take immediate action to remedy the cause of the financial difficulties experienced by the company. If the share capital falls below 50 per cent, the directors must convene an extraordinary general meeting in order to determine the course of action needed to remedy the issue. The directors and the auditor are jointly liable for any damage resulting from their failure to take the necessary actions.

(c) Where directors or managers of a company commit serious mistakes that lead to hardship in the company's business and which results in an inability to pay its debts, the court, on its own or upon the request of the bankruptcy judge, may issue an order prohibiting such person(s) from accepting any jobs in the public sector or any directorship position until they are rehabilitated.

(d) More generally, directors and managers can be held liable under the Companies Law "to the company, the shareholders and third parties for the damage resulting from … negligence committed by them during the performance of their duties and also for their failure to act as prudent persons under certain circumstances". What is 'prudent' or 'negligent' will of course differ for each circumstance. For example, where directors or managers form the view (or should have formed the view) that the company may not be able to trade, because of financial difficulties, prudent directors and managers should not act (or omit to act) in a manner which harms the interests of creditors.

When facing the threat of insolvency, directors and managers have to take into account all the interests of the company’s economic stakeholders, not just shareholders, and it is not always obvious which stakeholders’ interests should be given preference

More generally, and in addition to the statutory obligations, directors and managers must take into account contractual obligations in, for example, the company's financing agreements with lenders, which are likely to contain express provisions dealing with misleading information and misrepresentation. 

Accordingly, therefore, directors and managers must, at all times, approach their actions and communications with honesty and a necessary level of directness to avoid allegations of misleading creditors which could result in personal liability.

When facing the threat of insolvency, directors and managers have to take into account all the interests of the company’s economic stakeholders, not just shareholders, and it is not always obvious which stakeholders’ interests should be given preference.

Directors and managers must be aware of the scope of their fiduciary responsibilities and personal liabilities in considering substantive and strategic options to alleviate or resolve distress.

If they elect the wrong option, and there is not enough value to satisfy debts, liabilities and equity interests, their actions will be carefully scrutinised, particularly by disappointed creditors, equity interest holders and inquisitive regulators.

It is important to note that new procedures have not been tested before the courts in Oman so, judging by experiences elsewhere in the GCC it may be some time before clear practices are established. Advice should be sought before seeking to exercise any of the rights outlined in this paper as procedures and interpretations are liable to change.

About the author

This legal insight was provided by Thomas Wigley, an Oman-based partner at Trowers & Hamlins