The ability to take effective security is available in a number of ways in Oman, although there are significant regulations with respect to enforcement and the manner in which value can be realised.

This article is the first in a series of articles written to explain how to take security in Oman over a variety of assets. Together, we have written a number of articles which will provide an overview of the principal types of security available in Oman, methods of enforcement, issues relating to specific assets and financing structures, and issues for international lenders and foreign entities. This article will deal with commercial mortgages. Later editions will focus on security over land, receivables and other types of asset.

A commercial mortgage in Oman can be taken over moveable assets (including stock, vehicles, ships, aircraft, equipment, receivables and intellectual rights), buildings and a mortgagor's business (including the commercial registration number, commercial name and goodwill).

Key Issues

• There is no form of universal “floating charge”, as the concept is not recognised under Oman law. Assets subject to a commercial mortgage must exist, be clearly identified and be owned by the mortgagor on the date that the security is created. Contractual rights cannot therefore be mortgaged as they are future or contingent. As a result of this, a commercial mortgage over the commercial registration is frequently used as an alternative.
• The courts in Oman will only enforce a commercial mortgage perfected by way of formal registration in accordance with Oman procedures.
• It is not possible to register a commercial mortgage in Oman over assets located outside Oman.
• It is always crucial that the mortgagor has actual constructive possession of the assets to be secured. The courts would not be able to enforce the security if it was not perfected by registration in Oman.
• The mortgagor must be incorporated in Oman, have the requisite authority to secure its assets and not be subject to any restrictions in its constitutional documents.
• It is common in syndicated transactions, especially if non-Omani lenders are included, for a “security agent” to be appointed as mortgagee to hold the benefit of, and, if necessary, enforce, the security on behalf of the syndicate. Given the issues highlighted in this article, most lenders to Omani entities have sought to rely on commercial mitigants (such as careful choice of counterparties and extensive due diligence). Anecdotal evidence suggests that, to date, secured creditors have been willing to restructure debt and payment terms rather than take the trouble of enforcing Oman’s security interests.

Moveable Property Secured by Way of Commercial Mortgage

• Security can be taken by way of commercial mortgage (with actual or constructive possession) over moveable property. However, when a moveable asset is secured as part of a charge of a business under Article 67 of the Law of Commerce, it has not yet been judicially clarified as to whether constructive possession is presumed by law in addition to the requirement of registration of the charge. Moveable property typically includes any moveable objects as opposed to land. It includes all types of vehicle (including vessels and aircraft). For a vessel to be secured, the vessel must be registered in Oman since the charge will be registered against the title to the vessel with the relevant authority in Oman.
• Additional registration requirements will depend on the type of asset, for example a charge taken over vehicles will be registered on the Mulkiya (title deeds) of that asset by the Royal Oman Police. A charge over equipment should be registered with the relevant authority that governs that specific type of equipment. In the event that a relevant authority does not exist, this charge should be registered at the Ministry of Commerce and Industry of Oman (MOCI).
• Oman does not maintain a central registry. However, the MOCI maintains a register of commercial mortgages over company assets and records the charge on the company’s computer printout. This states the name of the chargee, the date that the charge against the asset was registered and the assets charged.

Commercial Mortgage Explained

• A commercial mortgage is a fixed charge; as we have already mentioned, there is no concept of a floating charge in Oman.
• The assets to be secured must be specifically identifiable on the date that the commercial mortgage is entered into. Where items included within the commercial mortgage are not precisely defined, as in a charge over the mortgagor’s commercial registration, only the mortgagor’s trade name, the right to lease, the right to contact clients and goodwill will be secured. It will be important to include a schedule of assets to be secured. Typically the asset schedule should cover details, in relation to each and every asset, such as value, quantity, name of supplier and registration numbers (where relevant).
• A commercial mortgage must be concluded by a formal contract in Arabic and be attested and registered at the MOCI within 30 days of being signed. Usually the process of signing and registration is carried out on the same occasion. Priority is established by the date and time of registration.
• Assets acquired by the mortgagor after registration of a commercial mortgage may be added by registration of a supplemental commercial mortgage at the MOCI. A charge over additional assets by way of a supplemental commercial mortgage will take effect in terms of priority from the date of registration of the supplemental commercial mortgage rather than from the date of registration of the original commercial mortgage.
• A commercial mortgage may be released and removed from the register at the MOCI by written agreement between the mortgagor and mortgagee or by virtue of a court judgment, or upon expiry of five years without renewal. To remain valid the registration must be renewed every five years.
• Security over a fluctuating pool of assets is not enforceable as the secured assets are not certain. However, where a commercial mortgage is taken over a fungible asset it shall continue to subsist even if it is substituted with an asset of the same type. If it is not fungible, then the mortgagor may only substitute a secured asset if allowed under the terms of the commercial mortgage and the mortgagee agrees.
• A mortgagee is only entitled to the proceeds of sale of the secured asset sufficient to discharge the secured debt once the item is sold by way of court process.

• A court order is required to enforce any type of security interest. A mortgagee may therefore be required to prove that the debt obligation owed to it has become due and payable and remains outstanding prior to taking any enforcement action.
• The value of secured assets may only be realised by sale in a public auction administered by the court. The mortgagee would then receive the proceeds of sale up to the amount of the debt depending upon the type of the assets in question.
• Enforcement can be a lengthy process and may take up to two years. Note that unless the mortgagor is co-operative, as far as we are aware it is not possible to circumvent the court process.

Enforcement Issues on Insolvency

• The insolvency process is a court-based process in Oman with no legislative alternatives (for example, administration as in the United Kingdom). However, creditors of a troubled company may informally agree amongst themselves an informal arrangement.
• Priority of a commercial mortgage will be enforced according to the date and time of registration and the courts will not enforce any arrangement which cuts across this. This has led to the practice in financing transactions of having security held in the name of one bank (usually the lead agent bank), which acts as “security agent”. There is then a separate contract between the security agent and all other lenders that deals with proceeds of enforcement and priorities. Alternatively, the commercial mortgage can be registered in favour of multiple creditors having pari passu ranking as long as they are included in one mortgage document and registered at the same time.

Self-help Remedies

There are no self-help remedies on enforcement of a commercial mortgage, and it is not possible for an enforcing mortgagee to simply take possession of secured assets and exercise a power of sale over them without the prior intervention of the courts. There is a specific provision in the Law of Commerce which provides that any agreement that permits a mortgagee to acquire ownership or sell a secured asset in the event of non-payment of a debt on the due date, without reference to the courts, will not be valid if granted prior to the debt falling due. It is likely but not confirmed that such an agreement would include a power of attorney.

It has become common practice in secured transactions for the mortgagor to grant a power of attorney to the mortgagee so that the mortgagee may proceed to sell the secured assets upon an event of default without reference to the court process. The ability of the mortgagee to obtain such a power of attorney after an event of default and avoid the need to go to court for enforcement of security will therefore depend on its relationship with the mortgagor. We are aware of instances of debtors, who do not dispute that a debt is payable, nor the amount of such debt, granting a power of attorney after an event of default to enable the mortgagee to sell a secured asset without recourse to the courts.

The date of registration of a commercial mortgage at the MOCI is relevant as it will determine the ranking of the priority position of the mortgagee in relation to other mortgagees in connection with the same asset(s). Mortgagees who apply for entry of their charges on the same day will have priority according to the time of registration i.e. the race to registration.

In order to register a commercial mortgage, an Arabic version must be supplied. This applies in relation to any supporting documentation such as a power of attorney or resolution.

Proceedings in the courts in Oman are conducted exclusively in Arabic. Should a commercial mortgage be produced before the courts in Oman, only an Arabic translation will be admitted in evidence. In such event there is the possibility that the Arabic text will prevail over the English text.

Authors: Sadaf Buchanan, and Philip Keun With thanks to Abdelrahman El Nafie for his contributions.

Please note that this article is based on the modern, written, secular legislation of the Sultanate of Oman as promulgated by decree or decision of HM the Sultan or other competent source of regulatory utterance including, but not limited to, Ministerial Decisions and/or fatwas having the force of law as at 2 March 2011.

It should be borne in mind that the Basic Law states, in Article 2, that “Islam is the religion of the State and the Islamic Shari'ah is the basis of legislation” and, in Article 77, that existing laws and regulations remain in force “provided that they do not conflict with any of the provisions of the Basic Law”. The Basic Law also provides for the establishment of a court with jurisdiction to determine whether legislation complies with the provisions of the Basic Law. Whilst it is our expectation that it is not the government of Oman's intention to introduce a means of challenging the validity and enforceability of legislation relating to commercial matters generally on the basis that it is contrary to Islamic Shari'ah and, therefore, conflicts with Article 2 of the Basic Law, it is not possible for us to state that this is or will be the case. The only area which the Basic Law expressly states will be governed by Islamic Shari'ah is the law related to family affairs and inheritance (Article 11).

All laws, regulations, decisions and decrees are in Arabic with no official translation into any other language. All references to or extracts from the same in this analysis are based upon unofficial translations. Please also note that the decisions of the courts of Oman are not published nor is there any doctrine of binding precedent as in common law jurisdictions. Consequently, it is difficult to predict with any certainty what decision or interpretation a court would take on any given issue in the future.