When debts pile up and cash runs short, many traders assume the only option is to wait for creditors to file for bankruptcy. Omani law offers a better route in many cases: preventive composition. This article explains what it is, its conditions and procedure, its effects, and how it differs from restructuring and bankruptcy.
What is preventive composition?
It is a court-supervised settlement between a trader debtor and its creditors, requested by the trader, to avoid a declaration of bankruptcy. The debtor and creditors agree on how the debts will be paid, by instalments, a reduction or both, so the business can continue.
The Bankruptcy Law 53/2019
Preventive composition is governed by the Bankruptcy Law issued by Royal Decree 53/2019, in force since 7 July 2020, which provides three routes: restructuring, preventive composition and bankruptcy. Insolvency disputes now fall to the Court of Investment and Commerce.
Conditions
- The applicant must be a trader, an individual or a company.
- Its financial affairs must be disturbed in a way likely to lead to a cessation of payments; it is a preventive tool.
- The debtor files the application with the required documents: assets, debts, creditors, financial statements and the proposal.
Procedure
- Prepare the file and the settlement proposal.
- File with the competent court, which decides whether to open proceedings.
- The debtor usually continues running the business under supervision and may not act against creditors' interests.
- Creditors lodge their claims.
- Approval requires a majority of admitted creditors holding two-thirds of the value of those debts.
- The court ratifies the composition, which then binds the creditors concerned.
- If the debtor fails to perform, the composition may be rescinded and bankruptcy may follow.
Composition, restructuring and bankruptcy compared
Restructuring is a broader plan to reorganise the business so it survives; composition is mainly an agreement with creditors on the debts themselves; bankruptcy applies once the trader has stopped paying and cannot be rescued, and usually ends in liquidation.
Frequently asked questions
What creditor majority is needed?
A majority of creditors whose claims were admitted finally or provisionally, holding two-thirds of the value of those claims.
When should I apply?
At the first signs of distress, before payments stop. Acting early makes your proposal stronger.
If your company is in financial difficulty, or you are owed money by a struggling trader, see our bankruptcy and restructuring lawyer service or contact Dr. Abdullah Al Rashdi Office in confidence on WhatsApp or +968 92000841.