De Facto Corporations in light of the Commercial Companies Law No. 18 of 2019, and Court judgements

The Omani Penal Code specified three categories of offences classified according to the length of the custodial A De Facto Corporation is established when there is a failure to complete the registration procedures pursuant to the Commercial Companies law No. 18 of 2019. Some of its examples is when people deal in the name or on behalf of a company during the incorporation period and before registration of its constitutive contract, or when the partners continue to do work for the company after it has been voluntarily or involuntarily dissolved or has been liquidated. In addition, individuals may establish a company and may not be able to be complete the registration procedures due to the inability to meet the requirements or licenses requirement to exercise a certain commercial activity; nevertheless, they continue to operate under its name. This is usually the case when there is a foreign investor.

The De Facto Corporation must enter transactions that give rise to mutual rights and obligations whether between the company and others or between the partners themselves. Therefore, in the interests of justice and stability of the legal status of companies, jurisprudence and the judiciary have created the theory of a De Facto Corporation.

Conditions of the application of the De Facto Corporation Theory

Courts stipulate that in order to apply the De Facto Corporation theory, there must be a void partnership agreement due to it not being registered in accordance with the Commercial Companies Law no. 18/2019. Therefore, there is a need for multiple partners and for those partners to have an intention to participate in bearing the profits and losses of the company. As a result, the De Facto Corporation becomes no different that other companies that require by law a partnership agreement in accordance with Article 468 of the Civil Transactions Law no. 29/2013, which reads as follow:

“Partnership is a contract entered into by two or more persons in which each of them agrees to furnish a part of the capital or work for a business enterprise, and by which each of them shares profits and losses resulting thereof.”

To apply the theory, there is also a requirement for the company to have commenced doing some of its business operations thereby obtaining rights and has obligations and became both a debtor and creditor. In practice, individuals may agree to establish a company and each person contributes an amount for the capital, but the company has not commenced its operations for various reasons, like the unwillingness of a partner to continue the partnership. In such cases, the theory of a De Facto Corporation is not applicable due to possible conflicts or disputes that may arise between the partners about the recovering of share capital.

It is important to note that the Courts in the Sultanate of Oman have not laid down any conditions regarding good faith when it comes applying the theory of a De Facto Corporation.

Management of a De Facto Corporation

Management of a De Facto Corpoation is a right that is available to all partners unless the constitutive contract dictates one or more partners to manage the company. The company manager must perform all actions agreed upon for the purpose of the company, unless his authority is restricted by the constitutive contract. Furthermore, every partner is considered to be an agent on behalf of the other partners in carrying out the business of the company unless it is agreed otherwise.

Practical complications may arise when it comes to distinguishing between the actions each partner/manager undertake for the Defacto Corporation or otherwise for his personal benefit, especially if there is no company address or a lack of documents regarding the De Facto Corporation. It was decided by the court in one case that there is presumption that the managing partner works for himself, not on behalf of the company, as he signed in his personal name without mentioning the company’s address. However, it may be possible for a non-contracting party to deny this presumption by any means of evidence.

Proof of a De Facto Corporation

Courts in the Sultanate of Oman do not have any specific means of proving the existence of a De Facto Corporation. Therefore, it can be proven by the various ways stated in the Omani Law of Evidence 68/2008. The law states that the partner of the company or whoever has carried out the company’s business is able to submit certain documents, witnesses or experts to prove the establishment of the company from the company’s capital with the intention of participating in bearing both the profits and losses.

Legal effects of the De Facto Corporation Theory

If it is proven that a De Facto Corporation exists through having actual dealings with other parties, the courts will decide that the company is a De Facto Corporation rather than a company with a legal personality, as reflected in the Supreme Court decision issued on 9/6/2004 in appeal number 34 of the year 2004. Although courts tend to rule in favour of the constitutive contract being void due to lack of registration, this does not mean that there is a retroactive effect on dealings or transactions prior to the date of judgement. It is only effective after the judgement is issued to protect others and preserve their legal status.

Based on the above, several conclusions can be made, including but not limited to the following:

  • The partners are personally liable for the company as joint partners according to Article (5) of the Commercial Companies Law which says: “Any company doing business without taking any of the forms stipulated in Article (4) of the present Law shall be deemed null and void. Any party concerned may invoke the nullity thereof and the court may, on its own initiative, render a judgment to that effect. The persons that deal or act in the name of the company or on its behalf shall be severally and jointly liable for the obligations arising from the works or acts performed by them”
  • The company is liquidated as it legitimately exists, even though it does not have a legal personality. This can be done by paying off the company’s debts and settling the account between the partners by dividing the capital and profits equally unless agreed otherwise. The Supreme Court adopted this approach in Case No. 34 of 2004, mentioned above.

Taking into account the abovementioned, there are still a number of legal, procedural and objective matters that need to be taken into consideration to determine the consequences of applying the theory of De Facto Corporations by the Oman court. Therefore, we advise consulting an experienced litigation attorney before taking any legal action.

Ali Al Rashdi

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