Bankruptcy Rules and Regulations in Iran

Bankruptcy Rules and Regulations in Iran

Bankruptcy Rules and Regulations in Iran consists of two main laws: the code of commerce law and the act of administration of the bankruptcy. There are also a number of crimes relevant in this context, which may result from certain cases of faults and frauds.

 

General Terms of Bankruptcy in Iran

As anywhere else, in Iran merchants get bankrupt because they can’t pay back their debts anymore. The process is the same for the individuals and corporations. According to the article 412 of the Code of Commerce Law, bankruptcy of a merchant could be declared up to the one year after her death. When the merchant declared bankrupt, she loses her control over her properties and liquidator takes her seat, as to clear her debts (article 418). All debts not yet due, will be accelerated and proportionally reduced (article 421).

 

Who can Apply to Bankrupt a merchant?

 Article 415 states that the courts of first instance will proceed to declare bankruptcy of a merchant upon the request of:

1. The businessman himself;
2. The public attorney;
3. The creditors.

 

Before Liquidation Process

The preliminary proceedings shall be done before the liquidation starts. First of all, the court will nullify all transactions detriment to the benefits of the creditors, as authorized in the articles 423 to 426. Then, an observer shall be assigned to record the properties of the bankrupt merchant and keep them under lock and key (article 433).

 

Immune Properties from Distraint

The note under the article 439 indicates to the immune properties from distraint, but doesn’t articulate them. article 24 of the Law on the Manners of Execution of the Financial Convictions enumerates immune properties among them are noticeable items like business and work tools and house. Nevertheless, one should know the stores and other precious items will not be considered as work tools, even though they are necessary means for running a business. Houses, even average ones, may be uncategorized as immune properties from distraint if the bankrupt merchant or her family are not dwelt in it and have rented somewhere else. Article 447 also provides that the merchant may provide for his family a livelihood by using her seized properties, in the face of no other alternative to make a living.

 

Legal Agenda for Liquidation Process

liquidation process is subject to the relevant articles of Code of Commerce Law, and the Act of Administration of Bankruptcy. There is also a regulation of bankruptcy, which is short and to the point: illuminating dark sides of the liquidator terms and conditions within seven articles. But the essential part is still articulated in the two earlier laws which we continue our journey through them.

 

General Duties of the Liquidator

First of all, the liquidator has to accomplish what has been done before him. Article 444 states that some of the items under lock and key, may be taken out from, at the discretion of the liquidator. For example, some properties like food and beverage are liable to get rotten. Some other are capital goods and are profitable by renting or keeping them working, like in a factory.

Creditors don’t want the merchant’s business wind down, on the contrary, they want it to work and make money to pay the debts. The whole liquidation process is based on the assumption that the merchant’s business is not profitable anymore, so why not selling it part by part and clear the debts thereby. If part of the business is still working, or could be profitable in one way or another, the liquidator must make sure that part has not been stymied. (paragraph 3 of the article 444).

 

Selling the Properties and Paying the Debts

After taking into consideration of all modifications mentioned above, liquidator sells the properties through auctions, according to the article 40 of the Act of the Administration of Bankruptcy. This article provides two exceptions to the rule. Firstly, where a majority of creditors as represented in the article 480, pronounce their allowance for the purpose of selling properties or a part of it by another plan.  Secondly, where the properties consist of items like gold with a specified price in the market and therefore auction would not bring any more money.

 

Composition with Creditors

First, the observer invites the creditors for an assembly to consult with them around the composition contract. Then the liquidator reports to the assembly on bankruptcy proceedings; and finally, the creditors toss ideas around and make decisions as an assembly. (article 487). When the majority of the creditors who possess at least three fourth of the whole credits approve the terms and conditions, the composition contract will be effective. (article 480). At last, the contract must be confirmed by the court (article 486).

 

Order of Creditors

Creditors shall be reorganized into classes and the bankrupt merchant will pay off the debts based on priorities reflected by this classification. Article 58 of the Act of the Administration of Bankruptcy devises a chart to this purpose. First of all, all claims will divide into secured and unsecured ones. Secured claims involving pledged assets are preferred all the time, but limited to the amounts of money obtained from selling those assets. Other debts are to be classified according to this hierarchy:

Class A:

1. Remunerations of domestic workers for the year before bankruptcy;
2. Remunerations of the business workers for the six months before bankruptcy;
3. Remunerations of the daily or weekly workers for the three months before bankruptcy.

Class B:

Reliefs as to the non-compliance with the legal or judicial guardianship duties when leads to the financial loss.

Class C:

Medical expenses for the merchant herself or her family.

Class D:

Mahr and dowry and maintenance.

Class E:

Other Credits.

 

Criminal Bankruptcy: Fault

Article 671 of the Islamic Penal Code penalizes bankruptcies resulted from the fault by six-month, up to the two-year incarceration. Articles 541 and 542 of the Code of Commerce Law provides actus reus of this crime. Accordingly, unreasonable high-risk transactions could be marked as fault. Non-compliance with the requirement as to declare defaults to the court (article 413) and non-compliance to the rules governing financial books (articles 6 to 15) are other faults which are criminalized therein.

 

Criminal Bankruptcy: Fraud

Article 670 of the Islamic Penal Code penalizes bankruptcies resulted from the fraud by one-year, up to the five-year incarceration. Article 549 of the Code of Commerce Law provides actus reus of this crime. Accordingly, concealing business books or expunging them, or making up fake debts are punishable offences on the part of the merchant.