Guardianship and Bankruptcy: Provisions and Interrelation Between them in the Iraqi Banks Law

By Mustafa Muayad - Head of Baghdad office in Salt & Associates - m.ridha@saltandassociates.com - 00964 78 050 10222

Guardianship and Bankruptcy:

Provisions and Interrelation Between them in the Iraqi Banks Law

Introduction:

The banking industry has recently witnessed a tremendous development worldwide due to the continuous progress in other sectors of the scientific and economic life. Banking sector is one of the important economic sectors so it has to be equally developed with other important sectors in order to keep in tone with them. Therefore, the re-assessment of the legal system governing the banking activities in any country has become an inevitable need. One of the most important requirements of such a process is to develop the legislative framework governing the work of banks and overcome all legal obstacles that may hinder this sector.

Because banks, like any other legal person practicing commercial activities, may face problems as they tackle some business and may also be able to overcome some of such problems, but they may fail to solve some other problems that fall out of their reach. This could lead to further complications to the extent that external interference is sometimes required to solve, or at least, mitigate the impacts of the problems.

Guardianship and bankruptcy systems and rules are among the most important types of problems the Iraqi legislator addressed in the Banking Law No. 94 of 2004 and gave solutions, regulations and provisions for.

Guardianship and bankruptcy systems are among theseverest procedures that can be applied on a bank that fails to pay its dues, in order to ensure the settlement of its debts by means of distributing the remaining assets of the debited bank over the creditors in a fair way, and preventing the bank from transferring  the money outside, in order to save the creditors and protect them from great damages.

We will try to shed some light on these two concepts in the Iraqi Banking law in following three sections:

  • The concept of guardianship over banks
  • The concept of bankruptcy
  • The relationship between guardianship and bankruptcy

Guardianship Over Banks

This system of guardianship over banks is relatively new. It appeared due to the advances in the banking activities. It aims at protecting the stability of the banking system in a country and helping banks overcome financial problems.

Guardianship system is practiced in many Iraqi legislation, such as the Iraqi Civil Code No. 40 of 1951, the Personal Status law No. 188 of 1959 and the Juveniles Care Law 78 of 1980. Although guardianship in each of these laws differs from that of the Iraqi Banking Law, we find resemblance in terms of the objectives of each of them in the sense that guardianship can be practiced over natural or legal persons,    according to the relevant law, to protect the rights and interests of that person due to his/her inability to run such rights and interests. Moreover, guardianship means depriving the person of the power and eligibility to practice the legal activities, regardless of the differences among laws.

As for the concept of guardianship in the Iraqi banking law, it somehow differs from guardianship in other laws. For example, in this law, we find that the basic rule is that banks are free to work without being influenced by any entity in terms of practicing and managing commercial activities. However, there is one exception for such freedom which is the guardianship system.

To highlight guardianship, we suggest it is discussed from three aspects: the legal grounds to appoint a guardian, the results of guardianship, and how guardianship is terminated.

 

As for the legal grounds of appointing a guardian, we find in article 59 that there are two ways to appoint a guardian: the first is mandatory and the second permissible. Mandatory guardianship happens when the bank cannot fulfill its financial obligations as they are due;when the capital is 5% below than the minimum level set by the law; when a claim is filed to declare bankruptcy against the bank according to article 72; or when the Central Bank finds it necessary to appoint a guardian on the bank to stabilize the banking system.

As for the permissible form of guardianship, it means that the Central Bank has the power to appoint a guardian on a bank when that bank does not implement an order issued by the Central Bank; when the bank’s capital is 75% less than the legal threshold; when there is an evidence that the bank, or one of its managers, is involved in criminal activities the penalty of which is one year imprisonment or more; or when the Central Bank finds that there is forgery in the licenses or documents of the bank then the Central Bank may appoint a guardian on the bank.

Regarding the consequences of appointing a guardian on the bank, the decision of the Central Banks hall be immediately executed, unless the law stipulates otherwise. Such a decision shall suspend the powers of the shareholders as well as the powers of the managers and transfer them all to the guardian. Also, appointing a guardian means that all decisions taken by the bank after the date of issue of the guardianship decision shall be void. Finally, the guardian is accountable only to the Central Bank  in practicing activities and managing its works.

With regard to the termination of guardianship, article 66 of the Iraqi Banks Law stipulates the cases of terminating guardianship period. It is terminated when the period of guardianship mentioned in the decision of appointing a guardian is expired; when the last extension of the guardianship period is expired; when the Central Bank or the court of financial services take a decision to terminate the guardianship; or in case of appointing a judicial liquidator by the court according to article 74 of this law.

When guardianship is terminate din terms of the situations above, the guardian shall immediately transfer the control over the bank and its assets and records to the bank’s manager. The guardian shall submit a final report to the Central Bank within 20 working days in this instance.

The Concept of Bankruptcy

The Iraqi Trade Law No. 30 of 1984 (amended) does not give a clear definition to bankruptcy, yet it directly mentions it through its procedures and how to declare it in article 566, and after. However, as we read the articles of this law we can reach as  the following definition: “bankruptcy  means that a businessman can no longer pay the commercial debts and the condition requires a court decision to declare bankruptcy which can be filed by the businessman him/herself or by the creditors.”

Speaking of the relationship between guardianship and bankruptcy in this law, we have to mention an important point, which is that article 70 prohibits the execution of bankruptcy articles in the Trade Law, or in any of its amendments, on banks. Rather, this law makes this issue a specialty of the law of banks through the mechanism it determines, about which we will talk elsewhere her. We find it appropriate to highlight bankruptcy system in both laws, i.e., the Trade Law and Banks Law.

Bankruptcy in Trade Law

This law deals with bankruptcy in article 566 and the articles that follow. This article stipulates that when a businessman ceases to pay the commercial debts, he/she is deemed bankrupt and bankruptcy is declared by a court order. A businessman cannot be considered bankrupt unless there is a court order of bankruptcy as stated   in the second paragraph of article 566. Also, the bankruptcy order sets the bankruptcy status and without such an order there is no effect on stopping payments unless the law stipulates otherwise. A request for bankruptcy can be filed by the businessman who quit business or dies. Such a request must be filed within one year after death or retirement. Inheritors of the dead businessman can file such request provided that article 567 is observed in terms of the stipulated period.

Bankruptcy request can be filed by the businessman or by a creditor. If it is filed by the businessman, it must be within 15 days as of the date payments suspension,  and the period can be extended to 45 days if the businessman notified his creditors about his financial difficulties (article 568). The bankruptcy request takes the form of a report explaining the reasons of payment suspension including all data that prove those reasons as stipulated in article 569.It is also possible for a creditor or a group of creditors who own more than 500.000 ID worth of commercial credit to request bankruptcy for the credited party (article 570).Moreover, bankruptcy requests can be filed by five or more of the employees of the businessman, collectively,  to demand payment of their wages if they were overdue by more than one month provided that wages in question are not disputed over (article 570/4) and bankruptcy is not permitted if the businessman stopped paying due fines or taxes of any kind (article 571).The bankruptcy request must be submitted to the specialized court which is entitled to make the necessary procedures to protect and manage the assets of the credited party.

There are more details about bankruptcy in the provisions of the Trade Law, but there is no enough space here for them and we believe that what we presented so far is enough to give a general idea about the subject. Now, we come to bankruptcy in the Iraqi law of banks.

Bankruptcy in the Iraq Law of Banks

First, we have to say that the Iraqi legislator stated in article 70 of Iraqi Banks Law that bankruptcy provisions in the Trade Law or any of its amendments are not applicable here. With such limitation, the law ruled out the banking sector from bankruptcy procedures in the Trade Law which is considered here as being general rules.

The Iraqi law regulates bankruptcy procedures, provisions and how to file a bankruptcy claim in article 71 and after. It specifies the parties entitled to file a bankruptcy claim, the grounds for such claims and the agency entitled to make the relevant decisions. Claims have to be submitted to the Court of Financial Services which is formed according to the Chapter 12 of the law of the Central Bank in 2004 in articles 63 and after.

As for the parties entitled to file bankruptcy claim in this law, they are exclusively: the Central Bank of Iraq or three creditors to whom the bank owes 4 billion ID of overdue payment. The Central Bank files bankruptcy claims when the grounds for it are available according to the law. These grounds are: the inability of the bank in question to fulfill its financial obligations including the credits on the financial deposits; hen the bank’s capital is 25% less that the required amount; and when the bases stipulated in article 53 of this law are applicable.

The claim must be filed in writing form to the Court of Financial Services against the bank. If the claim is submitted by the exclusive parties with the grounds stated in article 72, the court shall consider the claim and the final session shall be held within one week if the claim is submitted by the Central Bank, and within two weeks if the claim is submitted by three or more creditors. The court is entitled to summon the Central Bank, the Claimers and the bank’s officials to a public session as common, and the session can be private by exception. Then, the court makes a decision at the end of the session. If the court accepts the claim against the bank, it will declare bankruptcy of the bank and proceeds with the procedures of the claimant appoint a judicial liquidator according to article 80. If the court rejects the claim, it must mention the reasons in accordance with the justifications in the law when the claim is lacking in the required substantial documents or when the Central Bank objects on the claim according to article 75(2). The Central Bank cannot object against the claim unless it is filed by the creditors; the Central Bank previously decided that there is no legal grounds for the claim; or the Central Bank decides to rehabilitate the bank in question for the sake of stabilizing the banking system, provided that this is by an order by the minister of finance according to article 67. The court is entitled to reject the claim submitted by the creditors in writing regardless of the fact that the court considered or neglected the claim if it deems the claim trivial.

According to article 79, upon the acceptance or rejection of the claim by the court, the court must notify the Central Bank and the bank in question of its decision and publishes it in the official gazette in addition to two other popular newspapers.

The Relationship between Guardianship and Bankruptcy

Guardianship and bankruptcy  systems are connected by a strong legal bond. We mentioned earlier that guardianship is a legal procedure imposed on banks to stabilize the banking sector. Here, guardianship resembles bankruptcy in the objective the law aims at. Also, guardianship is applied on the bank upon submitting bankruptcy claim to the court of financial services.

Moreover, the bank in both cases, i.e., guardianship and bankruptcy by court order, is suspended and prevented from any administrative activity of its own due to being under a guardianship or bankruptcy order.

Finally, we hope we were successful in highlighting some of the aspects of this subject to make this paper an introduction for future research and tackle other aspects that are not mentioned here for the sake of conciseness and consistency.


Article written by :

Hussein N. Abdullah
hussein.abdullah@saltandassociates.com

Associate
Salt & Associates
Baghdad Office