This article examines how creditors and a struggling Iraqi business can use a standstill agreement to pause enforcement while a recovery plan is developed. When a business cannot meet its obligations, creditors may each take steps to protect themselves: calling guarantees, attaching bank accounts, seizing assets or initiating court proceedings. Individually, each step may seem rational. Collectively, they can destroy the value of a business that could have recovered if given time.
A standstill is a contractual agreement in which participating creditors agree not to enforce their rights for a defined period, while the debtor provides information and works toward a restructuring proposal. Because Iraq lacks a formal court-supervised moratorium of the kind available in some jurisdictions, a standstill depends entirely on contract. Its effectiveness rests on who signs it, what it restricts and what the debtor commits to in return.
The Iraqi Civil Code No. 40 of 1951 governs the standstill agreement where Iraqi law applies, including the rules on contractual obligations, waiver and the effect of agreements on third parties. The Execution Law No. 45 of 1980 governs enforcement that the standstill is intended to restrain. The Civil Procedure Law No. 83 of 1969 is relevant to pending proceedings. Where banks are involved, the Banking Law No. 94 of 2004 and Central Bank of Iraq instructions on classification and provisioning may affect how lenders approach the standstill.
Deciding whether a standstill is appropriate
A standstill is useful when the business has a reasonable prospect of recovery and creditors would collectively receive more through a negotiated plan than through immediate enforcement. It is less useful where the business has no viable future or where creditors are so numerous and dispersed that coordination is unrealistic.
Before proposing a standstill, the debtor should prepare a preliminary assessment of its financial position, the causes of its difficulties and the outline of a recovery plan. Creditors will be more willing to stand still if they can see a credible path to improved recovery.
Identifying the creditors who must participate
A standstill is only as effective as its coverage. If a significant creditor is not party to the agreement, it can enforce while others are restrained, which undermines the purpose and may make other creditors unwilling to participate. The debtor should identify:
- Secured lenders. Banks with security over key assets or accounts. Their participation is usually essential.
- Major unsecured creditors. Suppliers, contractors or landlords with significant claims who could disrupt operations.
- Guarantee beneficiaries. Parties holding bank guarantees or bonds that could be called.
- Public creditors. Tax and social security authorities, who are unlikely to sign a standstill but whose claims must be managed separately.
The standstill can be structured so that it becomes effective only when creditors holding a defined proportion of claims have signed, giving participants comfort that they are not alone.
Defining the restrained actions
The standstill should state precisely which actions are restrained. These commonly include accelerating debt, enforcing security, calling guarantees, initiating or continuing court or execution proceedings, applying for provisional attachment and setting off claims. It may also restrict creditors from transferring their claims to parties outside the agreement, since a transferee who is not bound may enforce.
Creditors will usually want exceptions. Actions needed to preserve rights, such as filing a claim to stop a limitation period running, may be permitted. Litigation and dispute resolution advice in Iraq can help identify procedural steps that must remain available to protect a creditor’s position without breaching the standstill.
Setting the debtor’s commitments
In exchange for restraint, creditors will expect the debtor to commit to:
- Information. Regular cash flow reports, management accounts and access to advisers.
- Operating restrictions. No new borrowing, disposals of assets, preferential payments or new security without creditor consent.
- Timetable. Delivery of a restructuring proposal by a defined date, with milestones for negotiation.
- Equal treatment. No payments to individual creditors outside the agreed framework, other than ordinary trade payments needed to keep operating.
The debtor should agree only commitments it can meet. A breach of the standstill will usually entitle creditors to terminate and enforce, leaving the debtor in a worse position than before.
Managing operations and trade creditors during the standstill
A standstill among financial creditors does not stop suppliers from demanding payment. The business must continue operating, which requires paying suppliers, employees and taxes. The standstill should allow ordinary course payments and may provide for a limited new funding facility with priority, if creditors are willing to support the business through the standstill period. Commercial contract advice in Iraq can help secure continued supply on terms that support the standstill.
Planning for the end of the standstill
A standstill has a defined duration. It should state what happens at expiry, whether it can be extended and on what basis, and what happens if the restructuring plan is agreed by some creditors but not others. Without a formal cram-down mechanism under Iraqi law, a restructuring plan generally binds only those who agree to it. The parties should therefore consider whether the plan can be implemented in a way that deals with dissenting creditors, for example by paying them out or leaving their claims unaffected.
Treating information and confidentiality carefully
A standstill depends on information. Creditors need cash flow forecasts, management accounts and details of other creditors to assess the restructuring proposal. The debtor, however, may be concerned that sensitive information will be used by a creditor to its advantage, for example by enforcing against a newly identified asset after the standstill ends, or that news of the company’s difficulties will reach customers and suppliers.
The standstill should therefore include confidentiality obligations covering the information provided, the existence of the negotiations and the terms of any proposal. It should also define how information will be shared, for example through a data room or through a financial adviser appointed by the creditors, and what happens to it if the standstill ends. Creditors that are banks may have regulatory reporting obligations, and the agreement should accommodate these.
Equal access to information also supports fairness among creditors. Where one creditor receives information that others do not, the others may suspect preferential treatment. Providing the same information to all participating creditors helps maintain confidence in the process.
Illustrative example. An Iraqi manufacturer with facilities from three banks and debts to several suppliers falls behind on payments after a major customer defaults. One bank attaches the company’s operating account, threatening payroll. The company’s advisers propose a ninety-day standstill. Two banks sign, but the third refuses unless its attachment is maintained. The company and the participating banks agree to a structure in which the attached account remains frozen but new receipts are paid into a fresh account controlled jointly by the participating banks, allowing operations to continue while a restructuring plan is negotiated.
Conclusion & how Etihad Law Firm can help
A creditor standstill can preserve value in a struggling Iraqi business, but only if it includes the creditors who matter, restrains the right actions and gives creditors the information and protections they need. Because it rests on contract, careful drafting and realistic commitments are essential.
Etihad Law Firm advises debtors and creditors on standstill agreements, restructuring negotiations and enforcement strategy in Iraq. Our corporate team can help design a standstill that supports a credible recovery plan.