This article considers how an Iraqi corporate group can restructure when its companies share employees, assets and bank facilities. Many Iraqi groups developed organically. A founding company employed staff who worked across the group, bought equipment used by affiliates and borrowed under facilities that funded the whole business. Over time, the legal separation between companies became blurred in practice, even though each company remained a distinct legal person.
When the group needs to restructure, whether to sell a division, separate a failing business from a healthy one, reduce debt or bring in an investor, that blurring becomes a problem. Buyers, lenders and investors need to know which company owns what, employs whom and owes what to whom. The restructuring must untangle these relationships while preserving the businesses’ ability to operate.
The Companies Law No. 21 of 1997, as amended, recognises each company as a separate legal person and governs transfers of shares and assets between them. The Iraqi Civil Code No. 40 of 1951 governs contracts, assignments, guarantees and the ranking of claims. The Labour Law No. 37 of 2015 and the Workers Retirement and Social Security Law No. 18 of 2023 govern the identity of the employer and the transfer of employees. The Income Tax Law No. 113 of 1982, as amended, affects intra-group transfers and pricing, and the Banking Law No. 94 of 2004 and facility documents govern the lenders’ rights.
Mapping the legal reality
The first step is a factual map of the group as it actually exists in law, not as management perceives it:
- Employment. Which company is the registered employer of each employee, which company pays them and which business they actually work for.
- Assets. Which company holds title to each significant asset, including real estate, vehicles, equipment and intellectual property, and which business uses it.
- Contracts. Which company is the contracting party for key customer, supplier and lease arrangements, and which business performs them.
- Debt and security. Which company is the borrower under each facility, which companies have given guarantees or security and how the facilities have been used across the group.
- Intra-group balances. Amounts owed between group companies, whether documented or simply recorded in accounts.
This map often reveals mismatches: employees paid by one company but working for another, assets bought by one company but used by another, or loans drawn by one company to fund another’s operations.
Resolving employment arrangements
Employees whose work does not match their legal employer present risks in a restructuring. If a business is sold, its workforce may remain employed by a company that is not being sold. If a company is liquidated, employees may claim against it although they worked elsewhere. The restructuring should align employment with the business that the employee actually serves.
Transfers of employees should follow the Labour Law, which contains provisions on the continuity of employment and successor liability on the transfer of an enterprise. Accrued service, end-of-service entitlements and social security records must be addressed. Employment law advice in Iraq can help design a transfer process that protects both employees and the companies involved.
Transferring assets between group companies
Assets used by one company but owned by another should be transferred or made available under a documented arrangement, such as a lease or licence. Each transfer must be valid and, where required, registered. Real estate transfers require registration under the Real Estate Registration Law No. 43 of 1971, and vehicles and certain equipment have their own registration systems.
Intra-group transfers should be at a value that can be justified for tax purposes and that protects the creditors of the transferring company. A transfer at an undervalue may be challenged by creditors of the transferor and may have tax consequences. Tax advisory services in Iraq can advise on the valuation and documentation of intra-group transfers.
Addressing bank facilities and cross-guarantees
Group facilities are often the most complex element. A single facility may have been made to one company and guaranteed by several others, with security over assets throughout the group. If one company is to be sold or separated, the lenders will need to agree to release its guarantee and security, and may require repayment or new security in exchange.
The restructuring should consider:
- Lender consents. Facility agreements commonly restrict disposals, mergers, changes of control and new security. The group must identify each restriction and obtain the required consent.
- Allocation of debt. Where debt funded the whole group, the parties must agree how much each business will carry after the restructuring.
- Release of guarantees. A company leaving the group should be released from guarantees of group debt; otherwise, it may carry liabilities for a business it no longer belongs to.
Documenting shared services
After the restructuring, some sharing may continue. A business may continue to use a central finance team, IT systems or premises owned by another company. These arrangements should be documented in shared services or transitional services agreements, specifying the services, charges, standards and termination rights. Documented arrangements protect each company and its creditors and support the arm’s-length pricing that tax authorities expect. Commercial contract advice in Iraq can help prepare these agreements.
Settling intra-group balances
Undocumented intra-group balances should be reconciled and either settled, documented as loans, capitalised or waived. Each option has tax and creditor consequences. A waiver may be treated as income for the debtor company. Capitalisation requires a capital increase. Settlement may require funding that the group does not have. The restructuring plan should decide how each balance will be treated before transactions are implemented.
Sequencing the restructuring steps
Group restructurings involve many interdependent steps, and the order in which they are taken matters. Employees should not be transferred to a company that does not yet hold the licence needed to employ them. Assets should not be transferred before lenders have consented and released any security over them. Shares in a subsidiary should not be sold before the subsidiary has been released from guarantees of group debt.
A step plan should list each transaction, the approvals it requires, the documents to be signed and the registrations to be completed, and should identify which steps must precede others. Where steps must occur simultaneously, such as the release of security and the payment that triggers it, the plan should provide a closing mechanism that protects each party. Preparing the step plan before negotiating with lenders and buyers allows the group to present a coherent proposal and avoid surprises late in the process.
Illustrative example. An Iraqi group comprising a trading company, a logistics company and a property company decides to sell the logistics business. On review, the trucks are registered to the trading company, the drivers are employed by the property company and the logistics company’s working capital was funded by a bank facility to the trading company guaranteed by all three. Before the sale, the group transfers the trucks at an agreed value, transfers the drivers in accordance with the Labour Law, obtains the bank’s consent to release the logistics company’s guarantee in exchange for a partial repayment and documents a short transitional services arrangement for accounting support.
Conclusion & how Etihad Law Firm can help
Restructuring an Iraqi group with shared employees, assets and facilities requires a clear map of legal reality, followed by deliberate steps to align employment, assets, debt and services with the intended structure. Each step should be valid, documented and consistent with the rights of employees, lenders and creditors.
Etihad Law Firm advises Iraqi and international groups on internal restructurings, divestments and debt reorganisations. Our corporate team can coordinate the legal workstreams needed to separate and reorganise group businesses.