This article considers how lenders and borrowers in Iraq can match the type of security to the asset being secured and to the route by which it would be enforced. Security is only valuable if it can be enforced. A lender may take a document described as security over an asset, but if the document does not create a recognised security interest, is not registered where registration is required or cannot be enforced through a realistic procedure, the lender may find itself an unsecured creditor when it matters most.
Iraqi law recognises several forms of security, each suited to particular types of asset and each with its own requirements for creation, perfection and enforcement. Iraq does not have a single modern registry for security over movable assets of the kind found in some jurisdictions, so the choice of security type for movables and receivables requires particular care. Understanding these differences helps lenders structure security packages that will work in practice.
The Iraqi Civil Code No. 40 of 1951 governs the principal forms of real security, including the registered mortgage (often called the insurance mortgage) and the possessory pledge, as well as personal guarantees and the assignment of rights. The Real Estate Registration Law No. 43 of 1971 governs registration of mortgages over real property. The Commercial Law No. 30 of 1984 contains provisions relevant to commercial pledges and banking operations. The Companies Law No. 21 of 1997, as amended, is relevant to pledges over shares. The Execution Law No. 45 of 1980 governs enforcement through the execution directorate.
Starting with the asset
The security analysis should begin with the asset. Different assets call for different approaches:
- Real estate. Land and buildings with registered title can be secured by a mortgage registered in the real estate registry.
- Vehicles and registered equipment. Assets with their own registration systems may be subject to restrictions or pledges recorded in those systems.
- Movable equipment and inventory. Assets without a registration system may be secured by a possessory pledge, which generally requires the creditor or an agreed third party to hold possession.
- Shares. Shares in Iraqi companies may be pledged, subject to the Companies Law, the articles of association and, for listed shares, the procedures of the Iraq Central Depository.
- Receivables and bank accounts. Amounts owed to the borrower may be assigned or made subject to arrangements under which payments are directed to an account controlled by the lender.
- Personal and corporate guarantees. Guarantees provide recourse against a third party’s general assets rather than a specific asset.
Each type has different strengths and limitations.
Understanding real estate mortgages
A registered mortgage over real property is generally the most robust form of security in Iraq. It gives the creditor priority over the property according to the registration date and allows enforcement through the execution process. The lender should verify title in the real estate registry, check for existing mortgages and restrictions, confirm that the mortgagor has capacity and authority and ensure that the mortgage is registered correctly. Real estate advice in Iraq can assist with title verification and mortgage registration.
Certain property, such as land held under state allocation, investment land or property subject to legal restrictions, may not be freely mortgageable or may require approval. These restrictions should be identified before the property is accepted as collateral.
Using possessory pledges for movables
The possessory pledge requires delivery of possession of the pledged asset to the creditor or a third party. This works well for documents of title, goods in a warehouse controlled by an agent or shares held in custody. It works poorly for equipment the borrower needs to use in its business. Lenders sometimes accept pledges where the borrower retains possession, but the effectiveness of such arrangements against third parties and in enforcement should be carefully assessed.
Securing receivables and cash flows
Receivables are often a borrower’s most valuable asset. Lenders can seek an assignment of receivables, with notice to the debtors, or require customers to pay into a collection account at the lending bank. The enforceability of assignments against debtors and third parties depends on compliance with the Civil Code’s requirements, including notice. Where receivables are owed by public bodies, contract terms and administrative practice may restrict assignment. Commercial contract advice in Iraq can help assess whether customer contracts allow assignment and how payments can be redirected.
Taking security over shares
Share pledges allow a lender to take control of a company by enforcing against its shares. For unlisted companies, the pledge should comply with the Companies Law and the articles, which may restrict transfers or require consents. For listed shares, the pledge should be recorded through the Iraq Central Depository. The lender should consider how it would enforce, whether a buyer could be found and whether regulatory approvals would be needed for a transfer of shares in a regulated company.
Relying on guarantees
Guarantees from shareholders, parent companies or affiliates provide additional recourse. Their value depends on the guarantor’s assets and the enforceability of the guarantee in the jurisdiction where those assets are located. Guarantees should be drafted to survive amendments to the underlying facility and should be supported by evidence of the guarantor’s capacity and authority. Foreign guarantees may require enforcement abroad.
Considering the enforcement route
For each security, the lender should consider how enforcement would work in practice:
- Procedure. Whether enforcement requires a court judgment or can proceed directly through the execution directorate on the basis of the registered security.
- Timetable. How long enforcement is likely to take, including potential challenges by the borrower.
- Sale process. How the asset would be valued and sold, and whether there is a market for it.
- Competing claims. Whether privileged claims, such as certain employee wages or taxes, would rank ahead.
Litigation and dispute resolution advice in Iraq can assess the enforcement route for each element of the security package.
Building a balanced security package
A sound security package combines several forms of security, each matched to an asset, supported by guarantees and backed by contractual protections such as financial covenants, information rights and events of default. The package should be proportionate to the risk and to the value of the assets.
Reviewing security periodically
Security that was adequate at the outset may become inadequate during the life of a facility. Property values may fall, equipment may depreciate or be replaced, receivables may shift to new customers and guarantors’ financial positions may change. Lenders should review their security periodically, particularly for longer-term facilities.
Reviews should check that registrations remain in force and accurate, that insurance over secured assets is maintained with the lender noted, that new assets acquired by the borrower are brought within the security where intended and that guarantors continue to have assets supporting their guarantees. Facility documents should give the lender rights to request valuations, require additional security if coverage falls below agreed levels and receive financial information from guarantors.
Periodic review also helps borrowers. A borrower whose security has increased in value may be able to negotiate release of some assets or better terms, and a clear record of security reduces disputes on repayment.
Illustrative example. A bank lends to an Iraqi manufacturer and takes security in the form of a pledge over its production machinery, with the machinery remaining at the factory. When the borrower defaults, another creditor attaches the machinery and challenges the bank’s pledge on the basis that possession was never transferred. Had the bank combined a registered mortgage over the factory premises with a collection account arrangement for the manufacturer’s receivables, it would have had stronger security that matched the realistic enforcement route.
Conclusion & how Etihad Law Firm can help
Effective collateral in Iraqi finance depends on matching the type of security to the asset and to a realistic enforcement route. Registered mortgages, possessory pledges, share pledges, receivables arrangements and guarantees each have their place, and each must be properly created and perfected.
Etihad Law Firm advises lenders and borrowers on security structures, registration and enforcement in Iraq. Our corporate team can assist with share pledges and corporate approvals required for security packages.