The Iraqi Federal Court of Cassation has confirmed that seeking a declaration of bankruptcy may not be the appropriate remedy where the Companies Law regulates the dissolution and liquidation of a company that has lost the prescribed portion of its capital.
Background
A company obtained a final judgment requiring another company to pay a commercial debt, but the debtor did not satisfy the judgment. Because the debtor’s financial position had deteriorated and substantial losses had accumulated, the creditor sought a declaration of bankruptcy and the appointment of an administrator.
The lower court dismissed the claim, and the creditor appealed to the Federal Court of Cassation.
Court’s Findings
The Court upheld the dismissal after finding that the debtor remained legally registered and in existence despite having ceased business activities and accumulated losses exceeding its capital.
The Companies Law identifies circumstances in which a company may be dissolved, including loss of the prescribed proportion of nominal capital. The creditor should therefore have applied to the Registrar of Companies for liquidation and appointment of a liquidator rather than using the bankruptcy procedure adopted in the claim.
Practical Implications for Creditors
Before commencing proceedings, creditors should investigate the company’s legal form, current registration status, operations, accumulated losses, any existing liquidation decision and assets available for enforcement.
A final judgment and non-payment do not, by themselves, determine the correct procedure for winding up the debtor and distributing its assets.
Practical Implications for Companies
Directors and shareholders should monitor accumulated losses and take the required corporate actions when statutory thresholds are reached. Failure to regularise the company’s position may expose it to liquidation applications and increased creditor disputes.
Conclusion
The ruling highlights the distinction between enforcing a debt, declaring bankruptcy and liquidating a company. A creditor must select the remedy appropriate to the debtor’s legal form and the Companies Law.