This article examines how directors and managers of an Iraqi business under financial pressure can approach their decisions and document them. When a company struggles to pay its debts, its managers face difficult choices: which creditors to pay, whether to continue trading, whether to seek new funding and when to consider restructuring or liquidation. These decisions may later be reviewed by shareholders, creditors, liquidators, courts or authorities, often with the benefit of hindsight.
Iraqi law does not contain a detailed wrongful trading regime of the kind found in some jurisdictions. However, the Companies Law imposes duties on those who manage companies and provides for their liability in defined circumstances, and general principles of civil liability apply. Managers who act carefully, take advice and record their reasoning are in a far stronger position than those who act informally under pressure.
The Companies Law No. 21 of 1997, as amended, governs the powers and duties of managers and board members and the circumstances in which they may be liable to the company, shareholders or third parties. The Iraqi Civil Code No. 40 of 1951 governs general civil liability and agency. The bankruptcy provisions retained from the Trade Law No. 149 of 1970 are relevant where a commercial company stops paying its debts. The Income Tax Law No. 113 of 1982, as amended, and the Workers Retirement and Social Security Law No. 18 of 2023 impose obligations whose breach may have consequences for those responsible for compliance.
Recognising when pressure changes the decision-making context
Financial pressure does not always mean insolvency, but it changes the context in which decisions are made. Signs that warrant heightened attention include persistent inability to pay debts as they fall due, breaches of bank covenants, loss of a major customer, legal action by creditors, unpaid taxes or social security contributions and shareholder unwillingness to provide further funding.
When these signs appear, managers should recognise that their decisions affect creditors more directly. A decision that would be routine for a healthy company, such as paying a dividend or repaying a shareholder loan, may be challenged if made when the company cannot pay its other creditors.
Understanding the scope of managers’ duties
Managers should understand the duties that apply to them. These generally include acting within the powers given by the articles of association and the general assembly, acting in the company’s interest, exercising appropriate care and complying with the law. Managers may be liable for losses caused by violations of the law or the articles, or by mismanagement, under the Companies Law and general civil liability principles.
Corporate governance advice in Iraq can help managers understand how these duties apply to the specific decisions they face and the protections available to them, including reliance on professional advice and proper approvals.
Making and documenting key decisions
Under pressure, certain decisions require particular care. Managers should approach each one deliberately and record their reasoning:
- Continuing to trade. Record the basis for believing that continuing operations will benefit the company and its creditors, such as cash flow forecasts, expected receipts or ongoing negotiations with lenders.
- Prioritising payments. Record why particular payments are made, for example to maintain supplies essential to operations, pay employees or meet tax and social security obligations. Avoid payments that prefer related parties or shareholders without clear justification.
- Taking on new obligations. Record why new contracts or borrowing are in the company’s interest and how they will be met.
- Disposing of assets. Record the valuation basis and the reason for the disposal, particularly where the buyer is a related party.
Minutes should be prepared promptly and should reflect the information considered, the options discussed, any advice received and the reasons for the decision.
Managing related-party transactions
Transactions with shareholders, managers or affiliated companies attract scrutiny during financial distress. Repaying a shareholder loan, transferring assets to an affiliate or paying management fees to a related company may be challenged by creditors or a liquidator as harmful to other creditors. Managers should ensure that any such transaction is properly approved, supported by evidence of fair value and justified by the company’s interest.
Meeting tax, social security and employee obligations
Unpaid taxes, withheld but unremitted amounts and unpaid social security contributions can create consequences for those responsible for the company’s compliance. Unpaid wages may lead to labour claims. Managers should give appropriate priority to these obligations and seek advice where the company cannot meet them in full. Tax advisory services in Iraq can help managers understand the consequences of non-payment and explore options with the authorities.
Seeking advice and involving shareholders
Managers should seek professional advice early, including legal, financial and tax advice. Advice should be documented and reflected in decisions. Managers should also keep shareholders informed and seek general assembly approval for decisions that fall outside their authority or have significant consequences. Shareholder approval does not always protect managers from claims by creditors, but it demonstrates transparency and proper process.
Considering formal options
Where the company cannot recover, managers should consider formal options, including negotiated restructuring with creditors, sale of the business, voluntary liquidation or, where appropriate, bankruptcy proceedings. Delaying these decisions while losses mount may increase creditor losses and the risk of later criticism. Litigation and dispute resolution advice in Iraq can help managers assess the procedural options and their consequences.
Recognising the limits of shareholder instructions
Managers of a company with a dominant shareholder may receive instructions to make particular payments, transfer assets or prioritise group interests. When the company is solvent, following such instructions is usually unproblematic if they fall within the shareholders’ powers. When the company is under financial pressure, the position is more delicate. An instruction that benefits the shareholder at the expense of creditors may expose the manager who implements it.
Managers should consider whether an instruction is lawful, whether it is within the authority of the person giving it and whether it is consistent with the company’s interest in its current circumstances. Where doubt exists, managers should seek advice and record their concerns. Managers who are also employees of the shareholder or its group face a particular conflict and should be especially careful to separate their roles. A formal general assembly resolution may clarify authority but does not necessarily protect a manager from claims by creditors harmed by the decision.
Illustrative example. The general manager of an Iraqi distribution company, facing unpaid bank facilities and supplier arrears, repays a loan from the majority shareholder using the proceeds of a large customer payment. Other creditors remain unpaid, and the company later enters liquidation. The liquidator questions the repayment. If the manager had documented why the repayment was made, sought advice and obtained proper approval, or had instead used the funds according to a documented payment plan, the manager would be in a much stronger position to respond.
Conclusion & how Etihad Law Firm can help
Directors and managers of a financially stressed Iraqi business face decisions that may later be scrutinised. Understanding their duties, recognising when the context has changed, seeking advice and documenting decisions carefully are the most effective ways to protect both the company and themselves.
Etihad Law Firm advises directors, managers and shareholders on governance and decision-making during financial distress in Iraq. We help clients assess their options, document decisions properly and respond to claims where they arise.