This article considers how a struggling Iraqi business can agree a workout with its trade creditors while maintaining the supplies it needs to operate. Trade creditors, such as suppliers of raw materials, goods for resale, equipment, fuel and services, are often the first to feel a business’s difficulties. They are also among the most important stakeholders in any recovery, because without continued supply the business cannot generate the revenue needed to repay anyone.
Trade creditor workouts differ from bank workouts. Trade creditors are usually more numerous, less organised and more varied in their interests. Some are critical to operations and others are not. Some have strong leverage because they can stop supplying, while others have little. A workout must balance the need to keep critical suppliers on board with fair treatment of all creditors and coordination with banks.
The Iraqi Civil Code No. 40 of 1951 governs supply contracts, settlement agreements, set-off and the rights of creditors, including challenges to transactions that prejudice them. The Commercial Law No. 30 of 1984 governs commercial transactions and instruments such as cheques and bills. The Execution Law No. 45 of 1980 governs enforcement by creditors. The bankruptcy and preventive composition provisions retained from the Trade Law No. 149 of 1970 are relevant if the workout fails. The Companies Law No. 21 of 1997, as amended, governs managers’ duties in making payment decisions.
Mapping the trade creditor base
The business should start by mapping its trade creditors:
- Critical suppliers. Those whose goods or services are essential to operations and cannot easily be replaced, such as a sole supplier of a key input or a utility provider.
- Substitutable suppliers. Those whose goods or services can be obtained elsewhere, possibly at higher cost.
- Large and small balances. Creditors with significant claims, whose cooperation affects the overall outcome, and those with small claims, which may be paid in full to simplify the workout.
- Secured or protected suppliers. Those with retention of title, security, cheques or guarantees that give them stronger enforcement options.
This map shows where the business’s vulnerabilities lie and where it has room to negotiate.
Securing continued supply
Critical suppliers will usually continue supplying only if they are paid for new deliveries. A common approach is to separate past balances from future supply. New deliveries are paid on cash or short credit terms, while overdue balances are addressed through the workout. This gives suppliers confidence that their new exposure is limited.
Suppliers may also request security for new supplies, such as bank guarantees, letters of credit or post-dated cheques. The business should consider whether it can provide these without breaching its bank facilities or preferring some creditors unfairly. Commercial contract advice in Iraq can help structure continued supply arrangements that protect both parties.
Proposing treatment of overdue balances
Overdue balances may be addressed through:
- Instalment plans. Repayment over an agreed period, possibly with a moratorium at the start.
- Partial settlement. Payment of a percentage of the balance in full settlement, usually paid promptly.
- Conversion to longer-term debt. Documenting the balance as a loan with defined repayment terms.
- Small creditor payout. Paying small balances in full to reduce the number of creditors involved.
The proposal should treat creditors in similar positions consistently. Unjustified differences in treatment may undermine trust and lead creditors to enforce individually.
Coordinating with bank lenders
Banks will want to know how trade creditors are being treated, because payments to suppliers reduce the cash available to service bank debt. A workout with trade creditors should be coordinated with any standstill or workout with banks. Banks may accept continued payment for new supplies as necessary to preserve value, but may object to payment of overdue trade balances while their own debt is unpaid. A single, consistent plan presented to all creditors is more likely to gain support.
Managing cheques and enforcement risk
In Iraqi commercial practice, suppliers often hold cheques issued by the business. A dishonoured cheque may give rise to legal consequences and enforcement action that can disrupt a workout. The business should identify outstanding cheques and address them as part of the workout, for example by agreeing that they will not be presented while the workout is in effect or by replacing them with new payment instruments. Litigation and dispute resolution advice in Iraq can help assess and manage exposure arising from outstanding cheques.
Documenting the workout
A trade creditor workout may be documented through individual agreements with each creditor or a common agreement signed by many. Individual agreements are flexible but may lead to inconsistent terms. A common agreement promotes equal treatment but may be harder to finalise. In either case, the documents should address the treatment of overdue balances, terms for new supply, the creditor’s agreement not to enforce, the consequences of default and the treatment of security and cheques.
Protecting managers’ decisions
Managers deciding which suppliers to pay must act in the company’s interest and avoid unjustified preferences, particularly to related parties. Decisions should be documented, showing why particular payments were necessary for operations. Corporate governance advice in Iraq can help managers frame and record payment decisions during the workout.
Preparing for the workout to fail
Even a well-designed workout may fail if the business does not recover. The workout documents should anticipate this by stating clearly what happens on default: whether suspended rights revive, whether creditors may claim the full original balance or only the restructured amount and how payments already made will be credited. Creditors will want reassurance that agreeing to the workout does not leave them worse off than if they had enforced immediately.
The business, for its part, should monitor its performance against the workout terms and raise problems early. A further renegotiation agreed before default is generally easier than one attempted after creditors have begun enforcement. Where the business ultimately cannot continue, a workout that has kept records orderly and treated creditors fairly will make any subsequent liquidation or composition procedure simpler and less contentious.
Illustrative example. An Iraqi pharmaceutical distributor falls behind with payments to forty suppliers after a hospital customer delays payment. Three international manufacturers are critical; the rest supply products that are available elsewhere. The distributor agrees with the manufacturers to pay for new shipments by letter of credit and to repay overdue balances over twelve months. It pays creditors with small balances in full, and offers the remaining suppliers a nine-month instalment plan. It informs its bank of the plan, and the bank agrees to a three-month standstill on its own facility.
Conclusion & how Etihad Law Firm can help
A trade creditor workout in Iraq must keep critical supplies flowing, treat creditors fairly and coordinate with bank lenders. Separating past balances from future supply, managing cheques and documenting payment decisions are central to a workout that succeeds.
Etihad Law Firm advises businesses and suppliers on trade creditor workouts and payment arrangements in Iraq. We help clients design workouts that preserve operations and reduce the risk of enforcement.