Bankruptcy in Companies

Bankruptcy in Companies

Bankruptcy in companies refers to a situation in which a company loses the ability to pay its debts and becomes subject to judicial supervision, allowing its assets to be administered and distributed among creditors.

Two questions are commonly raised in this context:

• The effect of the bankruptcy of partners or shareholders on the bankruptcy of commercial companies.
• The effect of the bankruptcy of commercial companies on the bankruptcy of partners or shareholders.

The Effect of Bankruptcy on Partners and Vice Versa

In Joint Stock Companies

Since shareholders of a joint stock company bear no personal liability for the company’s debts, the general rule is that the bankruptcy of a joint stock company does not result in the bankruptcy of its shareholders.

However, an exception may arise where, at the time of incorporation, part of the company’s capital was merely subscribed or undertaken to be paid, and the company subsequently becomes bankrupt. In such circumstances, the company’s creditors may claim the unpaid portion of the subscribed capital directly from the relevant shareholders. If a shareholder refuses to pay the amount demanded and is a merchant, an application for that shareholder’s bankruptcy may be pursued.

For these purposes, a shareholder is considered a merchant personally only if the shareholder engages in commercial activities outside the company. Accordingly, merely being a shareholder of a joint stock company does not, by itself, constitute merchant status.

In Limited Liability Companies

Under Article 94 of the Iranian Commercial Code, partners in a limited liability company do not bear personal liability for the company’s debts. Therefore, the general rule is that the bankruptcy of a limited liability company does not lead to the bankruptcy of its partners.

In General Partnership Companies

Under Article 116 of the Iranian Commercial Code, each partner in a general partnership is jointly and severally liable for all company debts. Nevertheless, this does not mean that the issuance of a bankruptcy judgment against the partnership automatically results in the partners’ bankruptcy. The bankruptcy of the partnership may lead to the bankruptcy of a partner only where the following conditions are cumulatively satisfied:

• A bankruptcy judgment has been issued against the partnership.
• The liquidation process has been conducted, and the partnership’s assets are insufficient to satisfy its debts.
• A creditor has sought payment from the partner, and the partner has refused to pay the debt.
• The partner is personally a merchant.

It must therefore be emphasized that merely being a partner in a general partnership is not, in itself, evidence of merchant status. Even serving as the manager of a general partnership does not, by itself, establish merchant status. Merchant status arises only when the partner is engaged outside the company in one of the commercial acts listed under Article 2 of the Iranian Commercial Code.

Pursuant to Article 439 of the Iranian Commercial Code, in the bankruptcy of general partnership, proportional, or mixed companies, the personal assets of the general partners are not sealed, unless a bankruptcy judgment against the partners has also been issued either within the same judgment as the company’s bankruptcy or by a separate judgment.

The legislature, in this provision, has contemplated a scenario in which the company’s bankruptcy and a partner’s bankruptcy may be determined concurrently. However, in light of the legal sequence described above, such concurrency is practically difficult to accept. As a general matter, the company must first be declared bankrupt, and only after liquidation and a determination of insufficiency of assets may the bankruptcy of a partner be established.

Where only the bankruptcy judgment of the company has been issued, only the company’s assets will be sealed. Where both the company and a partner are declared bankrupt, both the company’s assets and the partner’s personal assets may be seized.

Article 128 of the Iranian Commercial Code

Article 128 reflects two important principles:

1. The bankruptcy of a general partnership does not, as a matter of legal necessity, entail the bankruptcy of its partners. This statement is correct because, depending on the circumstances, the partnership’s bankruptcy may or may not result in a partner’s bankruptcy.
2. The bankruptcy of some partners does not, as a matter of legal necessity, entail the bankruptcy of the general partnership. This statement is correct if it is interpreted without an implied contrary meaning. If one were to infer that the bankruptcy of all partners necessarily causes the bankruptcy of the partnership, such an inference would be incorrect, because the bankruptcy of partners, in no case, automatically results in the bankruptcy of the company.

In Proportional Liability Companies

All principles stated with respect to general partnerships apply equally to proportional liability companies, with one key difference. In a general partnership, each partner bears joint and several liability for the entire debt. In a proportional liability company, each partner is liable only in proportion to the partner’s capital contribution.

Frequently Asked Questions on Bankruptcy in Companies