Issuance of a Bankruptcy Judgment

Issuance of a Bankruptcy Judgment

In the modern era, commerce has become a highly significant and complex field. One of the most important and widely discussed topics in commercial law is the bankruptcy of merchants and the liquidation of matters relating to them. A merchant’s inability to pay debts can disrupt many aspects of commercial activity. For this reason, governments have enacted bankruptcy regulations to preserve social and economic order. To properly address the issue of bankruptcy, it is necessary first to consider the definition of a merchant and commercial activities.

Role of the Court and Competent Authorities in Bankruptcy Proceedings

A merchant is a natural or legal person who engages in commercial transactions as their ordinary profession.

Persons lacking legal capacity, judges, notaries public, foreign nationals, and individuals who are legally prohibited from holding certain professions or establishing companies are not permitted to engage in trade and therefore cannot be recognized as merchants.

One of the key issues raised in commercial and corporate disputes is bankruptcy. Bankruptcy refers to a situation in which a merchant or a commercial company is unable to pay its debts and lacks the financial ability to fulfill its monetary obligations. In such circumstances, the merchant is required, within three days from the date of inability to pay debts, to submit all financial statements, asset records, and commercial books to the court of their place of residence, along with a declaration of cessation of payment, and request the issuance of a bankruptcy judgment.

Ordinary individuals whose usual profession is not commerce are not entitled to request a declaration of bankruptcy. Instead, when they are unable to pay their debts, they must, pursuant to Article 6 of the Law on the Enforcement of Financial Judgments, apply for a ruling of insolvency and installment-based payment of debts. Similarly, merchants and legal entities are ineligible to file insolvency claims and must instead initiate bankruptcy proceedings in accordance with the prescribed legal framework. Therefore, if a merchant or a legal entity files a claim for insolvency, the court will issue a decision rejecting such a claim.

For the issuance of a bankruptcy judgment, determining the date of cessation of payment is of great importance. The competent authorities will determine this date by taking into account all relevant circumstances and conditions of the merchant. If the court does not specify the date of cessation, the date of issuance of the bankruptcy judgment will be considered the date of cessation of payment.

The importance of determining the cessation date becomes more apparent when one considers the legal consequences that flow from it. For example, once the cessation date is established, the merchant is prohibited from interfering with their property and must refrain from engaging in transactions such as gratuitous transfers, gifts, collusive settlements, or any transactions involving their movable or immovable assets. Pursuant to Article 423 of the Iranian Commercial Code, such transactions are null and void.

Transactions involving a merchant who has ceased payment are not limited to this. The law also addresses transactions concluded before the cessation date that were carried out with the intention of evading debt repayment or harming creditors and that resulted in a loss exceeding one quarter of the property’s value at the time of the transaction. Such transactions are deemed voidable, and an action for rescission may be brought within two years from the date of the transaction.

Types of Bankruptcy

Bankruptcy may take one of the following forms: ordinary bankruptcy, bankruptcy for cause, and bankruptcy by fraud.

Ordinary Bankruptcy

In ordinary bankruptcy, no criminal liability is imposed on the bankrupt merchant. This type of bankruptcy occurs when the merchant ceases payment of their debts, declares such cessation to the court within the prescribed three-day period, and the bankruptcy results from unforeseen circumstances arising in the ordinary course of business. In this case, the bankruptcy is not attributable to the merchant’s fault or fraudulent conduct.

Bankruptcy Due to Fault

Bankruptcy due to fault occurs when the bankruptcy results from the merchant’s own negligence or misconduct. In such cases, the court will declare the merchant bankrupt due to fault.

Instances of bankruptcy due to fault include the following:

• Where it is established that the merchant’s personal expenses and household costs are excessively disproportionate to their income.
• Where the merchant has invested their capital in speculative transactions whose profit depends solely on chance.
• Where it is proven that the merchant has sold assets below market value or made purchases above market value in order to delay bankruptcy.
• Where the merchant has preferred one creditor over others by paying that creditor’s claim.

Pursuant to Article 671 of the Islamic Penal Code, Book Five, merchants declared bankrupt due to fault may be sentenced to imprisonment ranging from six months to two years.

Bankruptcy Due to Fraud

If a merchant conceals part of their assets, eliminates assets through fictitious transactions, or destroys or conceals commercial books, the court will declare bankruptcy due to fraud. Under Article 670 of the Islamic Penal Code, such conduct is punishable by imprisonment for a term of one to five years.

Filing a Bankruptcy Claim

Pursuant to Article 415 of the Commercial Code, the right to request the issuance of a bankruptcy judgment is granted to the merchant, the merchant’s creditors, and the public prosecutor. The request for a declaration of bankruptcy is registered through judicial electronic service offices and referred to the court of the merchant’s place of residence. Following judicial review and confirmation of the merchant’s cessation of payment, the bankruptcy judgment will be issued.

It should be noted that, in addition to the penalties imposed on the bankrupt merchant, the law also provides for the punishment of individuals who are involved in or contribute to the bankruptcy of the merchant.

Frequently Asked Questions About the Issuance of a Bankruptcy Judgment