What Is Corporate Bankruptcy?

What Is Corporate Bankruptcy?

Corporate bankruptcy is one of the most important and complex subjects in commercial and economic law. In Iran, it has drawn significant attention in recent years, particularly amid economic conditions. A company is generally considered bankrupt when it is unable to meet its financial obligations, and creditors cannot recover what they are owed. The concept of bankruptcy is recognized under the Commercial Code of the Islamic Republic of Iran, and the primary objectives of this legal framework are to protect creditors’ rights, prevent the dissipation of assets, and, where possible, allow the business to be reorganized.

Corporate bankruptcy is often discussed in two broad forms: balance-sheet insolvency and cash-flow insolvency. Balance sheet insolvency occurs when the company’s liabilities exceed its assets, leaving it unable to satisfy its debts. Cash flow insolvency arises when a company is unable to pay its debts as they fall due, even if it has assets that could, in theory, cover them.

Iranian law sets out the conditions and procedural steps for declaring bankruptcy and establishes safeguards designed to protect creditors. These mechanisms are intended to reduce the risk of misconduct by company management and to reassure creditors that the company’s assets and liabilities will be addressed through a fair and orderly process.

As a general matter, a bankruptcy petition may be filed with the competent court by one or more creditors or by the company’s management. After reviewing the evidence, the court may issue a bankruptcy judgment. Once the judgment is issued, the administration of the company’s affairs is typically placed under the authority of an appointed official responsible for collecting assets and distributing proceeds in accordance with the legal priority of claims. For this reason, a clear understanding of bankruptcy concepts, declaration requirements, and the implementation stages is essential for economic actors and legal professionals seeking to protect their rights and navigate the appropriate legal route.

The Status of Creditors’ Rights in Bankruptcy Proceedings

One of the central pillars of bankruptcy law is the protection of creditors’ rights. Creditors are individuals or entities that have a claim against the company and must have a meaningful opportunity to recover their debts. Under Iranian law, especially the Commercial Code, creditors’ rights are given priority to reduce the losses they may suffer in the bankruptcy process. The law establishes specific rules for creditor claims and generally distinguishes between two categories: secured or preferred creditors and ordinary creditors. Secured or preferred creditors include those whose claims are supported by collateral or those who benefit from legally recognized priority status, giving them precedence over other creditors.

A key creditor right is the right to receive information and to participate in relevant stages of the bankruptcy proceeding. Creditors may attend court-related sessions, participate in discussions concerning the appointment of the liquidation administrator, and provide documentation to prove the existence and amount of their claims.

Although the law provides protections, creditors should also understand the practical order of payments. In many cases, liquidation expenses, employee wages, and certain public claims, such as taxes, are addressed first. Then secured or preferred creditors receive payment according to their priority. Ordinary creditors are typically paid last, and only if sufficient funds remain. Broad constitutional principles related to legality and justice also support the protection of property and financial rights. Accordingly, any measure that unlawfully undermines creditors’ rights may be challenged through the appropriate legal channels.

Legal Requirements for Declaring Corporate Bankruptcy

Declaring corporate bankruptcy is subject to defined legal requirements and procedures under the Commercial Code of the Islamic Republic of Iran. To classify a company as bankrupt, there must be sufficient evidence demonstrating the company’s inability to pay its debts. In practice, one commonly cited condition is the existence of multiple creditors with due and payable monetary claims that the company fails to satisfy. In such circumstances, creditors may submit a petition to the competent court requesting a bankruptcy judgment. The company’s director or board may also file for bankruptcy when financial distress makes continued operations impossible.

After receiving a petition, the court conducts the necessary review. If the legal criteria are met, the court issues a bankruptcy judgment, which triggers the formal liquidation process. The law also emphasizes timely disclosure of insolvency to protect creditor interests and reduce the risk of improper asset transfers. Proper documentation and legal compliance are essential to safeguard creditors’ rights and prevent potential misconduct by the company’s management.

Courts play a key role in bankruptcy matters. They examine petitions, issue judgments, supervise liquidation, and provide legal protection for creditors. After issuing a bankruptcy judgment, the court typically appoints a liquidation administrator to collect and distribute assets. The court also reviews objections, addresses disputes, and may take legal measures if misconduct is identified, including asset freezes and applicable penalties. Ensuring transparency throughout the process is a core function of judicial oversight, including reviewing financial reports and monitoring the administrator’s performance.

Creditors’ Rights in Relation to the Assets of a Bankrupt Company

An important bankruptcy issue is how the company’s assets are distributed among creditors. Following the bankruptcy judgment and the commencement of liquidation, the liquidation administrator must identify, evaluate, and sell the company’s assets, then distribute the proceeds in accordance with the legally established priority rules. Under Iranian commercial law, payment is structured. First, the expenses of liquidation, employee claims, taxes, and secured debts are typically addressed. Next, creditors with special priority rights, such as holders of collateral, receive payment.

Ordinary creditors generally stand at the end of the distribution order. If any funds remain after higher-priority claims are satisfied, those proceeds are distributed to ordinary creditors in accordance with applicable law. Throughout this process, the liquidation administrator must prevent waste or concealment of assets and provide transparent reporting to the court and, where applicable, to creditors. Creditors may also raise objections at different stages. Any violation of the payment priority structure or mishandling of assets can be pursued through judicial procedures.

The Liability of Company Directors Toward Creditors in Bankruptcy

Company directors have specific legal duties during insolvency and bankruptcy, and failure to comply may expose them to civil and potentially criminal liability. Under Iran’s commercial legal framework, directors are expected to act with honesty, prudence, and timely disclosure, and to avoid conduct that harms creditors’ rights. Actions such as unlawful asset sales, transferring assets without proper justification, concealing financial information, or misrepresenting the company’s financial position may trigger legal consequences.

If directors delay initiating bankruptcy proceedings or engage in mismanagement that increases creditors’ losses, they may be held responsible for compensating for damages. By imposing these duties, the legal system aims to protect creditors and promote economic integrity, while emphasizing that directors must remain accountable for their conduct.

Understanding the Liquidation Process for Bankrupt Companies

Liquidation begins after the bankruptcy declaration and is designed to settle debts and close the company’s file. The process includes collecting assets, selling them, and distributing proceeds to creditors. Assets, whether cash or non-cash, are identified and valued. The liquidation administrator then sells assets, typically under court supervision and with consideration of creditor interests. Claims are verified, and payments are made in accordance with legal priority.

If the company’s assets are insufficient, creditors may only receive partial payment. If assets exceed liabilities, any excess may be allocated to shareholders after creditors’ claims are satisfied. Compliance with the law and consistent reporting are essential to ensure the liquidation process is carried out fairly and that the rights of all parties are respected.

Employee Rights During Corporate Bankruptcy

Employee rights are treated as a high priority during bankruptcy. Under Iran’s Commercial Code and labor regulations, employee wage claims and related entitlements generally receive preferential treatment compared to many other creditor claims. Outstanding wages are typically addressed early in the payment order, and the liquidation administrator is expected to prioritize these obligations. Insurance contributions and statutory employment benefits should also be settled in accordance with applicable rules.

These protections are intended to support the workforce and reduce social harm arising from unpaid wages or job losses during insolvency. Employees should remain informed about the bankruptcy process and be aware of the legal avenues available to protect and enforce their rights.

How Creditor Objections Are Handled in Bankruptcy Proceedings

During bankruptcy, creditors may object to decisions made by the liquidation administrator, the distribution method, or other procedural matters. Iranian law provides mechanisms to address such objections. Creditors may submit their objections to the court and request a review of the contested decisions. The court is required to examine objections and, where justified, adopt corrective measures.

Creditor meetings may also be held to address claim verification and distribution issues in a collective setting. These processes promote transparency, reduce disputes, and support fair outcomes in the payment and liquidation framework.

The Role of a Lawyer in Protecting Creditors’ Rights

A lawyer with experience in bankruptcy matters can play a decisive role in protecting creditor rights. Effective legal representation supports creditors by providing strategic advice, accurate filings, and strong advocacy before competent authorities. Counsel can assist with preparing petitions, reviewing documents, attending hearings, and pursuing objections when necessary.

A lawyer can also help creditors assemble and present the documents needed to prove their claims clearly and completely. Proper representation increases the likelihood of recovery and reduces the risk that creditor rights will be overlooked or weakened during the process.

Termination of Contracts Involving a Bankrupt Company

During bankruptcy, certain company contracts may be suspended or terminated. Commercial law sets specific rules for managing ongoing contracts during a company’s liquidation. Termination may be used to prevent additional liabilities, protect the bankruptcy estate, and facilitate an orderly liquidation process. In some cases, the liquidation administrator and, where relevant, creditors may seek to terminate contracts that are harmful to the company’s financial position.

Contract termination must be carried out lawfully and without unjustly infringing the counterparty’s rights. Improper termination or misuse of this authority may lead to legal liability.

Preventing Corporate Bankruptcy and Protecting Creditors’ Rights

One of the most effective ways to protect creditors’ rights is to prevent bankruptcy. Companies can reduce bankruptcy risk through sound financial management, legal compliance, and careful planning. Regular budgeting, transparent accounting, ongoing monitoring of financial performance, and cooperation with financial and legal advisors can be particularly effective.

In addition, legal mechanisms that support distressed businesses and allow for restructuring can protect jobs and preserve capital. A preventive approach benefits all stakeholders, including creditors, the company, and the broader community, and should be treated as a strategic priority.

Frequently Asked Questions About Corporate Bankruptcy