Debt Securities in the Recovery of Claims Based on Documents and Contracts

Debt Securities in the Recovery of Claims Based on Documents and Contracts

A creditor, in seeking to recover a claim, is exposed to the risk that the debtor may fail to make payment or may become insolvent. In certain cases, the debtor may engage in genuine or simulated transactions or act with the intent to evade payment, thereby placing assets beyond the reach of creditors and frustrating enforcement efforts. To mitigate such risks and facilitate the recovery of claims, creditors commonly require collateral from debtors. Moreover, individuals who can provide adequate security and earn lenders’ confidence are more likely to obtain credit from both individuals and banks. Another important advantage of holding security is that a secured creditor enjoys priority over other creditors. When the debtor’s assets are insufficient to satisfy all debts, creditors must compete with one another and are often able to recover only a portion of their claims. By contrast, a secured creditor has an exclusive right and may recover the full amount of the claim from the secured asset. These advantages have led to the widespread use of debt securities in legal relations since ancient times. Debt securities are generally classified into real securities and personal securities.

The Concept of Debt Security and Its Position in the Iranian Legal System

In addition to assessing applicants’ eligibility and creditworthiness for banking facilities, banks require securities and guarantees to ensure the recovery of claims, defray legal costs, and protect expected profits.

In legal terminology, a security refers to property in the broad sense or an obligation that is provided by the obligor to the obligee to strengthen the performance of a specific obligation. This definition encompasses pledges, transactions with a right of redemption, and cash guarantees.

The most important and reliable forms of security commonly used by banks to secure claims are immovable property, followed by deposits and bank guarantees, and subsequently commercial instruments and bills of exchange. The security requirements of banks vary depending on the nature of the facility. In cases such as legal partnerships and direct investments, where the bank’s rights are preserved through the acquisition of shares, there is no need to obtain any additional security or guarantee. In industrial and production projects, the project assets themselves, including land, machinery, and installations, are taken as collateral. In certain facilities, such as mudaraba or civil partnerships, security may take the form of a supporting official document under which the bank’s customer may, through ordinary contracts, engage in multiple transactions up to a specified ceiling. Nevertheless, in general, the securities required by banks fall into two main categories. They are either real securities, typically in the form of a pledge, or personal securities, such as guarantees.

Real and Personal Securities

The Civil Code recognizes both guarantee and pledge as nominee contracts and, in defining a pledge, explicitly characterizes it as a security under Article 771. Although the Civil Code does not expressly describe a guarantee as a form of security, in practice, a guarantee is always used to secure a debt. Accordingly, a guarantee, like a pledge, must be regarded as a form of debt security.

Real Security

A real security, or pledge, involves the designation of specific property for the satisfaction of a claim through its sale.

Personal Security

Personal security involves a guarantor’s acceptance of an obligation to pay. A personal guarantee is not a complete form of security, as the guarantor may also become insolvent. For this reason, when accepting a guarantee, the creditor examines the guarantor’s ability to pay to minimize the risk of potential insolvency.

Characteristics of the Guarantor

The guarantor is a principal party to the contract of guarantee, as the guarantor undertakes to pay the debt of the principal debtor in the event of non-payment. Accordingly, the guarantor must possess the following characteristics:

• Legal Capacity: The guarantor must have legal capacity and the right to dispose of their property. By accepting the guarantee, the guarantor becomes obligated to pay the debtor’s debt. If the principal debtor is absent, insolvent, or refuses to pay, the guarantor may be required to satisfy the debt. Therefore, the guarantor must have the legal capacity to manage and dispose of property.
• Financial Solvency: If the guarantor lacks sufficient assets, the guarantor will be unable to fulfill their obligation to the creditor, rendering the guarantee ineffective. When the parties agree on the identity of the guarantor, the creditor typically conducts the necessary investigations to verify the guarantor’s solvency and creditworthiness, and accepts only a guarantor with sufficient financial standing to discharge the debt. In such cases, the creditor is the effective decision-maker regarding the guarantor’s solvency, and financial capacity is an essential condition for a valid guarantee under banking contracts.

Frequently Asked Questions About Debt Securities in the Recovery of Claims Based on Documents and Contracts