We cover the conditions for insolvency of banks under the Iraqi Banking law, the insolvency procedures, and examine a recent case in Iraq.
Ali Al-DabbaghSenior Associate,Corporate Commercial
Nawar Al-AmeriTrainee Lawyer,Banking & Finance
The Iraqi Banking Law No 94 of 2004 (hereafter the “Banking Law”) excluded application of the general insolvency rules found in the Iraqi Civil Code No 40 of 1951 and the old Iraqi Code of Commerce No 149 of 1970 to the insolvency of banks. Instead, it stipulated a specific process to file for bankruptcy in (Article 70 of Section 14 - Receivership of Banks). This Article will briefly cover the substantiate conditions for insolvency of banks under the Iraqi Banking law, the insolvency procedures, and examine a recent case of bank rehabilitation in Iraq.
A bank is deemed insolvent under Article 71 of the Banking Law if one of the following conditions is met:
it fails to pay financial obligations, including deposit liabilities, on their due dates;
the capital of the bank is less than 25 percent of the legally required amount; or
the value of the assets of the bank is less than the value of the liabilities of the bank.
However, if the CBI opposes the petition the Tribunal may refuse the insolvency petition on the basis of a decision from the Minister of Finance requesting rehabilitation of the bank to preserve the stability to the Iraqi banking system under Articles 75.2.C and 67 of the Banking Law.
The insolvency process is initiated by the Central Bank of Iraq (hereafter the “CBI”) or three or more creditors of the bank, showing obligations that aggregates more than 4 billion Dinars - that are due and unpaid - filing a petition at the Financial Services Tribunal (hereafter the “Tribunal”). Under Article 74 of the Banking Law the Tribunal must hold a hearing to consider the insolvency petition which must begin no more than 2 business days after filing of the petition and conclude within one week (subject to extensions), if filed by the CBI, and two weeks if filed by the creditors of the bank.
The Tribunal may decide to grant the insolvency petition by declaring bankruptcy and liquidating the bank or deciding to rehabilitate the bank or rejecting the insolvency petition. If the Tribunal grants the insolvency petition, then the Tribunal will declare the bank bankrupt and among other things:
Publish the bankruptcy decision;
Order cessation of operations, such as taking deposits from the public;
Appoint a receiver who shall take control of the bank and any acts performed by or on behalf of the bank shall be legally void and unenforceable unless taken or ratified by the receiver;
Stay current court proceedings and prevent the filing of future court proceedings;
Remove any liens in favour of the bank’s creditors and any restraints on the bank’s assets; and
Stop the accruing of all interests and other charges on liabilities;
Invalidate share transfers of the bankrupt shall be void except for transfers made with the prior consent of the CBI; and
Authorise the receiver to challenge all legal acts of the bank that are taken within 60 business days before the bankruptcy decision.
If the Tribunal decides to rehabilitate the bank or the CBI appoints a conservator prior to insolvency proceedings then the appointment of a conservator would suspend the powers of the shareholders of the bank to make decisions and transfer all powers concerning the day-to-day operations of the bank to the conservator. In addition, the CBI may grant a Moratorium freezing claims against the bank until rehabilitated or liquidated.
In 2018, Dar AL Salam (hereafter “DES”) was found to have only 18 billion Iraqi Dinars (hereafter “IQD”) in assets, out of which 16 billion IQD was real-estate property, and the rest were other assets. DES had almost no liquid assets. Three persons in the bank’s management had embezzled the depositors’ money, and as a result of that, DES reached a point where it couldn’t pay its financial obligations that were somewhere between 240 to 254 billion IQD, which consisted of current accounts, deposits, and other debts. On 26 August 2020, the CBI created a bridge bank (Hammurabi Bank). The CBI controlled the bridge bank under Article 61 (6) of the Banking Law and transferred whatever assets were left in DES to the bridge bank. The bridge bank was to remain under the control of the CBI for a term of two years, which may be extended to three. Afterwards, the bridge bank would have to be either licensed as a regular bank or liquidated. The CBI offered the creditors of DES the option to capitalise their claims as shares in the bridge bank in the hope selling the shares later on, perhaps when the bank is listed on the Iraqi stock exchange, or claim in the liquidation of DES and get nothing.
Hammurabi Bank received 50 billion IQD bailout money from the CBI in exchange for 50 billion shares in the bank. The assets of Hammurabi bank added up to 68 billion IQD including the assets transferred from DES. Capitalisation converted the debts into shares in the bridge bank; each share was issued for a nominal value of 1 IQD and the conversion rate was 1 to 1 for all debts in DES. The bridge bank’s management stated that approximately 196 billion out of the debts in DES were capitalised as shares in Hammurabi Bank.
The Central Bank approach to the rehabilitation of the insolvent Datr AL Salam bank gave the creditors no choice but to capitalise their debts into shares in the bridge bank (Hammurabi Bank) to have any chance of recovery because all of the insolvent bank’s assets were transferred to the bridge bank.
The CBI approach to the rehabilitation of the insolvent DES bank gave the creditors no choice but to capitalise their debts into shares in the bridge bank to have any chance of recovery because all of the insolvent bank’s assets were transferred to the bridge bank. The debt capitalisation was implemented by allowing the creditors of the insolvent bank to subscribe to shares in the bridge bank on establishment. The subscription was governed by the Iraqi Company Law No 21 of 1997 and was only open for 30 days.
For further information,please contact Ali Al-Dabbagh or Nawar Al-Ameri.
Published in February 2023
