Credit Recovery in Iran

Premise

Iran has always had excellent trade relations with Italy, so much so that over the last few decades it has become the second largest European trade partner, after Germany.
Even if Iranian companies are considered good payers, commercial disputes aimed at recovering a credit, in the context of trade exchanges between Italy and Iran, are part of the reality.
It should also be considered that the reintroduction of economic sanctions against Iran by the United States of America - even if not by the European Union - has led to the emergence of new disputes between Iranian operators and those Italian companies which, being linked to the financial or economic system of the United States, had to abandon the local market, leaving large unclaimed credits.

The Civil Code

In the Islamic Republic of Iran, relations between individuals are governed mainly by the Civil Code, a legal instrument of Napoleonic inspiration but based on the sources of Islamic law and on the principles of the Imamate Shiite legal school. The codification of Iranian civil law began in 1928 and was the subject of numerous amendments, until the advent of the modern Civil Code, consisting of 1335 articles. The Code is divided according to the tripartition of European codes, into OBJECTS (governed by book I), PEOPLE (governed by book II) and ACTIONS (governed by book III).
As shown below, it is not taken for granted that the contract that is the subject of the commercial relationship with the Iranian party is governed by local law. However, if a dispute is initiated before the Iranian Judicial Authority for the recovery of the debt, the law applied by the judge in the proceedings can only be the local one, since the application of a foreign law in an ordinary court is not allowed in Iran.

Preliminary formalities

Let’s see the formalities to be put in place in the event that the Iranian debtor has not paid off its commercial debt. At the outset, it is necessary to correctly identify the effective company name of the debtor. In fact, it often happens that Iranian companies operating abroad keep two names: an official designated at the Register of Companies (in Farsi) and an international one (in Latin characters), used only for commercial and marketing purposes.
It should be noted that only the official name will be the one valid for the purposes of the law and the only one that must be used to carry out any type of legal activity, including that of recovering a credit.
Secondly, in the case of a contract for the supply of goods, it will be necessary to ensure that the person who appears in the customs documents as the recipient of the goods is actually the debtor. Often, in fact, when the customer does not have the import licenses necessary to introduce foreign goods into the country, he relies on the figure of the importer, to whom the customs documents, including invoices, are made out. In such cases, from a formal point of view, the importer is not the holder of the contractual relationship and therefore cannot be the recipient of the credit recovery activities. Be careful, therefore, not to confuse the importer with the customer: only the latter is to be considered the one carrying the obligation.
Once the debtor has been correctly identified, it will be necessary to send him a legal warning, ordering the payment of the amount due within a peremptory term, generally of 15 days.
The legal warning can be put in place directly from Italy or from Iran. Taking into consideration that certified e-mail does not exist in Iran and that international couriers (such as DHL) do not operate to the country due to the US embargo, if the warning is sent from Italy by international registered letter, the time of reception will be particularly long. It is therefore suggested that the debtor be notified in advance by e-mail and fax. If the warning is sent from Iran, however, it is possible to use the institution of the so-called "Judicial warning", which allows the creditor to notify the debtor of the fulfillment through the Iranian Judicial Authority, despite not having yet instituted a judgment. This type of warning will be notified by the same Judicial Authority.

The judicial process

In the event that the notice sent has no effect and therefore the debtor continues to be defaulting, the option of initiating judicial proceedings aimed at recovering the credit must be evaluated.
In the event that a written contract has been stipulated between the parties, it is necessary to first verify whether a forum for the resolution of disputes has been provided, which may be a judicial forum (for example the Court of Tehran or the Court of Milan ), or an arbitration forum (for example the Lugano Chamber of Commerce). In this case, it will be necessary to initiate the procedure at the indicated court, under penalty of a declaration of incompetence by the judge otherwise referred.
If, on the other hand, there is no written contract, it will be necessary to assess where to establish the procedure, whether in Italy or Iran, depending on the type of service provided between the parties.
All foreign natural and legal persons have the right to access the local justice: it should be noted that access to the courts, unlike in the vast majority of states, can also be carried out autonomously, that is, without the patronage of a lawyer, but this practice is now almost abandoned and, in any case, not recommended.
The Iranian judicial power is exercised by the Courts of Justice both based on national legislation and on the basis of Islamic principles and is characterized by three degrees of judgment.
The first instance is represented by the common courts of first instance, to which all disputes in civil and criminal matters are competing. The second degree of judgment rests with the common courts of appeal, one for each of the 30 Iranian provinces, which are responsible for deciding on the sentences rendered by the courts of first instance. The last degree of judgment, which operates only in the cases provided for by law, is that of the Supreme Court, which has three different branches (one in Tehran, one in Qom and one in Mashhad), which is responsible for checking the legitimacy of the sentences issued by lower courts. Cases with a value greater than Rial 20,000,000.00 (approximately Euro 400.00) can be submitted to the Supreme Court in civil matters.

Loans secured by Iranian checks

In Italy, the delivery to the creditor by the debtor of a check to guarantee a debt is contrary to the mandatory rules, and therefore the guarantee agreement underlying the delivery of the check is illegitimate, null and void.
In Iran, on the other hand, the issuance of a check by the debtor, to be returned only if the latter correctly fulfills his obligation 'while remaining in the possession of the creditor as an enforceable title to be activated in the event of non-fulfillment or incorrect fulfillment' is a fully legitimate and frequent practice, especially when dealing with contracts of significant amounts.
Obviously, the check will be drawn on an Iranian bank and the expected amount will be in Rial currency.
In the event that the Italian creditor received an Iranian check as guarantee and the notice to pay remained unfulfilled, he, independently or through a proxy, can go to a local credit institution and cash the check.
Under Iranian law, the lack of funds in the drawer's account can have very serious consequences, both from a civil and criminal point of view.
Specifically, the debtor will have all its current accounts blocked as well as losing the right to receive any loans. Furthermore, the unpaid check constitutes an enforceable title for the creditor, which can be filed immediately before the judicial authorities. From a criminal point of view, the issuance of an unpaid check may result in the debtor's imprisonment for up to two years and a ban on leaving the country.

Practical tips

There is no statute of limitations in Iran, so it is possible to claim a credit at any time. However, in the event a credit was guaranteed by a check, the latter must be cashed within 5 years from the date affixed to the title. Criminal liability for the unpaid check, on the other hand, can be exercised within 6 months from the date affixed to it. In any case, regardless of whether the credit is guaranteed by a check, it is crucial to act as soon as possible, given the frequent fluctuations of the Iranian currency, which is often subject to devaluation.

Bologna - June 22, 2020

Avv. Dario Gorji Varnosfaderani – Studio Legale de Capoa e Associati – Bologna – dario.gorji@decapoa.com

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