You did the work, emailed your invoice to your client with the usual 30-day payment terms and it’s now three weeks overdue. It’s a common complaint for any business, dealing with clients who don’t pay on time, but it’s something we all have to face on a regular basis. Having a healthy cash flow is paramount to your survival and success, so you have to learn how to tackle overdue invoices; otherwise you put pressure on your cash flow.
It is a fact that a successful business depends on good customer relationships. Sometimes, however, debt collection procedure is the only measure that can be taken to collect the amount of invoices which are long overdue.
Generally speaking, liability divides into monetary and non-monetary, however, Debt Collection usually includes monetary liabilities. Source of monetary liabilities, measures that can be taken to collect a debt and guarantees instruments that can be used to secure one’s own money are some of the subjects we discussed in this newsletter.
Dividing liabilities to Contractual and Non-Contractual is one of the well-known and classic liability classifications. This classification is based on liability source which can be a contract or a tort.
Contracts: Contract is usually defined as an agreement between public or private parties creating mutual obligations enforceable by law. Contract is one of the specified legal actions in Iranian Law which can be a source of monetary liability. If a contract includes monetary obligations and one or both of the parties do not respect their obligations regarding payment of their debts in due time, debt collection should be considered. Commercial contracts almost always result in monetary liability; therefore, debt collection procedure under the title of dispute resolution clause is usually determined by such contracts.
Civil Liability (Tort): Tort is a liability that arises from an act or omission that gives rise to injury or harm to another and amounts to a civil wrong for which courts impose liability. The primary aims of tort law are to provide relief to injured parties for harms caused by others, to impose liability on parties responsible for the harm, and to deter others from committing harmful acts. Torts can shift the burden of loss from the injured party to the party who is at fault or better suited to bear the burden of the loss. Typically, a party seeking redress through tort law will ask for damages in the form of monetary compensation. Less common remedies include injunction and restitution.
According to what has been said in the previous section, Debts can be rooted in a contract or a tort. Depending on its source, one or more debt collection measures can be taken which range from ADR methods to litigation.
A. Debts that raised from a contractual relationship:
Negotiation: One of the very first ADR methods that can be used to settle a debt is negotiation. Using this method can be agreed during a contract conclusion or after that. In this method, parties try to reach a common solution through interactive dialogue and reciprocal accreditation. This is the most cost effective solution and sometimes with a little discount, you can collect your money and also maintain your future business relationship with your clients.
Arbitration: Arbitration is a non-judicial process for the settlement of disputes where an independent third party – an arbitrator – makes a decision that is binding. The role of an arbitrator is similar to that of a judge, though the procedures can be less formal and an arbitrator is usually an expert in the referred dispute. Using arbitration becoming increasingly popular in contract concluded in Iran.
2- Litigation: Litigation is the last resort for collecting your debts in Iran and there is no need to specify it in a contract as it is recognized public right in Iran to refer a claim to public court. Based on “Iranian Civil Act”, every foreign national enjoys the rights that an Iranian has unless it is exempted by law. Since every Iranian has the right of litigation, every foreign national whose government is recognized by Iran’s government has the right of litigation as well.
Since there is no contractual relationship between the parties in a tort, using ADR methods is subject to agreement of the both parties which is difficult to reach. However, it is recommended to request for negotiation or arbitration to collect such debts as they save your time and money.
Based on articles 454,455 and 496 of Iranian Civil Procedures Act, arbitrators can decide if there is a civil liability and also make a decision about debt collection (if he/she is permitted to do so according to the arbitration agreement).
On the other hand, the most common measure that is often taken by creditor in a tort base debt collection procedure is litigation. This is mainly because there is no contract between the parties and the public court is the only tribunal that can force debtor to pay his/her debts.
If the structure of an electronic communication is compatible with “Electronic Commerce Act of Iran”, it will certainly consider as evidence and can be used in a debt collection procedure.
Article 14 of “Electronic Commerce Act of Iran” states that:
“All “data messages” which have been generated and stored via secure method are deemed to be valid and reliable documents by judicial or legal authorities in terms of what they contain as well as included signature therein, obligations of both parties or the party who covenants and all persons who act legally on their behalf, and effecting the terms and conditions contained therein”.
Article 16 of the Act also says:
“Any “data message” recorded and retained by a third party in accordance with the provisions of … this Law, is deemed valid”
It can be concluded from the above mentioned rules and common practice that emails are usually considered as valid evidence for proving a debt. Communications in other messengers such as WhatsApp and Telegram can also be used as evidence and in case of doubt in validity of an electronic data; an expert determination will be used.
Common Guarantee Instruments which are used to secure assets (especially money) in Iran are as follows:
- i) Mortgage: Mortgage is a legal agreement that transfers the conditional right of ownership on an asset or property by a debtor to the creditor with the condition that the conveyance of title becomes void upon the payment of the debt. The mortgage contract is recognized in article 458-463 of Iran Civil Code and considered as one of the strongest available guarantees.
- ii) Lien: A lien is a form of security interest granted over a property to secure the payment of a debt. When a property put under lien and the debtor has not settled his debts, the creditor would able to sell the property to take back his money. A lien contract has to be registered in a notary public and certain costs should be borne.
iii) Lien with Irrevocable Power of Attorney: In this sort of lien, the debtor issues an irrevocable power of attorney to the creditor to sell the property and take back his money. This power of attorney solves the problem of enforcement of a lien and there is no need to obtain court order any more.
- iv) Giving Irrevocable Power of Attorney: In this type of guarantee, debtor only issues an irrevocable power of attorney to the creditor and empowers him to sell the property on his behalf. Although the cost of issuing such power of attorney is low, it does not secure the creditor’s interest properly. The debtor can easily sell the property before the creditor uses the POA and as a result, the POA will become ineffective.
- v) Bank Guarantee: A bank guarantee is a written promise from a bank that the liabilities of a debtor will be met in the event that he fails to fulfill his contractual obligations. There are several kinds of bank guarantee available, but the one which provides the best protection of creditors’ right is an “irrevocable, unconditional, on-demand bank guarantee”.
- vi) Promissory note: “Promissory note is a signed document containing a written promise to pay a stated sum to a specified person or the bearer at a specified date or on demand. This type of guarantee is recognized in Commercial Law of Iran and therefore it can be used as a guarantee of payment.
vii) Cheque: “Check is a document that orders a bank to pay a specific amount of money from a person’s account to the person in whose name the check has been issued. A check is also a recognized guarantee instrument in the Commercial law of Iran and compared to a promissory note, it is more common among businessmen.”
Note: Comparing above mentioned guarantees, “Mortgage”, “Lien with Power of Attorney” and “Bank Guarantee” provides the highest level of guarantee for a creditor in Iran. On the other hand, it may be difficult to convince the debtor to accept mortgage or even lien with POA. Therefore, the most desirable available guarantee would be a bank guarantee.
You might have already tried your best to collect your money by keep calling or sending emails to the debtor, but still there is no sign of success. You may also wonder what else a lawyer can do for you to collect your money. Below are the main reasons of engaging a lawyer to help you during this process:
(i) A lawyer can help come up with strategies to get back money that you’ve loaned out. This is also a fact that when lawyers call a debtor, debtor will take the issue more seriously and it would be easier to negotiate or convince the debtor to pay your money.
(ii) Since lawyers are aware of the legal steps and the consequences of nonpayment of a debt, they are better negotiators. In an appropriate time, lawyers would be able to threaten the debtor by elaborating the consequences of nonpayment of the debt and make a breakthrough in collection of the debt.
(iii) When the time comes and file a case in a court is required to collect a debt, lawyers can present you in a competent court and also take care of all paperwork. Official warning notice can also be sent to the debtor by a lawyer before starting litigation.
Note: Since there is no debt collection institute in Iran, only lawyers can assist you during the procedure of debt collection if you need help in this regard