Iraq is a country of both tremendous. Secured lending transactions in Iraq: defining market practice in a volatile environment

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1 repayment of loans and depreciation of direct investment; and remittance of funds for family expenses in reasonable amounts. Foreign investors who bring investment funds into Myanmar must declare to the CBM the funds and documentary evidence, otherwise the CBM may not allow repatriation of the funds (Section 27 of the FEML). Foreign investors can repatriate their investment funds from Myanmar after termination or expiration of the investment period, subject to compliance with the rules specified by the CBM (Section 28 of the FEML). As of May 2014, at least three state-owned banks, that is Myanmar Foreign Trade Bank (MFTB), Myanmar Investment and Commercial Bank (MICB) and Myanmar Economic Bank (MEB) and at least 19 private banks hold authorised dealer licences and actively operate foreign banking transactions. The reform of the banking law of Myanmar has commenced, but it is still far from being complete. The volume of banking operations and banking transactions are increasing. But the lack of human resources with experience and expertise is obvious. It is therefore expected by all parties concerned, local and foreign, that training and transfer of banking technology and know-how will be accelerated at the same speed as banking law reform. Secured lending transactions in Iraq: defining market practice in a volatile environment Dahlia Zamel Amereller Legal Consultants: Mena Associates, Erbil zamel@amereller.com Iraq is a country of both tremendous potential and significant challenges; this also applies to the banking sector, where secured lending has only emerged recently. Inconsistent regulation, a slow local financial market, political instability and security issues all contribute to the belated development of asset and project financing. The dire need of financing, however, also provides particular opportunities for lenders who know how to navigate the Iraqi market and tackle its risks. This article discusses the legal framework for taking security in Iraq from a practical perspective. The legal framework for taking security in Iraq at times is criticised for being outdated Iraqi law, for example, does not recognise taking security over future assets; giving abstract guarantees, except by registered Iraqi banks; or floating charges. It nevertheless does provide a basic framework for taking security. The key challenge for the international lawyer is to put this framework into practice, by bringing international security structures in line with the existing legislative framework. Foreign lenders: local law Iraqi law does not prohibit foreign parties from lending to local Iraqi parties. Furthermore, it does not require that a foreign lender register a local presence in Iraq nor does lending into Iraq subject a foreign lender to the licensing requirement contained in the Iraqi Banking Law No 94/2004 (the Banking Law ). According to Article 3(1) of the Banking Law: No person in Iraq shall engage in banking business without a banking license or permit issued by the Central Bank of Iraq (CBI), other than a person exempted by the CBI pursuant to paragraph (3) and paragraph (6), where banking business is defined as: the business of receiving deposits of money or other repayable funds from the public for the purpose of making credits or investments for its own account. Provided a foreign lender does not have a local presence in Iraq, then a foreign lender will not be subject to Iraqi banking 30

2 regulations. A foreign lender is further not prohibited from taking security in Iraq. However, a foreign lender is required to have a local presence for service of process in order to register and perfect security. Such a presence may either be a branch of the foreign lender or a local agent, which, in practice, can be a law firm. Regulating security interest To date, the creation and perfection of security interests under Iraqi law are regulated by a myriad of laws and regulations, namely the Iraqi Civil Code No 40/1951 (the ICC ), Commercial Code No 30/1984 (the Commercial Law ), Companies Law No 21/1997 (the Companies Law ) and Notary Public Law No 33/1998 (the Notary Public Law ). In addition, regulations and directives issued by the competent authorities, often not made public, may also apply. The Iraqi legislature has yet to promulgate a unified law regulating security interests. In addition, there are certain deviations in the Kurdistan Region. Types of security Iraqi Law recognises several types of security that may be created over movable and fixed assets: (i) authentic mortgage, for real estate; (ii) possessory mortgage, for movable assets; (iii) commercial pledge; (iv) registered machine pledge; and (v) share pledge. In addition, a borrower may also assign its receivables as security or although this is not a security technically speaking deposit promissory notes. Authentic mortgage Real estate often represents the most valuable asset of a project company and will therefore be the most valuable security a lender can obtain. An authentic mortgage is regulated by the ICC. The asset underlying the authentic mortgage may only be real estate, which may also include buildings, installations or the other rights in rem relating to the land. The authentic mortgage allows the lender to secure repayment of the debt from the proceeds of the sale of real estate. The authentic mortgage is created by a written deed, which must be registered with the real estate directorate. Possessory and commercial pledge Possessory and commercial pledges create a security interest over movable assets, which can be taken into the possession of the lender (Article 1321 of the Civil Code and Article 187 of the Commercial Code). In addition to the written agreement of the parties, a possessory or commercial pledge requires that possession of the asset underlying the security be transferred to the pledgee. Possession constitutes perfection and without it, the pledge is not created validly. Given that possession is not always practical, since the borrower may need the assets for its operations, a trustee structure may be set up whereby a plant manager or other employee can exercise possession on behalf of the pledgee. This also means that future assets may not be pledged, that is, no floating charge. However, a list of pledged assets may be annexed to the pledge agreement with an obligation on the mortgagor to update the list on a periodic basis or when new assets are acquired. The rights created under a possessory or commercial pledge cannot be registered under existing laws and regulations. Machine pledge The machine pledge is specific to a certain type of asset defined in Article 33 of the Notary Public Law as: Any device or group of automated devices that operate using any energy source or means other than manual, that is used for industrial, agricultural or production purposes. Machines, as defined in Article 33 of the Notary Public Law, for purposes of evidence of title, are between movable and fixed assets. According to the Notary Public Law, title to machines or any right attached thereto, such as a pledge, is only valid when registered. Share pledge Shares of an Iraqi limited liability company or joint stock company may be pledged according to Article 71 of the Companies Law. Shares of simple partnerships cannot be pledged. A share pledge is perfected through registration in a shareholder register maintained by the target company and may also be registered with the Iraqi Registrar of Companies for increased comfort. BANKING LAW NEWSLETTER SEPTEMBER

3 Assignment of receivables/claims A security assignment of receivables is not regulated under Iraqi Law. However, an assignor may freely assign its rights or receivables against a third party by notice to the debtor of the assigned receivables/claims. Such an assignment entitles the assignee to all receivables/claims of the assignor vis-à-vis its debtor. This can include revenue from a project agreement or amounts held to the credit of the assignor in a bank account. While such an assignment is not regulated as a security under Iraqi Law, it can be structured as such, giving the assignee the right to provide notice of the assignment to the debtor in the event of default of the borrower under the relevant financing agreement. Commonalities Ancillary nature of security Pledges created under Iraqi law are ancillary in nature, which means that the debtor can bring all defences against enforcing the security, which it can bring against the secured obligations. Therefore, the validity of the security is dependent on the validity of the secured obligation. Secured obligation The secured obligation must be a known amount or at least provide for a maximum limit. The secured obligation may not be all amounts due to the lender without reference to an upper limit or obligations created under a certain agreement. Interest may also be included in the secured obligations provided at an agreed interest rate given that it does not exceed the interest rate cap imposed by Article 172 of the ICC. The secured obligation under a registered security, such as an authentic mortgage or machine pledge, may be denominated in a foreign currency in the security agreement; however, for purposes of registration, the competent authority will require that the secured obligation be denominated in Iraqi dinars. No step-in right Iraqi law does not recognise the right of a secured lender to dispose of the secured asset at will upon the occurrence of an enforcement event. Instead, a secured lender must apply for the attachment and sale of the secured asset by a court-sanctioned public auction to be held by the Enforcement Directorate or the Real Estate Registration Directorate in the case of an authentic mortgage, the proceeds of which are then distributed to the secured lender. A clause, which provides the lender with the right to take immediate ownership of the pledged asset in case of an event of default, is void. Alternative forms of security Promissory notes While not technically a security, it is common in Iraqi financing transactions to create a parallel independent payment obligation through the issuance of promissory notes. Promissory notes create an obligation to pay that is not subject to the fulfilment of any other conditions and are, according to Enforcement Law No 40/1980 (the Enforcement Law ), immediately enforceable instruments. This means that promissory notes may be enforced without the need of a court order and the debtor may not bring any defences based on the loan documentation. Promissory notes may also be registered with the enforcement directorate in order to avoid a future defence based on forgery or nonexistence of the debt. Power of attorney A lender may also consider a power of attorney (POA) from the borrower authorising the lender or its designee to manage or dispose of the borrower s assets. POAs are common, yet their value for a lender is limited for several reasons, among which: (i) Iraqi law does not recognise the concept of an irrevocable POA and therefore, the principal may unilaterally revoke it at any time; and (ii) selling or disposing of a borrower s assets will most likely adversely affect the borrower s operations and consequently, its revenue stream and debt service capabilities. Direct agreements Direct Agreements granting a lender a step-in right or other rights vis-à-vis project parties other than the borrower can be invaluable for a lender especially in public private partnership (PPP) projects. Iraqi law restricts the amendment or assignment of public contracts without prior consent 32

4 and therefore, having a direct agreement represents a pre-approval of the transfer of the project to the lender or a representative of the lender. It may also require the relevant party to give the lender sufficient advance notice in the cases of an event of default under a major project agreement that is not remedied within the contractual cure period. Negotiating direct agreements with Iraqi government entities can be very tedious and drawn out. Government entities are reluctant to grant a lender any rights or to create new notification obligations vis-à-vis the lender. While we are aware of several instances where direct agreements were concluded, enforcement or such agreements have not been tested in practice or in court. Priority/ranking In connection with a registered security, such as the authentic mortgage, machine pledge or share pledge, the priority of the security is based on the date of registration with the competent registering authority and such a priority is valid vis-à-vis third parties from the date of its registration. For a non-registered security, such as a possessory mortgage, the priority of the security may be challenged, since the security is documented in an informal document and the date is not certified by a competent authority. Signing a possessory mortgage in notarial form would mitigate the risk of the ranking being challenged. Enforcement of security While parties to a transaction with a foreign element may, as a general rule, choose the law to govern their agreements, security agreements over assets located in Iraq must be governed by Iraqi Law (Article 24 of the ICC). Enforcement in Iraq can be burdensome, time-consuming and can pose particular challenges to a foreign lender, given the courts lack of experience in enforcing security for the benefit of a foreign creditor. In addition to the lack of firmly established administrative and judicial practices, as well as the ongoing change of the laws in force, the political situation in Iraq, including the security situation, can establish additional hurdles for a foreign party intending to enforce its rights in Iraq. Enforcement in Iraq is subject to the Enforcement Law, according to which papers documenting a real right that meet the required legal formalities, such as registration, and negotiable commercial instruments are immediately enforceable instruments (Article 14 of the Enforcement Law) provided that the right contained in the enforceable instrument is: (i) known; (ii) due; (iii) not conditional; and (iv) does not violate Iraqi public order (Article 13 of the Enforcement Law). This means that a registered security, such as an authentic mortgage, and a machine pledge, in addition to promissory notes, are immediately enforceable upon application to the Enforcement Directorate without the need to obtain a court order. Enforcement proceedings should not be suspended except on the basis of a court order. The Enforcement Law does not provide detailed time frames for the completion of all enforcement proceedings and therefore, in practice, enforcement, especially with an uncooperative debtor as the case usually is, is long and tedious. Political and social considerations may also have the effect of prolonging enforcement proceedings substantially. Reform Iraq would benefit greatly from legislative reforms in connection with the creation, perfection and especially, the enforcement of security interests to ease the concerns of international lenders. Currently, a project to amend the application of the Enforcement Law in Kurdistan is under way. The project, which is spearheaded by the Kurdish Ministry of Justice, builds on the expertise and experience of seasoned Iraqi lawyers in collaboration with foreign development institutions. The aim is to streamline the enforcement process and increase transparency. This is a welcome development, but it is unclear when such amendments might come into force. The project remains with the Ministry of Justice and has not been submitted to parliament. The Federal Ministry of Justice should also consider a similar initiative. A unified secured transaction law would be the ideal scenario for an economy that is relying more and more on debt-based financing. The existing legislations are outdated and are more suited to local noncommercial transactions. A unified secured transaction law that balances the interests of local borrowers and foreign lenders, BANKING LAW NEWSLETTER SEPTEMBER

5 BRAZILIAN ENVIRONMENTAL DIRECTIVES AND THE FINANCIAL SECTOR and creates a single public registry for perfection of security interests over nonfixed assets would go a long way towards attracting foreign lenders. Such a law would be beneficial to both the lender and the borrower, where the former would benefit from a transaction that is less risky in terms of security, while the latter would benefit from the increased access to credit and an opportunity to leverage movable assets to raise finance at lower interest rates. Notwithstanding the benefits of a unified secured transaction law, there is no indication that such a law is on the agenda of the Iraqi law-maker and at present, lenders must structure their transactions carefully within the existing scattered legal framework. In the absence of a unified secured transaction law, systematic application of existing law and established market practices, the legal community has an opportunity to develop and agree on best practices within the existing framework. Lawyers can play a pivotal role in the development of market practices to fill in some of the gaps in existing legislation, including developing model documentation, defining acceptable parameters on how to implement perfection requirements contemplated by law but not tested in modern secured financing transactions, and building a precedence base for future transactions. In addition to other obstacles, often, officials are unfamiliar with the law and have for years relied on implementing the procedures that were handed down to them, whether based on the law or not. By establishing accepted market practice and consistent model documents, the legal community has an opportunity to influence future implementation of the law and elicit more cooperation and transparency from competent authorities. Collaboration in providing training sessions to public officials could also greatly enhance the efficiency and transparency of legal requirements and procedures for registering and enforcing security in Iraq. Brazilian environmental directives and the financial sector Ana Luci Grizzi Veirano Advogados, São Paulo analuci.grizzi@ veirano.com.br How does Brazil deal with its environmental liability directives for the financial sector? Well, the answer is still under construction. Pursuing the most suitable answer, Veirano has been following up discussions on this matter for the last decade. Our environmental practice team is used to interpreting the Brazilian legal liability environmental system from an economic perspective: our goal is to deduce how the liability system could achieve more than just imposing penalties when damage had already occurred. In our opinion, the whole legal environmental system should look forward and create mechanisms to impact economic sectors positively; which would help to achieve sustainability. Given this scenario, environmental laws should not be understood as a limitation to economic growth and a country s development. Environmental laws should be read as crucial to the development of the economy; once we are able to use natural resources wisely, we can benefit from more raw materials and inputs at lower costs. At the same time, quality of life would be enhanced automatically through developing a more sustainable approach to the economy. However, unfortunately, this is certainly not the way environmental laws are interpreted by most of our leaders, or even the population. Brazilian civil environmental liability rules and financial institutions As for environmental liabilities, the main concern is how far the liability chain could be spread based on the indirect polluter 1 34