Suretyship in company contracts
A partner or a company may be asked to stand surety for an obligation of another company, or for an obligation arising from a supply contract, a loan, or the performance of works. The rule is read from the title on suretyship in Civil Code No. 40 of 1951. The frame is on company registration. Preparing the wording of a contract — not a suretyship form — is on the contract-drafting page.
The definition of suretyship, and how it is formed
Article 1008 defines suretyship as the joining of one estate to another in claiming performance of an obligation. It is formed by offer and acceptance of the surety and the creditor, and it may be immediate, or made subject to a condition, or postponed to a future time, under article 1009. The surety may not withdraw from the suretyship after it has been formed, subject to the rule on withdrawal before the debt attaches in a conditional or postponed suretyship, under article 1010.
Suretyship covers the accessories of the debt, the costs of the first demand, and costs that arise after the surety has been notified, unless an agreement provides otherwise, under article 1015. Suretyship of a debtor for a commercial debt is treated as a civil suretyship even if the surety is a merchant, except that suretyship arising from backing commercial papers as an ancillary backer, or from endorsing those papers, is always a commercial suretyship, under article 1016. The path of bills of exchange and promissory notes is on its page. The word used in article 1016 for that backing is a description of a type of suretyship in the text, not an obligation that arises outside what that article lays down.
The surety's recourse, and the limits of this page
If the surety performs the debt, recourse is had against the debtor for what was secured, within the limits articles 1033 and following draw. When the debt falls due and the debtor does not perform, the surety may require the debtor to release the surety from the suretyship or to provide further security, under article 1036, together with a right to give the creditor notice that steps must be taken within a period of no less than a month, failing which the surety is discharged from the suretyship if the creditor does not demand the debt from the debtor.
Article 7 bis allows a holding company to make loans, suretyships and financing available to its subsidiaries. That is a permission in the Companies Law. The suretyship contract itself is read from the Civil Code when it is concluded. The detail is on the holding-companies page. The managing director's authority to sign a suretyship is read from the limits in article 123 and from the company contract, on the managing-director page.
Suretyship, real security, and notarial form
A mortgage or other real security is another path, which is not replaced by suretyship. If the act requires a particular form, it is authenticated by a notary public within the limits of the law.
The Law Office of Ali Barakat follows this reading of suretyship from Baghdad, al-Yarmouk.
Legal basis and sources
Frequently asked questions
How is a suretyship formed under the Civil Code?
A suretyship is formed by offer and acceptance of the surety and the creditor, under article 1009. It is the joining of one estate to another in claiming performance of an obligation, under article 1008. When it appears in company contracts, its formation remains the same, and within the authority of whoever signs for the company.
Is suretyship of a commercial debt always a commercial suretyship?
Article 1016 treats suretyship of a debtor for a commercial debt as a civil suretyship even if the surety is a merchant, except suretyship arising from backing commercial papers as an ancillary backer, or from endorsing them, which is always a commercial suretyship.
May a holding company stand surety for a subsidiary without a contract?
Article 7 bis allows a holding company to provide suretyships to its subsidiary. Forming the suretyship itself remains a contract, read from articles 1008 and following, and within the authority of whoever signs for the company.
Is a clause in the company contract enough to form a suretyship without offer and acceptance with the creditor?
No. Article 7 bis allows a holding company to provide suretyships to its subsidiary, but the suretyship itself is still formed by offer and acceptance of the surety and the creditor under article 1009, and within the authority of whoever signs for the company. A statement of objects in the contract does not take the place of forming the suretyship in the manner the Civil Code sets out.
Related topics and articles
- 01Bills of exchange and promissory notes, and their enforcementBills and promissory notes under the Commercial Law, enforced at an Enforcement Directorate under Law 45 of 1980, not general debt collection.
- 02Holding companies in the Companies Law after the 2019 amendmentA holding company is a joint-stock or limited company that controls a subsidiary, under article 7 bis added by Law No. 17 of 2019.
- 03Obligations that recur after a company is recordedFinal accounts, the audit, the general-assembly meeting and copies sent to the Registrar, distinct from post-incorporation steps and from branch duties.
- 04The address of a company or branch, a lease and a title deedThe company's address in its contract, before the Registrar and in the commercial register; a lease or deed may evidence it. Not a real-estate page.
- 05Registering a company in Basra: which department is approached, and what differs from Baghdad?Registering a company when dealing in Basra under the federal Companies Law, followed from Baghdad.