A Review of the Similarities and Differences Between the Institutions of "Bankruptcy" and "Insolvency" [Iflas] in Islamic Law, with a Look at Iranian Law and the Common Law System

 ∴ Introduction ∴ ‌
The legal and economic implications of bankruptcy are profound, influencing not only the financial health of individuals and businesses but also the stability and fairness of the broader economic system. The concept of bankruptcy, as understood in contemporary Iranian law, is a construct with origins that can be traced back to the enactment of the Iranian Commercial Code of 1932. This legislation borrowed significantly from the Napoleonic Code, incorporating principles aimed at ensuring equal treatment of creditors. The contemporary Iranian legal framework for bankruptcy primarily focuses on preventing preferential treatment among creditors and safeguarding the collective interests of all creditors against unilateral actions by the debtor.
     However, the notion of bankruptcy is not entirely novel within the Iranian context. Traditional Islamic jurisprudence has long recognized a similar concept under the term insolvency/indigence [Iflas]. Within Islamic law, bankruptcy is considered one of the six causes of incapacity/ interdiction (Hajr), wherein the insolvent individual [Mofles] is restricted from disposing of their property. This jurisprudential approach mirrors the principles found in modern bankruptcy laws, emphasizing the prohibition of preferential treatment and ensuring equitable distribution among creditors. The central inquiry of this research is to ascertain whether the Islamic jurisprudential concept of Insolvency can be equated with the legal construct of bankruptcy, facilitating a meaningful comparative analysis.
‌ ∴ Research Question ∴ ‌
The primary research question addressed in this study is: To what extent do the concepts of "bankruptcy" in contemporary Iranian law and "Insolvency" in Islamic jurisprudence correspond to one another? Specifically, the research seeks to determine whether these two concepts can be considered equivalent, thereby allowing for a comparative analysis of their respective frameworks, or if there are fundamental differences that distinguish them.
‌ ∴ Research Hypothesis ∴ ‌
The research hypothesis posits that the concepts of insolvency in Islamic jurisprudence and bankruptcy in modern legal systems, while originating from different legal traditions, share substantial similarities in their fundamental principles and objectives. These similarities may provide a basis for comparative analysis and potential integration or harmonization of these legal concepts within the context of Iranian commercial law. The hypothesis further suggests that understanding these similarities and differences can lead to more effective and equitable bankruptcy regulations that are consistent with both Islamic jurisprudence and contemporary legal standards.
‌ ∴ Methodology & Framework, if Applicable ∴ ‌
The research employs an analytical-descriptive doctrinal method, a common approach in the study of Islamic humanities. This methodology involves a detailed analysis of legal texts, jurisprudential opinions, and statutory provisions, drawing upon a rich body of Islamic legal library resources. The study's scope is primarily focused on Shia jurisprudence and Iranian law, with limited reference to Sunni jurisprudence and foreign legal systems, particularly those following common law traditions.
‌ ∴ Results & Discussion ∴ ‌
The comparative analysis of the concepts of bankruptcy in contemporary Iranian law and Insolvency in Islamic jurisprudence reveals several significant findings. First and foremost, Shia jurisprudence does not distinguish between merchants and non-merchants regarding the applicability of bankruptcy rules. This inclusive approach underscores a fundamental principle of equality among creditors, ensuring that all creditors have proportional access to the debtor's assets, regardless of the debtor's status as a merchant or non-merchant.
     In Iranian law, however, the bankruptcy provisions of the Iranian Commercial Code are currently limited to merchants. This restriction creates a disparity in creditor protection, favoring those who deal with merchants over those who transact with non-merchants. The analysis highlights that creditor of non-merchants are exposed to higher risks of non-recovery of their claims. This risk disparity stems from the fact that non-merchant debtors are not subject to the same stringent regulations and oversight as merchant debtors, allowing non-merchants to potentially evade their financial obligations more easily.
     From the perspective of creditor prioritization, both Shia jurisprudence and Iranian law prioritize creditors who have a specific claim to a particular asset in the debtor’s possession. These creditors are given priority in receiving their claims, with the remaining assets distributed proportionately among the other creditors. This principle of proportional distribution is a cornerstone of both systems, reflecting a shared commitment to fairness and equality among creditors.
     The discussion also points out that in practice, a merchant who resumes trade after a period of bankruptcy is regarded similarly to a non-merchant debtor who has faced insolvency. Both types of debtors hold equivalent credibility and standing in the eyes of third parties’ post-bankruptcy. This practical equivalence suggests that extending bankruptcy regulations to non-merchants could enhance overall creditor protection without significantly altering the perceived reliability of debtors returning to economic activity.
     Another critical observation is the potential for legal evasion under the current framework. Since the Iranian Commercial Code confines bankruptcy regulations to merchants, individuals can engage in commercial activities while avoiding the title of merchant, thereby evading the associated legal obligations. This loophole not only undermines the principle of equality among creditors but also encourages economic actors to exploit the system to their advantage, leading to unfair outcomes and economic insecurity.
‌ ∴ Conclusion ∴ ‌
The study concludes that the institution of bankruptcy, as understood in Shia jurisprudence, applies equally to both merchants and non-merchants. This approach upholds the principle of equality among creditors, ensuring that all creditors, regardless of the debtor’s status, have equitable access to the debtor's assets. The current Iranian legal framework, however, restricts bankruptcy provisions to merchants, creating a risk disparity between creditors of merchants and non-merchants.
     Given these findings, the research recommends amending the Iranian Commercial Code to extend bankruptcy regulations to non-merchant debtors. Such an amendment would align Iranian law more closely with Shia jurisprudence and the principles observed in common law countries. This change would also mitigate the risks faced by creditors of non-merchant individuals and prevent economic actors from avoiding commercial responsibilities by eschewing the title of merchant.
     Implementing these recommendations would promote economic security and public order by ensuring that all creditors are treated equally and that the legal system cannot be easily manipulated to evade financial obligations. This proposed extension of bankruptcy regulations to non-merchants would enhance the robustness and fairness of the Iranian commercial legal framework, providing a more stable and equitable environment for economic activities.
     Ultimately, aligning the Iranian Commercial Code with the inclusive principles of Shia jurisprudence and common law practices would contribute to a more balanced and secure economic system, benefitting both creditors and debtors by promoting fairness, transparency, and accountability in financial dealings.