According to the Iranian Law the mortgage is a real contract which its conclusion is subject to the transfer of the property to the possession of the mortgagee. In this regard, Article 772 of Iranian Civil Law stipulates that:
"The property which is pledged must be transferred to the possession of the mortgagee, or to that of a person agreed upon by the two parties; but it is not a necessary condition for the validity of the transaction that the property should remain in that possession."
The first implication of this Article is that the validity of the mortgage contract is depending on the transfer of the possession of the subject to the mortgagee and contrary to the consensual contracts, the mere offer and acceptance of the parties may not result in conclusion of the contract.
With regard to this fact, subject of the mortgage, should be a materially transferable object, taking into account that the intangible properties such as debts and profits may not be transferred materially.
The sanction of this requirement is stipulated in Article 774 of Iranian Civil Code as follow:
"A pledged thing must be a definite object, and the pledging of a debt or a profit is void."
Consequently, most of the Iranian lawyers believe that the intangible properties may not be mortgaged and in turn, if the matter of validity of such contracts would be brought before the Iranian Courts, they will be nullified.
Nevertheless, in spite of the clarity of the aforementioned Articles, there are still some doubts, whether some properties such as companies's shares and bonds, are intangible or not. In prevalent theory of Iranian commercial lawyers, the shares of a company regarded as its debt to the shareholders and consequently, the assets of the company belong to the legal entity of the company, not to the shareholders. As a consequence, the share certificates may not be assumed as a tangible or a real property which may be delivered and possessed. As to the bonds, the Iranian Commercial code of Iran is more clear and in Article 53 emphasizes that:
"Bond holders shall not participate in the management of the company and they are considered to be creditors only."
Nevertheless, the financial facility and negotiability of the aforementioned intangible properties have resulted in retention and mortgage of these properties by most of the merchants especially the banks as pledge. This attitude of the banks contains some justifications. They believe that the share certificates are definite objects and the subject of the mortgage is the share certificate, not the debt of the company to the shareholder.
In spite of the above justification which seems to be convincing, the Iranian courts and traditional jurists refuse to accept the share certificates as the subject of mortgage, because they believe that the share certificates indicate no real and independent value and they represent only the debt of the company to the mortgagee.
In conclusion, the validity of the International mortgage contracts on shares such as put option agreement, share retention agreement, security agreement, tag-along agreement and etc, which are governed under the Iranian Law or are related to the shares of Iranian companies, is subject of doubt and it is strongly recommended to the foreign merchants and investors who intend to involve in contracts with Iranian people or companies in this respect, to resort to other form of contracts which are more consistent with local law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
