The Quarterly Journal of Judicial Law Views

The Quarterly Journal of Judicial Law Views

The Conflict between the Voidable Preference and the Independence Principle of Letters of Credit; a Comparative Study of Iranian and American Law

Document Type : p

Authors
Homayon Mafi
Milad Kianpouriannejad
Department of Private Law, Faculty of Judicial Law, University of Judicial Sciences and Administrative Services, Tehran, Iran.
10.22034/jlvi.2025.2032793.1193
Abstract
Voidable preference, with the aim of respecting the equality of creditors, is to prevent a bankrupt businessman from preferring one creditor over another. In the implementation of this rule, the instrument of preference has a method and the transfer or restriction of property is invalid if it reduces the share of creditors. Issuing letters of credit relying on the applicant's property is one of the payment methods that, on the one hand, has the principle of independence and is immune to any defects, and on the other hand, it can be considered a void preference. The answer to the question of which one comes first in the conflict between the prohibition of preferred payment and the principle of the independence of the letter of credit, requires attention to the basis of the invalidity of the preferred payment and the separation of the types of letters of credit. In American law, the Earmarking Doctrine and transfer of value in a contemporaneous exchange are consistent with cases of letter of credit that does not detract from the merchant's property and the preference is not voidable Preference. Also, in Iranian law, the principle of correctness affirms the exceptionality of preferred cases. Therefore, if the date of issuance of the letter of credit is later than the date of the stoppage and with obtaining collateral, in Iranian law, preferential payment is realized in Standby letters of credit, but in the case of commercial letters of credit, it can be assumed to be correct. In American law, issuing valid commercial letters of credit and issuing Standby letters of credit after the bankruptcy date is invalid. If the letter of credit is issued without obtaining collateral or before the bankruptcy date, the independence principle will be fulfilled and the payment to the beneficiary will be correct.
Keywords
Letters of credit
Independence principle
Voidable preference
Bankruptcy
Conflict of nullity
Invalid conflict

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  • Receive Date 18 June 2024
  • Revise Date 17 October 2024
  • Accept Date 02 August 2025