The Law on Amendments to the Enforcement and Bankruptcy Law and Certain Other Laws, adopted on 28.02.2018, entered into force upon publication in the Official Gazette on 15.03.2018. Thus, the institution of postponement of bankruptcy, which had been used for 15 years, was abolished, and the long-forgotten concordat reappeared in an updated form. The Law states that applications regarding ongoing postponement of bankruptcy proceedings will continue and be concluded in accordance with the former system, but stipulates that companies may no longer apply for the postponement of bankruptcy as of 28.02.2018.
The reasoning behind the law states that: ”… the institution of suspension of bankruptcy has failed to deliver the desired results in terms of achieving its intended purpose. When evaluated together with the fact that creditors have no say whatsoever in the institution of suspension of bankruptcy, the process being conducted solely between the debtor and the court, and the procedural issues experienced, the complete abolition of this institution and the more effective and active use of the concordat institution – based on the principle of an agreement being reached between the creditors and the debtor following negotiation and the approval of this agreement by the court – has been deemed a necessity in terms of commercial and social life.“ The lack of a voice for creditors in the suspension of bankruptcy, the process being conducted solely between the debtor and the court, certain procedural issues experienced, and the abuse in practice of this institution – which possesses ”overly optimistic” provisions – have necessitated the establishment of a new institution for the same purpose. With the new law, it is intended to completely eliminate the institution of suspension of bankruptcy and replace it with a structure that allows the concordat system to function more easily.
The most important change introduced by the new law is the acceptance that non-merchants can apply for a concordat. The second significant change is the assignment of the commercial court of first instance instead of the enforcement court. With the entry into force of the law, the commercial courts of first instance will have jurisdiction in all kinds of concordat proceedings. Another innovation is the provisional grace period, which was not previously included in the concordat system. Another novelty introduced is the creditors' committee. The creditors' committee, which was not previously included in the concordat practice, appears as a structure that will try to ensure that the concordat process proceeds more correctly. With the new law, a different creditor and receivable ratio has been introduced for the approval of the concordat project. A condition has been introduced for the concordat process to be concluded within a certain period.
What is the Suspension of Bankruptcy Institution and What Is It Used For?
The institution of bankruptcy postponement appears as a last resort before companies that have become unable to pay their debts go bankrupt. This mechanism applies to companies subject to bankruptcy, specifically cooperatives and capital companies, and can be utilised if the court decides that the company's financial situation is salvageable. While bankruptcy postponement is implemented upon an application made to the Court of First Instance by those authorised to make such a request, its maximum duration is 1 year, and this period can be extended up to 4 years by a court decision. Throughout this process, the bankruptcy of the relevant company cannot be decided, existing claims against it are suspended and no new proceedings can be initiated, and creditors cannot collect their receivables during this period. However, during the postponement, proceedings can be initiated through the conversion of a pledge into cash, or ongoing proceedings can be continued, due to receivables secured by a pledge over movable property, immovable property or a commercial enterprise.
Who Can Apply for the Postponement of Bankruptcy Institution?
In accordance with Article 179 of the Enforcement and Bankruptcy Law, persons authorised to manage and represent the company, or one of the creditors, may request the postponement of bankruptcy by submitting to the court an improvement project demonstrating that it is possible to improve the financial situation of the company or cooperative.
Conditions of the Bankruptcy Postponement Institution
Substantive and formal conditions must be met for the postponement of bankruptcy. The conditions for the postponement of bankruptcy are specified in the Enforcement and Bankruptcy Law. The company requesting the postponement of bankruptcy must be over-indebted, but it must also be possible to improve this situation of the company. Of course, the protection of the rights of creditors is another condition. These conditions we have listed are the substantive conditions for the postponement of bankruptcy. In addition, mention must also be made of the formal conditions. First of all, it depends on the postponement of bankruptcy being requested. In other words, the court does not issue this decision proprio motu. Notification of over-indebtedness must also be made in order to protect the creditors.
Measures to be Taken During Postponement
The court making the decision shall take all kinds of measures necessary for the protection of the assets of the company or cooperative. In this direction, the court shall appoint a trustee to the company. The trustee may take over all the powers of the board of directors or, in accordance with the court's decision, may be made responsible solely for approving the validity of the decisions and transactions of the board of directors.
Effects of the Postponement Decision
Upon the decision for a stay, no enforcement proceedings may be initiated against the debtor, and existing proceedings are also suspended. Furthermore, statutes of limitation and forfeiture periods that can be interrupted by a procedural enforcement act do not run. During the stay, proceedings may be initiated through the conversion of a pledge into cash, and initiated proceedings may be continued, in respect of claims secured by a pledge over movable property, immovable property or a commercial enterprise. However, protective measures cannot be taken and the pledged property cannot be sold on account of these proceedings.
The postponement period is a maximum of 1 year. This period may be extended based on the reports provided by the trustee, but the total of the extended periods cannot exceed 4 years.
Upon the rejection of the request for the postponement of bankruptcy or the determination upon the expiry of the period that recovery is not possible, the court decides on the bankruptcy of the company. If, even before the period granted for the postponement of bankruptcy expires, it is understood in line with the report given by the trustee that the postponement of bankruptcy will not be beneficial, that is, if it is concluded that the financial position of the company or cooperative cannot be improved, the court revokes the decision of postponement and decides on the bankruptcy of the company.
Concordat
Although bankruptcy suspension and concordat are mechanisms that can be resorted to in order to rescue a capital company in financial distress, bankruptcy suspension can only be applied if the capital company has made a notification of over-indebtedness within the meaning of Article 324 of the Turkish Commercial Code (TCC). However, such a condition is not required to apply for a concordat.
Because the institution of the postponement of bankruptcy failed to achieve its intended purpose and its provisions were abused, the Enforcement and Bankruptcy Law transitioned to the “concordat” system, which is based on the principle of debtors and creditors reaching an agreement following negotiations and the court’s approval of this agreement.
When evaluated in terms of form, bankruptcy postponement requires the existence of a balance sheet and a rehabilitation project, whereas concordat only requires the existence of a duly prepared concordat project.
Concordat is an option open to everyone, such as capital companies, sole proprietorship commercial enterprises, and real persons. However, postponement of bankruptcy is a path that only capital companies and cooperatives can apply for.
Application for Concordat
According to Article 285 of the Execution and Bankruptcy Law (İİK), any debtor who cannot pay their debts as they fall due or is in danger of being unable to pay them when due may request a concordat in order to pay their debts by being granted time or a discount, or to avoid potential bankruptcy.
In addition to this, unlike the institution of postponement of bankruptcy, creditors who have the right to file for bankruptcy also have the authority to apply to the court and request the initiation of concordat proceedings concerning the debtor.
Temporary Stay
Upon the request for a concordat, if it is determined that the documents specified in Article 286 of the EBL (Execution and Bankruptcy Law) are present in full, the court, immediately is obliged to issue a provisional measure decision and to take all measures it deems necessary for the preservation of the debtor's assets:
- provisional concordat project showing at what rate or maturity the debtor will pay its debts, to what extent creditors will waive their claims in this context, whether the debtor will sell its existing assets to make payments, and that the financial resource required for the debtor to continue its activities and make payments to its creditors will be provided through capital increase or obtaining credit or by using another method.
- Documents showing the status of the debtor's assets; if the debtor is a person obliged to keep books, the latest balance sheet, income statement, cash flow statement prepared in accordance with the Turkish Commercial Code, interim balance sheets prepared both on a going concern basis and on the basis of probable sale prices of assets, opening and closing certifications of commercial books and e-ledger berat information regarding books created in an electronic environment, other information and documents explaining the financial situation of the debtor, lists containing book values pertaining to tangible and intangible fixed assets, lists and documents showing all receivables and payables together with their due dates.
- list showing the creditors, the amounts of the claims and the priority status of the creditors.
- A comparative table showing the amount projected to be received by creditors according to the proposal included in the concordat preliminary project versus the probable amount creditors could receive in the event of the debtor's bankruptcy.
- Financial analysis reports and their underlying grounds, prepared by an independent audit firm authorised by the Capital Markets Board or the Public Oversight, Accounting and Auditing Standards Authority, indicating that the proposal included in the preliminary concordat project is highly likely to be realised.
According to the EBL, the court, having determined that these documents are complete, shall appoint a provisional concordat commissioner together with the provisional grace period decision for the purpose of closely examining whether the success of the concordat is possible.
The provisional period is granted for three months. Before this three-month period expires, upon the request of the debtor or the provisional commissioner, the court may extend the provisional period by a maximum of two months, and thus a provisional period of five months at most may be granted.
In terms of its consequences, the provisional moratorium produces the effects of a definitive moratorium.
Definitive Period
Pursuant to the EBL, the court is obliged to make a decision regarding the definitive grace period before the expiry of the temporary grace period. Before rendering a decision on the definitive grace period, the court is required to summon the debtor and, if any, the creditor who requested the concordat to a hearing. The temporary commissioner is obliged to submit their written report prior to the hearing and, if deemed necessary by the court, to be present at the hearing to provide a statement.
If it is understood as a result of the examinations that the concordat is likely to be successful, the debtor shall be granted a definitive grace period of one year. In the event of special circumstances presenting difficulty, upon the commissioner's substantiated report and request explaining this situation, an extension of up to six months may be decided by the court.
Consequently, the concordat must be concluded within a total period of 26 months (2 years and 5 months), comprising five months of provisional grace period (3 months + 2 months), 18 months of definitive grace period (12 months + 6 months), and a 6-month trial phase.
Committee of Creditors
The court may also establish a creditors' committee, along with the definitive period decision or at a time deemed appropriate within the definitive period, provided that it does not exceed seven creditors, no fee is awarded, and it consists of an odd number of members. The creditors' committee shall convene at least once a month and take decisions by a majority vote of those present. The concordat commissioner is required to be present at this meeting and to record the decisions taken in the minutes by obtaining the signatures of the participants.
Approval of the Concordat Project
The EBL provides for the commissioner to invite the creditors to a meeting to negotiate the concordat project after the preparation of the concordat project, the notification of claims and the verification are completed.
It is necessary for the debtor to attend this meeting, chaired by the commissioner, in order to make the required explanations.
Of the concordat project;
- Half of the recorded creditors and receivables, or
- It is stated that it shall be deemed to have been accepted if signed by a majority exceeding one quarter of the registered creditors and two thirds of the claims.
The concordat commissioner submits the approved concordat project, along with a reasoned report, for the approval of the court.
The Execution and Bankruptcy Law (İİK) states that the project must be approved in the presence of these circumstances, or if the court finds the project inadequate, it may request the necessary amendments to be made or it may reject it:
- It being understood that the amount offered in the concordat will exceed the probable amount that creditors could obtain in the event of the debtor's bankruptcy.
- Realisation that the proceeds obtained from the conversion into cash in a concordat through the abandonment of assets, or the amount offered by a third party, will exceed the proceeds that could be obtained in the case of liquidation through bankruptcy.
- The proposed amount being proportionate to the debtor's resources.
- The claims of privileged creditors being paid in full and the performance of debts incurred during the moratorium period with the permission of the commissioner being secured by adequate collateral, unless the creditor explicitly waives this.
- The trial expenses required for the confirmation of the concordat and the fee to be charged on the money agreed to be paid to the creditors in the event of the confirmation of the concordat must have been deposited by the debtor into the court cashier's office prior to the confirmation decision.
Provided that the debtor is subject to bankruptcy, if the concordat is not approved by the court and one of the grounds for direct bankruptcy exists, the court shall ex officio order the bankruptcy of the debtor.