Over the recent years, the postponement of bankruptcy proceedings (iflas erteleme), provided under the Execution and Bankruptcy Law numbered 2004 (“Law No. 2004”), was a popular method to improve the financial structure of equity companies and cooperatives. However, with the declaration of the state of emergency in the immediate aftermath of the attempted coup and its subsequent extensions up until July 19, 2018, the request for and the declaration of postponement of bankruptcy proceedings were banned and thus lost its function. Although the initial intention was to resume the implementation of bankruptcy postponement proceedings, after the expiry of the state of emergency, the Law amending the Code of Execution and Bankruptcy and Certain Laws numbered 7101 published in the Official Gazette numbered 30361 on March 15, 2018 (“Law No. 7101”) and entering into force on the same date, repealed the concept of bankruptcy postponement proceedings and introduced significant changes to the concept of composition with creditors (konkordato).
The bankruptcy postponement proceedings concept was mainly repealed because of the major problems encountered in implementation, such as the long terms provided for trial and application, ineffective supervision by the court, limited intervention rights of the creditors to the process. The new amendments aimed to find a balance between the rights of the creditors and the debtors, by providing broader creditor control along with appropriate debtor relief.
Below is a summary of the composition with creditors, as amended by Law No. 7101.
Pursuant to Article 285 of Law No. 2004, any debtor, who cannot pay its due debts or is in jeopardy of not paying its debts when they fall due, may request composition with creditors, from a commercial court to agree with its creditors on new maturity dates for its payables or on reduction of its payables or to avoid a possible bankruptcy. Any of the creditors, who is entitled to initiate a bankruptcy proceeding, may also apply to a commercial court with the aim of initiating composition proceedings for a debtor.
Any party applying for composition with creditors, shall submit an application to the commercial court, including but not limited to the preliminary restructuring project showing a payment plan with scheduled maturity dates and rates, the most up-to-date balance sheet and other commercial books or documents showing the assets of the debtor, a list showing the creditors, amounts to be paid to the creditors and the status of the privileges, a table comparing the estimated amount planned to be paid to the creditors as proposed in the preliminary restructuring project and as estimated in the event of bankruptcy, financial analysis report prepared by an independent audit firm (authorized by the Capital Markets Board or the Public Oversight, Accounting and Auditing Standards Authority (“KGK”)) indicating that the proposals provided in the preliminary restructuring report are viable (except for small size enterprises).
Temporary Period: Following the application for composition and upon confirmation by the commercial court that the application file is complete, the court shall grant a “temporary period” of three months, which may be extended for up to five months in total, to the debtor. During this period, the court shall examine the preliminary restructuring project and shall appoint a temporary commissar (or up to three commissars depending on the number of debtors and the amount of debt) to assess the possibility of the composition’s success. Such temporary period shall have the same consequences with the definitive period, which is detailed below.
Definitive Period: Following the assessment of the preliminary restructuring project, if the court deems that the composition may be successful, it shall grant a “definitive period” of one year, to the debtor. In case of special circumstances posing difficulty for the debtor, the court may extend this period with an additional six months period. The temporary commissar or commissars shall continue their duties during the definitive period as well, unless there is a need for a new assignment. Following the definitive period ruling, the court may also appoint a “creditors committee” comprising of a maximum seven creditors, in order to ensure that creditors are appropriately represented in any related proceedings.
Outcomes of the Temporary Period and Definitive Period:
Applicable to the Creditors.
- Creditors cannot initiate any proceedings against the debtor including for public receivables arising under the Law on the Procedures for Collection of Public Receivables No. 6183 and all ongoing proceedings shall be suspended. The lapse of time and statute of limitations, which may be suspended with an execution proceeding, shall not be applicable.
- It is not possible to take preliminary injunction (ihtiyati tedbir) or initiate provisional attachment (ihtiyati haciz) proceedings against the debtor. However, (i) attachment proceedings can be initiated for privileged claims ranked first as per Article 206 of the Law No. 2004, and (ii) secured creditors may initiate or continue enforcement proceedings for the foreclosure of securities relating to their secured receivables, provided that no protective measures are taken or no security assets are sold.
- Agreements executed before the beginning of the temporary or the definitive period, in relation to assignment of future receivables, which will become due and payable, after the ruling for the definitive period, shall be void.
- Agreements which have been executed by the debtor and which are significant for the continuation of the debtor’s operations, regardless of whether the counterparty is affected by the composition project, cannot be terminated or accelerated due to the initiation of a composition request, with the claim that the debtor is in breach or that composition is a valid ground for termination. Such agreements cannot be terminated due to initiation of a composition request, even if the agreement does not include a specific provision addressing such issue. However, the debtor may terminate its long term agreements, which interfere with the purpose of the composition process, provided that termination of such agreement is approved by the court, following the affirmative opinion of the commissar. Compensation claims of the counterparties arising as a result of such termination, shall also be subject to the composition process. Service agreements shall be subject to special provisions.
- Unless otherwise stated, no further interest shall accrue on unsecured claims.
Applicable to Debtors.
- The debtor may continue its operations under the supervision of the commissar. However, the court may rule that certain of its activities may only be conducted with the commissar’s consent or that the commissar continues the operations of the debtor instead of the debtor itself.
- The debtor cannot establish pledge, surety, transfer any immovable or movables from its permanent installation or establish any security thereon or perform any gratuitous legal transaction, without obtaining the prior consent of the court. Otherwise such transactions shall be deemed void. The court is required to obtain the opinion of the commissar and the creditors’ committee, prior to finalizing its decision on such matters.
- If the debtor fails to comply with the aforementioned consequences or breaches the notices of the commissar, the court shall be entitled to suspend the ownership rights of the debtor or reject the composition request by cancelation of the definitive period and rule for the bankruptcy of the debtor.
II. AFFIRMATION OF THE COMPOSITION PROJECT
Ordinary Creditors’ Meeting.
After its appointment, the commissar shall prepare a register recording the assets of the debtor and shall determine the value for such assets. The commissar’s decision on the value of the secured assets shall be available for the examination of the creditors and the pledgees and the debtors shall be notified of the value assessment in written form prior to the ordinary creditors’ meeting. Relevant persons may request the court to re-determine the value of the secured assets within seven days and if such relevant person is a creditor then the creditor may request the debtor to pay the court fees.
The creditors shall further be invited to claim their receivables within 15 days’ through a publication made in accordance with Law No. 2004. The creditors failing to notify their receivables shall not be included in the negotiations on the composition project. Later, the commissar shall invite the debtor to make a statement of the receivables and prepare a report on the probability of the receivable claims of the creditors after making an analysis on the books and records of the debtor.
Upon preparation of the composition project, notifications on the receivables and their analysis, the commissar shall make a new announcement to invite the creditors for a meeting to negotiate the composition project, to be held at the earliest 15 days after such announcement. The debtors shall also be allowed to review the books and records of the debtor, during the seven day period before the meeting.
The commissar shall preside the meeting and report on the status of the debtor, which is required to be present at the meeting to make any necessary explanations. The composition project shall be approved by the majority exceeding: (i) half of the registered creditors and receivables, or (ii) quarter of the registered creditors and two thirds of the receivables. Only the creditors affected by the composition project shall be entitled to vote in this meeting, however privileged receivables ranked first as per Article 206 of the Law No. 2004 and relatives of the debtor as specified under the Article 302/III of the Law No. 2004, shall not be taken into account when calculating the majority of the receivables and creditors. For the secured receivables, only the portion of the receivables which remain unsecured, as a result of the above mentioned valuation (made as per the Article 298 of the Law No. 2004) shall be taken into account. The minutes relating to the composition, shall promptly be signed by all attendees voting for and against. Adhesion shall be allowed for seven days following the meeting. The commissar shall submit all documentation relating to the composition, a report with reasoning including the results of the ordinary creditors’ meeting and information on the conformity of the court’s affirmation, within seven days following the expiry of the adherence period.
Meeting with Secured Creditors.
The debtor may request to execute a separate settlement with its secured creditors, if such option is indicated under the preliminary restructuring project. The commissar may invite the secured creditors to negotiate principal amount or interest rate discounts, changes to the maturities or any other payment methods which may be proposed. If any settlement is reached between the parties during the negotiation or during a seven day adherence period following the meeting, with the approval of the secured creditors holding at least two thirds of the secured debts, then the commissar shall include such results to its report on the ordinary creditors’ meeting under a separate title.
Having said that, the secured creditors which do not agree with the above mentioned settlement, shall be subject to the longest maturity date agreed by other secured creditors with the interest rate determined by the parties in their agreement prior to the request for composition.
Affirmation by the Court.
The composition project shall become binding upon the affirmation of the court. If the composition project specifically indicates that the composition shall become binding upon the finalization of the court’s affirmation decision, the effects of the consequences of the definitive period shall continue to be applicable until the date of finalization.
The affirmed project shall be applicable to all receivables, accruing before the request for composition or arising during the temporary or definitive period without the permission of the commissar, except for: (i) privileged receivables ranked first as per Article 206 of the Law No. 2004, (ii) receivables of the secured creditors, corresponding to the value of the security, and (iii) public receivables within the framework of Law No. 6183.
Also pursuant to Article 307 of the Law No. 2004, upon the request of the debtor, the court in its affirmation decision may grant postponement of: (i) the protection and sale of the secured assets and (ii) return of the assets sourced by way of financial leasing, for a maximum period of one year, provided that certain conditions are met.
III. THE NEW DRAFT LAW
On November 13, 2018, a new proposal law was submitted to the Parliament for the purposes of amending certain provisions of Law No. 2004 relating to the composition with creditors, to prevent wrongful or abusive use of the composition with creditors. The proposed amendments are summarized below.
- Audit reports instead of financial analysis reports shall be prepared by independent audit firms authorized for the purposes of auditing public interest entities instead of all independent audit firms.
In order to determine if the proposal of the party applying to the court with a preliminary restructuring report is viable, the party applying to the court shall be required to submit an audit report instead of a financial analysis report (as provided under the current legislation). Also, such audit reports shall be prepared by independent audit firms authorized for the purposes of auditing public interest entities (kamu yararını ilgilendiren kuruluş) by the KGK. Having said that, since the number of the independent audit firms authorized for the purposes of auditing public interest entities is less than half the number of authorized independent audit firms, there is an ongoing discussion that this may lead up to monopolization by audit firms. Thus, there is a possibility that during its proposal discussions the General Assembly of the Parliament may remove the requirement of the independent audit firms to be “authorized for the purposes of auditing public interest entities”. It further states that the standards applicable will be determined in a regulation to be published by the Ministry of Justice. Also, although the applicable legislation exempts the small size enterprises from the requirement to submit a financial analysis report, the proposal removed such exemption.
- One commissar should be an independent auditor in three commissar procedures.
In procedures with three commissars, one of the commissars shall be appointed from among a list of independent auditors authorized by the KGK and approved as responsible auditors, provided that such persons carry on their business in the city where the court is located.
- A commissar list will be compiled by the relevant regional expert committee.
The commissars shall be chosen from a list to be compiled by the relevant regional expert committee. This list shall only include persons trained in the institutions authorized by the Ministry of Justice. The details relating to the qualifications of the commissar, as well as the authorized training institutions and those who are exempt from the trainings, shall be regulated by the Ministry of Justice. The KGK shall also provide to the regional expert committee, a list indicating the independent auditors eligible for appointment, authorized and approved as responsible auditors.
- The court shall rule for bankruptcy if the debtor acted with the intent to harm its creditors.
If it is determined that the debtor acted with the intent to harm its creditors during the definitive period, upon receipt of the commissar’s report on such issue the court shall reject the composition request by cancelation of the definitive period and rule for the bankruptcy of the debtor.
We will be providing further details once the relevant legislation is enacted by the Parliament and published in the Official Gazette.
In line with the recent changes in the composition with creditors and with the help of its simplified procedures, the amended composition with creditors is expected to be applied more often in the coming days. Although the composition with creditors procedure with the recent modifications can be seen as a fresh and popular relief for companies undergoing economic difficulties, it is crucial that the courts and the appointed commissars ensure to sustain a balance between the creditors and the debtors and avoid unfair implications to the creditors. In that regard, the above-explained Draft Law is expected to be beneficial for ensuring such balance.
This information is provided for your convenience and does not constitute legal advice. It is prepared for the general information of our clients and other interested persons. This should not be acted upon in any specific situation without appropriate legal advice. This information is protected by copyright and may not be reproduced or translated without the prior written permission of Ergün Avukatlık Bürosu.