By the London approach which was put into practice by the lead of Bank of England in 1970 for the first time, restructuring debts of the companies in financial crisis owed to Financial Institutions has been carried out. During this period, more than 160 companies participated in the restructuring program in order to survive in the economic life. The London approach was adopted by Mexico, Thailand, South Korea, Indonesia and Malaysia later on.
In Turkey, however, as a result of businesses coming to a standstill, increased interest rates and decreased new investments due to the Economic Crisis began in 2000, it became a requirement to carry out such an approach. At this point, Framework Agreement on Financial entered into effect by signatures of 25 banks and 18 financial institutions on 24.05.2002 which was prepared by The Banks Association of Turkey ("BAT") and which regulates restructuring conditions and principles of negotiations between the creditor institutions.1 This restructuring approach which enables financial institutions to involve on a volunteer basis and without any public authority, was referred as Istanbul Approach. During the period in question, more than 320 companies had opportunity to benefit from the Istanbul Approach.
Today, on one hand the current economic conjuncture on the other hand termination of "suspension of bankruptcy" procedure brought up an approach such as Istanbul Approach for distressed companies to restructuring their debts owed to financial institutions for one more time.
Eventually, Directive on Restructuring Debts Owed to the Financial Sector ("Directive") was published on 15.08.2018 and gave good news of financial reconstructing opportunity. Just as the Istanbul Approach, Framework Agreement on Financial Restructuring ("Agreement") and principles of application by Financial Institutions and the engagement letter, assignation and the practice of the arbitration board ("Arbitration Board") has been prepared by the BAT and shared with the financial institutions. The Agreement became effective by signatures of vast majority of the Creditor Institutions2 and approval of Banking Regulation and Supervision Agency ("BRSA") on 19.09.2018. The Agreement is open for signatures of the rest of the Creditor Institutions until 05.10.2018. Moreover, Draft Act on Restructuring Debts Owed to Financial Sector ("Draft Act") was presented to the Financial Institutions' review and is expected to become effective soon. The laws that shall apply to Financial Restructuring, the Agreement and relevant procedure have been examined within this article.
- Between whom shall the Agreement be concluded?
Agreement shall be concluded between banks referred to in article 3 of the Banking Law no. 5411 dated 19/10/2005, and firms referred to in article 3 of the Financial Leasing, Factoring and Financing Corporations Law No. 6361, both to be referred as "Creditor Institutions". Apart from that, separate Financial Restructuring Contracts ("FRC") shall be concluded with the debtors that are eligible for restructuring, in the scope of the general framework determined by this Agreement.
- What is the aim of the Agreement?
The aim of the Agreement is to determine in which terms the debtors may restructure their debts, what the obligations of the Creditor Institutions are before and during the procedure of restructuring, what principles shall be applied to the applications in scope, how and in what term the procedure of restructuring shall be managed and how the conflicts in scope of the Agreement shall be settled.
- Is it Obligatory to Sign the Agreement?
According to the following provision of the Paragraph 1 of the Art. 6 of the Directive as "Framework Agreements are prepared by the Union and signed by the authorized representative of the Creditor Institutions", the Agreement shall be signed by the Creditor Institutions on a volunteer basis. As it is signing the Agreement depends on the discretion of the Bank or the Financial Institution.
- Are the creditors that are not party to the Agreement obliged to act in accordance with the provisions of the Financial Restructuring Contract (FRC)?
The Paragraph 4 of the Art. 5 of the Directive states that "Provided that a contract with the debtor in the scope of Framework Agreement is signed by creditors who represents the two third of the total debt, it is obligatory for the rest of the creditor institutions to restructure their receivables."
As regulated explicitly under hereby provision, when the two third of the Financial Institutions sign a contract with the debtor, all of the Financial Institutions who are a party to the Agreement shall be obliged to act in accordance with the FRC, therefore the creditors who are not a party to the Agreement do not have such obligation.
- Is it possible to participate in the Agreement subsequently?
As stated above, the time allotted for Creditor Institutions to sign the Agreement shall expire on 05.10.2018. As the Agreement is examined in detail, it is explicit that Creditor Institutions' subsequent participation to the Agreement and/or FRC is not regulated under the Agreement whereas there are provisions concerning subsequent participation of the other creditors. The Directive and Draft Act also lack such provisions. Provided that such arrangement is made consciously, and no alteration shall be made on the Agreement, as of today, the subsequent participation of the Creditor Institutions to the Agreement or FRC is at risk after the expiration of duration and conditions.
- Which debtors may benefit from FRC?
It is regulated under the Agreement that debtors whose principal debt (cash, non-cash) to the Creditor Institutions exceeds 100 million Turkish Lira as of the date of application, may benefit from FRC. But it is vastly accepted in the financial sector that debtors whose total debt is less than stated amount shall be taken in the scope of FRC in the progressive aspect.
On the other hand, the debtor whose debts which are to be restructured must meet the following requirements:
- It is a requirement that none of the Creditor Institutions had started enforcement proceedings against the debtor whose debt is to be reconstructed.
- If one or more Creditor Institution(s) has started enforcement proceedings against the debtors for maximum 25% of their total/combined debt, debtors may also be included
- The debtors who are covered by an adjudication of bankruptcy shall in no case be included within the scope of Financial Restructuring.
- In what conditions may the debtor benefit from FRA?
Debtor's financial condition and ability to repay his debts as a result of reconstructing or arranging a new extinguishing plan must be confirmed. Provided that the contract is concluded in the scope of the Agreement by the two third of all Creditor Institutions, the rest of the Creditor Institutions shall become obliged to restructure their receivables.
- What is the Consortium of the Creditor Institutions ("CCI")?
The consortium in question consists of the Creditor Institutions and the other creditors if approved by CCI. Separate or a single uniformed CCI may be established for each debtor and/or all debtors included in the same risk group.
CCI may accept a creditor who is not a party to the Agreement into the FRC by the approval of Creditor Institutions that represents 75% of all receivables and 30% of total number of the Creditor Institutions enrolled in CCI. This quorum of decision also applies to the other decisions of the consortium.
- What may be done in the scope of FRC (with the approval of CCI)?
On the condition that the CCI approves, changes considered necessary may be done or requested from the debtor to do in order to render the debtor concerned effective, including but not limited to the following
- Maturity of the existing risk may be extended under conditions to be re-determined separately for each debtor,
- The new or when necessary unfinished investments or business capital may be financed additionally,
- Activities that are not directly related to the main operations of the debtor may be discharged,
- The capital of the company may be increased,
- The management of the company may change,
- The company may go public,
- Assets or the subsidiaries of the company may be sold,
- Partnership structure may be changed,
- The company may establish pledge or usufruct on its shares/equities in favor of the creditors who are included in the CCI,
- If considered necessary, the assets of the partner or first-degree relatives of the applicant debtor may be distributed to the CCI members proportionately as a guarantee,
- The whole or part of the principal receivables can be waived.
- How does the period of the standstill process proceed, when does it start and what are the principles that must be followed during this period?
The standstill process is defined in the Agreement as "the process that includes preservation of current legal status of parties either among themselves or with the debtor, the collateral structure, level of relation and assets of the debtor company and its subsidiaries throughout the anticipated and reasonable negotiation process"
It is regulated that the standstill process begins upon proper submission of an application and sharing of the application with the relevant Creditor Institutions without any further procedure. The continuation of the standstill process shall be decided within the first CCI meeting.
During the process in question, the Creditor Institutions cannot pursue executive proceedings apart from events which may lead to forfeiture of right due to the statute of limitations and cannot commence new executive proceeding or apply to other legal procedures.
On the other hand, "As of an contract is signed in the scope of the paragraph 3, no executive proceeding shall be pursued, commenced proceedings shall put on hold, interim injunction and provisional attachment decisions shall not be enforced and period of limitation and final term that can be interrupted by the executive proceedings shall not run including the proceedings commenced in accordance with the Law on Collection Procedure of Assets dated 21.07.1953 and numbered 6183" provision of the paragraph 4 of the Art. 4 of the Draft Code rules that third parties are also unable to pursue legal proceedings in order to collect receivables.
By the herein provisions, due to the fact that debt collection proceedings would be prevented for the creditors who are not a party to the Agreement during the Preservation of the Position period, it is beyond any doubt that both Creditor institutions and other creditors would want to participate in this process in order not to be left out.
- What is the term of the Agreement?
The Agreement shall be applicable to the restructuring contracts to be signed within 2 years starting from approval by BRSA. If CCI does not decide to restructure within 90 days from the application, the process ends. Period hereby may be extended by the decision of CCI for maximum 2 months. Up to 2 applications can be made during mentioned 2-year period.
- Is it possible to amend the Agreement?
Any provision of the Agreement may be amended by approval of all of the Creditor Institutions and approval of BRSA.
- What terms and conditions must the Restructuring Contract contain? Is it possible to change the terms after becoming effective?
FRC between debtor and the Creditor Institutions must contain:
- Debts owed to members of CCI by a certain date
- Schedule and amount of the repayment in the scope of FRC
- What are considered as the breach of the FRC and sanctions for these breaches
- The pricing method throughout the FRC (interest, dividend, commission, etc.)
- Monitoring criteria and how the mechanism of audit shall be
- Statement that Creditor Institutions shall have the authority to inspect all of the accounts and documents of the debtor
- The collateral structure of each CCI member separately
- Other obligations of the parties
- And other matters which CCI considers necessary
FRC can be amended by demand of at least two of the CCI members and by the approval of CCI members that represents %75 of all debts of the members and %30 of all CCI members during the application process on condition that the amended form does not deviate from the fundamental principles determined at the beginning.
- How are the disputes arising from the Agreement settled?
A Panel of Referees ("PR") consisting of three arbitrators shall be appointed within the scope of the principles that Board of Directors of BAT. They shall be responsible for settling disputes arising from Creditor Institutions evading their obligations which are governed under hereby Agreement. All three members of the PR, who should have at least 10 years of seniority and who should be directors, shall examine the application and determine the presence of the violation.
- How to apply to the FRC?
The debtors shall apply to one of the three creditors having the highest amount of receivables by submitting the application form in the format which the TBU has prepared and the letter of engagement, attaching any document and information (such as assets inventory (current and last 3 years retrospectively) of partners, guarantors and their spouses' and children's and the assets inventory (current and last 3 years retrospectively) of domestic and abroad subsidiaries irrespective of being indebted or not, inventory of other assets and encumbrances and information on risks and collaterals in all financial institutions) which may be required for the process.
The debtors must agree and declare in the letter of engagement and application form that
- Debtors shall not utilize any loan facilities from any new bank or financial institution, real or legal person,
- Debtors shall not put any restriction on their own assets in their own initiative,
- Debtors shall not dispose any of their assets (including trademarks, patents, licenses and know-hows) by way of assignment, sale, donation, and shall not apply to pledges or mortgage etc.
- Debtors shall not stand as a surety of a guarantor in favor of third parties,
- Debtors shall not issue any negotiable instruments or conduct any activity that incurs debt, apart from check, bill and bonds that arises from an actual transaction and which can be documented, and which is within the usual area of activity of the debtor,
- Debtors shall not make any arrangements or do any practice that may cause a privilege or inequality among the current creditors,
- Debtors shall not lease, assign or establish any kind of right in rem on the movable, immovable assets or intellectual property rights,
- The debtors shall permit audit of their records and by an expert if considered necessary by the CCI,
- Debtors gives explicit consent to sharing their customer and business secrets and information that can be considered as personal data,
- Debtors shall not transfer, acquire or release any right in personam, right in rem and pledges that are established in favor of debtor's partners, partners' spouses or children or the guarantor and in this context, debtor shall not abdicate any claim, settle for less than the full balance or withdraw the lawsuit.
- Shall any tax exemptions be applied to the Agreement and contracts that is signed in the scope of the Agreement?
The tax exemption matter which has not been regulated in the Act or the Directive is included in the Art. 9 of the Draft Act. According to the mentioned provision, Restructure Contracts, transactions in this scope and papers are exempted from the stamp tax, any duty and banking and insurance transactions tax.
Aforesaid exemption shall also be applied for disposing of assets acquired by Creditor Institution and for the resource utilization support fund of credits which are made available in the scope of FRC and the Agreement.
It must be kept in mind that these matters shall become definite by the enactment of the Draft Act.
Consequently, it wouldn't be a mistake to characterize the FCR process as a concordatum out of court, considering the regulations on third parties' inability to pursue proceedings aimed for collection of receivables including the proceedings commenced in accordance with the Law on Collection Procedure of Assets numbered 6183, statute of limitations, tax exemptions, partial waiving of the principal receivables of the banks and financial institutions in a legal aspect. With these matters, it differentiates from the Istanbul Approach considerably. Congrats on the Neo Concordatum that shall be carried out by the banks and financial institutions without involvement of courts or/and any judicial authority!
1 İstanbul Yaklaşımı Bir Yeniden Yapılandırma Deneyimi, İstanbul, Finansal Yeniden Yapılandırma Koordinasyon Sekreteryası, August 2005, pg.4.
2 As defined in the Agreement: banks referred to in article 3 of the Banking Law no. 5411 dated 19/10/2005, and firms referred to in article 3 of the Financial Leasing, Factoring and Financing Corporations Law No. 6361,
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.