Turkey: Bankruptcy Proceedings: Recent Developments

The effort and time spent on bankruptcy proceedings are greater than the effort and time spent on execution proceedings.

The basic source of the Turkish bankruptcy law is the Execution and Bankruptcy Code No. 2004 (the "EBL"), published in the Official Gazette on June 19, 1932 and numbered 2128.

Under Turkish Law there are two different methods for collection of receivables: (i) execution proceedings; and (ii) bankruptcy proceedings. In practice, execution proceedings are more common for several reasons.

The effort and time spent on bankruptcy proceedings are greater than the effort and time spent on execution proceedings, but bankruptcy proceedings are more advantageous in some respects because in bankruptcy proceedings all debts of the debtor, including undue debts, become mature and all assets of the debtor are liquidated in order to satisfy creditors' receivables.

Bankruptcy proceedings are initiated by the submission of a request to the relevant Execution Office. The second step is the issuance of an order of payment by the execution office stating that if the debtor fails to pay its debt, the creditor will apply to the Commercial Court, requesting that the debtor be declared bankrupt. In cases where the non-payment of the debt has occurred, the creditor will initiate a bankruptcy lawsuit before the competent commercial court in the jurisdiction where the debtor's headquarters are located. In cases where the debtor has objected to the order of payment, then the court will first examine the claim of the creditor and decide whether to remove the objection. If the objection of the debtor is dismissed, the court will proceed with the examination of the bankruptcy lawsuit ex officio. During this lawsuit, the creditor must prove the existence of the debt.

Where the creditor chooses to initiate bankruptcy proceedings against a debtor, the debtor's property (receivables, assets and rights) at the time the court renders the bankruptcy decision becomes a part of the debtor's estate and as such can only be administrated by the debtor's estates' trustees. If the creditor proves the existence of the debt, the court will rule through a depository decision, requiring the debtor to deposit the debt (including all incurred interests and expenses) within seven (7) days and will notify the debtor that if the amount is not deposited, then it will declare the bankruptcy. If the debtor fails to deposit the designated amount, the court will decide to declare the bankruptcy of the debtor at the first hearing to be held upon the depository decision. Upon the court's rendering its bankruptcy decision, the Bankruptcy Office will take the necessary action and will initiate the liquidation process.

As it is understood, bankruptcy proceedings may cause dissolution of the debtor and in cases where the bankruptcy decision is rendered, public receivables become mature as well. Public receivables are ranked at first grade even before the debtor receives the bankruptcy decision. All of these reasons make bankruptcy proceedings a matter of public order. According to Turkish bankruptcy law doctrine and well established precedents of the Turkish Court of Appeals, bankruptcy is absolutely a matter of public order. Therefore, public authorities, authority of competent commercial court and application of Turkish law cannot be excluded from bankruptcy proceedings.

From the perspective of Turkish bankruptcy law, being a matter of public order brings some procedural and material results. One of the most important results is with regard to the inapplicability of jurisdiction agreements/clauses. As per Article 154 of the EBL, jurisdiction agreements cannot be executed regarding bankruptcy lawsuits. Bankruptcy lawsuits must be filed in the commercial courts where the debtor's transactional center is located; and in bankruptcy lawsuits, the jurisdiction of the commercial courts located where the debtor's transactional center is seated is absolute and is a matter of public order. Since such jurisdiction is a matter of public order, jurisdiction agreements may not be executed for bankruptcy lawsuits. Therefore, even if a jurisdiction agreement or clause exists between a debtor and a creditor, the creditor must initiate a bankruptcy proceeding before the commercial court where debtor's headquarters are located. It should also be noted that arbitration agreements/clauses cannot be executed for bankruptcy.

Although the above-referenced rules had been implemented for almost eighty years and there have been numerous precedents regarding this practice, the Turkish Court of Appeals has changed this view in 2013 and as such has allowed parties to execute jurisdiction or arbitration agreements for bankruptcy proceedings. According to the Court of Appeals' precedent, the examination of creditor's claim in the bankruptcy lawsuit is very similar to an ordinary collection of receivables lawsuit. Therefore, a bankruptcy lawsuit initiated upon objection to the bankruptcy proceeding may be divided into two phases: (i) the assessment of existence and amount of receivables; and (ii) the bankruptcy phase. The difference between these two different phases of the bankruptcy lawsuit is due to the legal character of these sections. The collection of receivables section is subject to the will of the parties. However, the bankruptcy section is related to public order. This means that, while the parties can execute jurisdiction or arbitration agreements for the ordinary collection of receivables section, they cannot eliminate the authority of commercial courts where the debtor's headquarters are located for bankruptcy lawsuits by executing jurisdiction or arbitration agreements. As to the same precedent, in case there is an arbitration or jurisdiction agreement/ clause between the debtor and the creditor, prior to initiation of a bankruptcy proceeding, the creditor must prove its receivables before the arbitration tribunal or before the court in which parties agreed to appear. Upon finalization of the decision with regard to receivables, the creditor may initiate a bankruptcy lawsuit. Pursuant to this new precedent, in order to initiate bankruptcy proceedings, the creditor must proceed with two different lawsuits, one for proving the debt and the other for the bankruptcy of the debtor. Additionally, there can be a third lawsuit for recognition of a foreign arbitral award or a foreign court decision because foreign arbitral awards or a foreign court decision cannot be enforced before Turkish authorities without an enforcement decision rendered by Turkish courts.

Outcomes of the aforementioned precedent of the Court of Appeals with regard to ongoing lawsuits and Turkish bankruptcy law shall be analyzed separately. The Court of Appeals' precedent is a result of the misevaluation of the EBL because of the bankruptcy lawsuit's division into two separate sections and does not have any legal ground in terms of Turkish bankruptcy law. Furthermore, the new precedent makes bankruptcy proceeding unfeasible since no creditor will initiate three different lawsuits in two different jurisdictions for the collection of a debt that will take more than ten years to collect. Additionally, the Court of Appeals applies this precedent to ongoing lawsuits which the creditor initiated even if there is a jurisdiction/ arbitration agreement between the parties on the ground of eighty years practice of the Court of Appeals. Based on said precedent, bankruptcy lawsuits are rejected by Turkish courts if a jurisdiction/arbitration agreement exists between the parties. This situation is an absolute breach of the principle of legal certainty and foreseeability of rulings which is a part of Article 6 (Right to a Fair Trial) under the European Convention on Human Rights.

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.

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