Turkey: Direct Bankruptcy For Collection Of Receivables Under Turkish Law

Introduction

Bankruptcy cases may be filed by the creditors following an enforcement proceeding against the debtor, without any need for a prior enforcement proceeding, in the presence of certain grounds. The grounds for the initiation of a direct bankruptcy cases are, in general, set out under Articles 177 and 178 of the Enforcement and Bankruptcy Law ("EBL"). In addition to these Articles, there are various provisions in other legislation that permit the creditor to file a direct bankruptcy case against the debtor.

Grounds for Direct Bankruptcy Case

Article 177/1 of the EBL provides four grounds for filing a direct bankruptcy case against a debtor. The first ground is when the residence of the debtor cannot be determined. The notion of "residence" is interpreted wider than its meaning in civil law, and therefore, it comprises the domicile of the debtor. As a result, in the event where the debtor has a de facto, or temporary, domicile, the condition shall not be fulfilled. In addition, in the event where the debtor has a domicile abroad, the condition shall not be deemed fulfilled, as the provision does not make any distinction between a domicile within the country, or abroad. The presumptive evidence for these conditions is sufficient. This ground is only applicable for real persons, since the residence of the legal persons are stated in their articles of association and are, therefore, determinate.

Another ground is established when the creditor may file a direct bankruptcy case if the debtor has fled for purposes of avoiding creditors[1]. This means the debtor has left his/her residence in order to avoid his/her due or undue obligations, thereby damaging his/her creditors. In some cases, the new address of the debtor may be known, but it may be inconvenient for the debtor to initiate an enforcement proceeding. In such cases, certain scholars state that presumptive evidences would be sufficient to prove the intention of the creditor. However, some others defend that the burden of proof is on the debtor; thus, the creditor shall prove the change of residence of the debtor, and the debtor shall prove that the purpose of this change was not to avoid his/her debts, and not to damage his/her creditors[2].

Another ground for a direct bankruptcy case is the occurrence or attempt by the debtor of fraudulent transactions which threaten the rights of the creditors. This act does not have to qualify as a crime in terms of criminal law, nor does the debtor have to be subject to any criminal investigation. Occurrence or attempting to conduct fraudulent transactions that have a direct or indirect negative effects on the assets of the debtor is deemed to be sufficient. The creditor may initiate a direct bankruptcy in the presence of the cases set forth under Articles 278-280 of the EBL regarding the initiation of a lawsuit on the annulment of a disposal transaction[3]. Similarly, the grounds of fraudulent bankruptcy set forth under Article 311 of the EBL may also be evaluated as grounds for a direct bankruptcy case[4].

The last of the ground provided by Article 177/1 of the EBL is hiding the assets by the debtor during an attachment proceeding. This ground is only applicable once the obligation to declare its assets arises for the debtor[5]. After the enforcement proceeding for purposes of attachment becomes definite, this condition is deemed fulfilled in the event the debtor avoids to declare its assets, or does not declare its assets in their entirety, and the declared assets do not cover the total amount of the receivable, interest, and expenses. If the declared assets cover the total amount of the receivable, interests and enforcement expenses, this condition is not fulfilled even if the debtor did not declare its assets in their entirety.

Pursuant to Article 177/2 of the EBL, suspension of the payments is another ground for a direct bankruptcy case. Suspension of the payments means the permanent and general non-payment of the debts by the debtor. Although it is similar to insolvency, suspension of payment is different than insolvency; in the case of suspension of the payments, the debtor does not have enough cash to pay its debts, regardless of its assets. The debtor may explicitly declare that it has suspended its payments. Additionally, there are several indicators of suspension of payments, such as existence of numerous pending enforcement proceedings against the debtor and non-payment of due debts. However, if the debtor requests arrangement of debts with the creditors does not mean that the debtor has suspended its payments. Accordingly, if the enforcement court grants an arrangement period to the debtor, the enforcement proceedings shall be suspended during this period, but such suspension shall not be deemed as "suspension of payments" in terms of a direct bankruptcy case. The Court of Cassation also considers the suspension of payments as a reason for the direct bankruptcy case[6]: "In accordance with the documents in the file, the evidences that the decision is based on and in particular art. 177/2 of the EBL, it is concluded that the suspension of the payments is a reason for direct bankruptcy case; that the debtor, as the defendant, did not make any payments as it is understood from the enforcement files; that the trustee appointed to the company has declared before the court that they will make the payment, and that the suspension of payments has been determined by the expert report; thus, it is decided that (...) the decision that is in compliance with the procedure and law is APPROVED."

In accordance with Article 177/3 of the EBL, refusal of the offered arrangement with creditors, removal of the arrangement period and dissolution of the arrangement are grounds for the direct bankruptcy; however, refusal of its request for arrangement period would not constitute a ground for direct bankruptcy as per art. 177/3 and 301 of the EBL[7]. Nevertheless, the refusal of request for arrangement period by the enforcement court might be interpreted that the debtor has suspended its payments. In addition, in the case of restructuring by way of reconciliation, the courts declare the bankruptcy of the debtor if the debtor does not comply with its obligations arising from the project or the rights of the financing creditor is not satisfied[8].

The last ground provided by Article 177 of the EBL is non-payment of a debt approved by a court decision although it has been requested by a statutory demand, and which is also accepted by the Court of Cassation's decisions[9]: "According to the fact that (...) the statutory demand is notified, that it is adequate to accept that bankruptcy request and court decision was due pursuant to art. 166 of the EBL; and that no additional payment order was required as Art. 177/4 of the EBL provides grounds for direct bankruptcy case (...)." The prior court decision does not have to become definitive in order to initiate the direct bankruptcy case. However, in practice, the courts suspend the direct bankruptcy case until the decision of the Court of Cassation is granted if the debtor obtains a decision for suspension of execution proceedings[10]. It is controversial among the scholars whether a direct bankruptcy case may be initiated if the enforcement proceeding is based on a document that substitutes a court decision, and the Court of Cassation has rendered different decisions with this regard[11].

In addition to the above, various other grounds for direct bankruptcy are provided regarding the general partnership and limited partnership (société en commandite) companies, as well as the share capital companies. Pursuant to Article 238/2 of the Turkish Commercial Code, a creditor may initiate a direct bankruptcy case against a general partnership and its partners if the creditor has initiated an enforcement proceeding with a prior court decision, and the debtor has not repaid the debt despite the payment order. This provision applies for the shareholders of imited partnerships, as well. For the share capital companies, over-indebtedness constitutes a reason for a direct bankruptcy case. The state of over-indebtedness is determined by the experts appointed by the court.

Procedure

In the presence of the above-stated grounds, the creditors may file a direct bankruptcy case before the commercial court of first instance where the debtor is situated, without any need to conduct a prior enforcement proceeding for the purposes of bankruptcy.

The bankruptcy case is subject to a simple procedure and fixed fee regardless of the amount of the receivable since the subject of the case is the bankruptcy of the debtor and not the payment of the debt. Nonetheless, the creditor shall pay advance costs to be determined by the court. The court will spend the advance for the liquidation transactions during and after the bankruptcy case.

The claimant shall specify the ground for the direct bankruptcy in its petition. As the grounds for direct bankruptcy are different from each other, amendment of this ground shall be subject to the prohibition of extension of the claims[12]. Claimant shall prove its receivable and ground for the direct bankruptcy. However, in some cases, definitive evidence is not required and presumptive evidence is deemed sufficient; any type of proof may be submitted to the court.

After receiving the petition, the commercial court announces the bankruptcy request in the trade registry gazette and in daily newspapers. In accordance with Article 178/2 of the EBL, other creditors may demand the refusal of the request before the court within fifteen days as of the date of announcement by claiming that the debtor has arranged the bankruptcy in order to postpone the enforcement proceedings due against him and the payment of its debts. The court will examine whether bankruptcy is appropriate; if there is a need for a further examination, it will examine the merits of the case. Otherwise, the request will be rejected at the very beginning of the case.

With respect to the provisions applicable to the direct bankruptcy case upon the request of the creditor, Article 181 of the EBL makes reference to the provisions on the general bankruptcy procedures. However, the provisions on the last order for payment shall not apply, and the court declares the bankruptcy once the presence of the receivables and the ground for direct bankruptcy is proven.

Conclusion

The creditors are entitled to file an enforcement proceeding for the purposes of bankruptcy in order to request the bankruptcy of the debtor, as well as to file a direct bankruptcy case where the legislator considers that the creditor is under the risk of non-fulfillment, or that the debtor's financial situation is fragile. In this respect, the EBL provides certain general grounds for the direct bankruptcy case, and the Turkish Commercial Code specifies certain grounds for the partnerships. In the presence of these grounds, the creditor may file a lawsuit before the commercial court and prove its receivable and the ground allowing the initiation of the direct bankruptcy case.

Footnotes

[1] Court of Cassation 23rd Civil Chamber, Date 31.05.2012, No E. 2012/1431, K. 2012/3846 (www.kazanci.com).

[2] Sümer Altay, Türk İflas Hukuku, Book I, Ocak 2004, p. 468.

[3] Baki Kuru/Ramazan Arslan/ Ejder Yılmaz, İcra ve İflas Hukuku Ders Kitabı, Ankara 2012, 2nd Edition, p. 493.

[4] Altay, s. 469.

[5] Hakan Pekcanıtez/ Oğuz Atalay/Meral Sungurtekin Özkan/Muhammet Özekes, İcra ve İflas Hukuku, Ankara 2013, 11th Edition, p. 649.

[6] Court of Cassation 19th Civil Chamber, Date 11.03.2004, No E. 2003/7969, K. 2004/2562 (www.kazanci.com).

[7] Court of Cassation 19th Civil Chamber, Date 24.04.2003, No E. 2002/10298, K. 2003/4431 (www.kazanci.com).

[8] Kuru/Arslan/Yılmaz, p. 495.

[9] Court of Cassation 19th Civil Chamber, Date 03.03.2005, No E. 2004/12356, K. 2005/2159 (www.kazanci.com)

[10] Altay, p. 473.

[11] Altay, p. 474.

[12] Pekcanıtez/Atalay/ Özkan/ Özekes, p. 654.

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