The law governing Turkish Insolvency procedures known as the Execution and Bankruptcy Law (the EBL) (Icra Iflas Kanunu) has in previous years been amended twice and has introduced new procedures for ailing companies. In this article, we will take a look at these procedures.
The EBL has somewhat of a vintage status and most of it dates from 1932. It created a mostly debtor friendly regime which was accentuated by the Turkish judicial system whereby the EBL was even more debtor friendly than had been intended. The Turkish parliament took a hard look at insolvency procedures following the Turkish economic crisis which occurred from 2000 to 2001. The crisis was far reaching and led to a substantial devaluation in the Turkish lira and many corporate bankruptcies. In the light of the experience arising from the financial crises, there was a push to modernise Turkish insolvency laws.
As a result, the EBL was amended in 2003 and 2004. The 2003 amendments introduced two mainly debtor friendly procedures called "postponement of bankruptcy" and "reorganisation by way of abandonment of the debtor's assets" (Reorganisation). In addition, the EBL was changed (with a view to giving something to creditors) to provide for quicker bankruptcy procedures (e.g. the execution court is required to rule on a debtor's objections within 7 days) and cutting back the debtor's rights under the old EBL (e.g. during the hearing that will be held following the debtor's objection, the debtor may not raise any additional objections). The 2004 changes introduced another new procedure called "restructuring of capital stock companies by way of conciliation" (Restructuring).
Interestingly, the changes in 2003 and 2004 were driven by the desire to give a debtor facing financial difficulty the best possible chance to revive its fortunes rather than entering into a terminal insolvency proceeding from which no-one expected it would recover as a commercial enterprise.
Let us now have a look at the new insolvency procedures.
2. Postponement Of Bankruptcy (Iflas'in Ertelenmesi)
Under this procedure, a corporate debtor is given the opportunity to persuade the court that it will be able to improve its financial situation and for that reason, no bankruptcy order should be made now but should be deferred depending on whether it cures its financial problems in the future. If the court is so persuaded, it has the power to postpone the debtor's bankruptcy for a specified period of time.
The EBL provides that if the debts of the corporate debtor are greater than the value of its assets, the officers of the company are obliged to apply to the court for a declaration of bankruptcy. This mirrors similar legal requirements in other countries, e.g. Germany and Switzerland. However, under the new EBL, when the debtor's officers apply to the court, they may also lodge with the court a development project (Iyilestirme Projesi). The project is the debtor's attempt to persuade the court that its financial position will improve over a specified period and will usually deal with matters such as how the debtor is to improve revenue and how it will cut costs. If the court is persuaded that the project is feasible and genuine, it may postpone the bankruptcy for up to a year. The court at the same time will appoint a trustee (Kayyim) who will have certain powers set out in the court order (e.g. the right to manage the company, the right to suspend certain transactions of the company).
Once the court has entered an order to postpone the bankruptcy, a moratorium is in place protecting the company from enforcement proceedings. However, enforcement proceedings in relation to secured debts can still be commenced and continued by secured creditors (e.g. payment orders can be sent, notifications can be delivered, price assessment in relation to the secured asset can be made). These secured assets however, cannot be sold.
At the end of the postponement period, either the company's financial position will have improved in accordance with the development project, in which case the court will rescind its order for the postponement of the bankruptcy, or if the situation has not improved, the court can enter an order of bankruptcy although it has the power to extend the postponement of the bankruptcy up to a maximum of four years.
3. Reorganisation By Way Of Abandonment Of The Debtor's Assets (Malvarliginin Terki Suretiyle Konkordato)
This is a new procedure introducing a type of voluntary arrangement into Turkish Law. Under this procedure, the debtor will earmark some or all of its assets for its creditors and propose that those assets are sold and then distributed to creditors in accordance with their entitlements. This procedure allows the company to continue trading with the remainder of its assets free of its historical debt burden. In principle, secured creditors are permitted to enforce their security notwithstanding Reorganisation.
A debtor wishing to make use of the procedure of Reorganisation or a creditor having the right to institute bankruptcy proceedings may apply to the competent execution court, supplying to the execution court its reorganisation project (Konkordato Projesi). If the execution court determines that the project is likely to be successful it will order a creditor's meeting to be convened to decide whether they accept the reorganisation project. If the creditors approve the project with the required quorum (at least one-half of all the creditors and whose debts amount in value to at least two-thirds of the total recorded debts) then the project will be submitted to the court for approval. If the court determines that the funds that can be generated for the creditors by way of Reorganisation will exceed the funds that can be generated for them by way of bankruptcy, it will approve the project.
4. Restructuring Of Capital Stock Companies By Way Of Conciliation (Sermaye Sirketlerinin Uzlasma Yoluyla Yeniden Yapilandirilmasi)
A debtor company facing financial difficulty has the right to apply to the court for approval of a restructuring project previously approved by the required quorum of creditors affected by it (at least one-half of the creditors affected by the project in number and whose debts amount in value to at least two thirds of the total affected debts). The court will not enter a bankruptcy order if it accepts the restructuring proposal. Once approved by the creditors and the court, the proposal becomes binding. However, creditors have the right to apply to the court for relief if the debtor does not fulfil its obligations under the project. The court has a right to declare the debtor bankrupt following any non-compliance.
Whilst Reorganisation targets a quick recovery for the debtor by realising a part of its assets, restructuring is geared towards a longer recovery period for the debtor to restore its financial health. Consequently, whereas in the case of Restructuring the approval procedure is more burdensome, given the nature of the quorum required, in the case of restructuring the approval procedure is less complicated and a lower quorum has to be satisfied. Under a Restructuring, the debtor remain at risk of becoming bankrupt for as long as the restructuring continues, which may take a number of years. Unless there is a specific provision in the reorganisation project to the contrary, Reorganisation, however, is completed when the assets or parts of the assets of the debtor are realised for the benefit of creditors and consequently the debtor remains at the risk of bankruptcy for a much shorter period of time. Restructuring is only available for companies and co-operatives with the exception of banks and insurance companies. Reorganisation however is available for all persons who could enter bankruptcy.
There have been major changes in Turkish insolvency law in the previous years. We believe that these changes brought Turkish insolvency procedures closer to the procedures expected by international investors and therefore has benefited both foreign investors and the domestic Turkish economy. These procedures are specifically designated to prevent avoidable bankruptcies and to give relief to Turkish enterprises suffering cashflow or other financial difficulties capable of remedy with a view to an enterprise's long term recovery. We believe that the use of these procedures will significantly increase in the very near future as the impact of the credit crunch is felt heavily on the Turkish economy.
Guner Law Office was established in 1996 and has since grown into one of the major corporate, M&A, banking, litigation, energy and TMT practices in Turkey. Guner Law Office is headed by Ece Guner and works with international law firm Denton Wilde Sapte.
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