The Institution Of Composition With Creditors In Joint Stock Companies

Introduction

The Execution and Bankruptcy Law No. 2004 (the "Law") has aimed to improve the debtor's financial situation and to establish a balance between the interests of the debtor and the creditor through the institution of composition with creditors. Pursuant to Article 285 of the Law, a debtor who is unable to pay its debts when due or who is in danger of being unable to pay may request composition with creditors in order to be able to pay its debts or to avoid a possible bankruptcy. Although the mechanism of composition with creditors is not subject to a special regulation in terms of joint stock companies, in practice it contains certain characteristics and distinctions specific to joint stock companies. In this article, the stages, characteristics, and the consequences of composition with creditors in joint stock companies will be examined.

In Turkish law, the legal institution of composition with creditors exists in order to create an opportunity for debtors who have difficulty in paying their debts or who are at risk of falling into insolvency to restructure their debts by reaching an agreement with their creditors and to continue their activities. Composition with creditors is regulated under Articles 285 and the following of the Law, and it aims for the debtor to reach an agreement with its creditors within the framework of a specific payment plan and thereby avoid bankruptcy. With significant legislative amendments made to the Law in recent years, the process of composition with creditors has been rendered more effective and has been strengthened as an alternative solution to bankruptcy.

The Institution of Composition with Creditors

The Court of Cassation defined composition with creditors as "a mitigated collective enforcement institution applied as a result of the debtor, who has become unable to pay its debts, pleading for relief in order to avoid bankruptcy, provided that the conditions of composition with creditors exist." in one of its decisions.

According to Article 285 of the Law, any debtor who is unable to pay when due or who is in danger of not being able to pay when due, as well as any creditor entitled to file for bankruptcy, may request the commencement of composition with creditors proceedings against the debtor. It should again be emphasized that, pursuant to Article 285/1 of the Law, both debtors and creditors may apply for a composition. Therefore, both natural persons and legal entities may resort to the composition with creditors mechanism. However, for the debtor to be able to apply for a composition with creditors, it is required that there be more than one creditor. In addition, it should be noted that for the composition with creditors process to be successful, it must be possible to improve the debtor's financial situation, and a significant portion of the creditors must approve this process.

A composition with creditors may be either pre-bankruptcy or post-bankruptcy; if concluded before bankruptcy, it is pre-bankruptcy, and if concluded after bankruptcy, it is post-bankruptcy. While a pre-bankruptcy composition with creditors aims to prevent the debtor from being driven into bankruptcy, a post-bankruptcy composition with creditors ensures the suspension of the bankruptcy process. In addition, depending on its purpose, its content, the manner in which it is concluded, and whether it is judicial or extrajudicial, various types may exist.

Application Process

Pursuant to the Turkish Commercial Code ("TCC"), in joint stock companies, the board of directors authorized for management and representation, or any creditor, may apply to the competent commercial court of first instance for a composition with creditors together with the documents enumerated in the law. If the court, after examination, finds the application appropriate, it decides to grant a temporary moratorium. In addition, in order to examine whether the composition with creditors is likely to succeed, a composition commissioner is appointed. Upon the assessment that there is a possibility of success, a definitive moratorium of one year is granted. During this period, the board of directors continues its duties under the supervision of the commissioner, a creditors' meeting is held, and the composition project is discussed. Once the required quorum is achieved in the creditors' meeting, the file is submitted to the court, which decides whether to approve or reject the composition with creditors. The decision sets forth the extent to which creditors waive their receivables and the schedule according to which debts will be paid, thereby making the composition with creditors binding. If the court does not approve, the application is rejected, and the debtor is declared bankrupt. Furthermore, with respect to debtors subject to bankruptcy, in the event that certain circumstances arise after the granting of the definitive moratorium, the composition process may not be continued. Pursuant to Article 308/i of the Law, upon the commissioner's written report, the court may ex officio "revoke the definitive moratorium, reject the application for composition with creditors, and declare the debtor bankrupt." Such circumstances are: (i) where the opening of bankruptcy is mandatory for the protection of the debtor's assets, (ii) where it is understood that the composition with creditors cannot succeed, (iii) where the debtor acts in violation of Article 297 of the Law, fails to comply with the commissioner's instructions, or acts with the intent to harm creditors, (iv) where a capital company or cooperative that is over-indebted withdraws its application for composition with creditors. Accordingly, the debtor avoids bankruptcy only if the composition with creditors is approved by the court and the approval decision becomes final and effective.

As a rule, no enforcement proceedings may be initiated against the debtor during the moratorium granted in the composition with creditors. However, this provision does not prevent the filing of lawsuits against the debtor. Therefore, during the moratorium period, it is possible to bring new lawsuits against the debtor as well as to continue the lawsuits that have already been filed. By contrast, no bankruptcy action may be filed against the debtor during the moratorium, since a bankruptcy action constitutes a continuation of enforcement proceedings and is incompatible with the protection afforded by the composition with creditors.

There is also a possibility to seek legal remedies against decisions rendered in respect of the composition with creditors. The debtor or the creditor who has applied for the composition with creditors may file an appeal within ten days from the service of the decision. This period starts to run from the announcement of the approval decision for other creditors who have objected. Against the decisions rendered by the regional court of appeal, an application for cassation may be filed within ten days. The appellate and cassation reviews are conducted in accordance with the provisions of the Code of Civil Procedure.

Specific Features of the Composition with Creditors in Joint Stock Companies

The institution of composition with creditors has been regulated under the heading "Composition with Creditors and Restructuring of Capital Companies and Cooperatives by Means of Reconciliation" of the Law. Accordingly, these provisions apply to any debtor who is unable to pay its debts when due or who is under the threat of being unable to pay. However, when joint stock companies enter into the composition with creditors process, situations specific to this type of company may arise.

• The board of directors applies for a composition with creditors on behalf of the company. The board must adopt a resolution in this regard and submit the petition of application together with the required documents to the court.
• The board of directors continues its duties under the supervision of the commissioner during the moratorium; however, the company's activities are carried out under the supervision and control of the composition commissioner.
• The scope of the composition with creditors covers only the assets of the company. The personal assets of the shareholders, which are independent from the legal personality of the joint stock company, are not subject to the composition.
• When notifying over-indebtedness, a request for composition with creditors may be made instead of bankruptcy, thereby aiming at the continuation of the company's activities rather than its liquidation.
• Since the company is subject to balance sheet preparation and independent audit, the composition project is based on these reports. In preparing the composition project, the company's financial statements and independent audit reports are taken as a basis; these reports provide reliability for the court and the creditors.

Effects of the Composition with Creditors

Upon the court's approval, the composition with creditors becomes binding for both joint stock companies and creditors. As a result, the institution of composition protects the debtor company from bankruptcy, allowing it to continue its operations, while securing the collection of receivables within a certain plan, taking into account the interests of the creditors. This mechanism gives rise to various consequences for the parties, the main ones being as follows:

• The joint stock company is prevented from being driven into bankruptcy.
• Enforcement proceedings are suspended during the moratorium, and no new proceedings may be initiated.
• Interest shall not accrue on the receivables during the moratorium.
• Creditors collect their receivables in accordance with the terms specified in the composition project.

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.