Questions
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor- to creditor-friendly jurisdictions?
The Enforcement and Bankruptcy Law (also referred to as “Law Nr 2004” or “İİK”) governs the restructuring, insolvency and bankruptcy of businesses registered and operating in Türkiye. In addition, the Turkish Code of Obligations (also referred to as “Law Nr 6098” or “TBK”) and the Turkish Commercial Code (also referred to as “Law Nr 6102” or “TTK”) are other primary laws both containing provisions on this matter.
Some of the other important regulations governing restructuring, insolvency and bankruptcy are as follows:
- Regulation on the Application of the Enforcement and Bankruptcy Law (Regulation Nr. 13307 and dated 18/09/1932).
- The Regulation on Granting the Debtor the Right to Sell pursuant to the Enforcement and Bankruptcy Law (Regulation Nr. 39545 dated 28/05/2022).
- Regulation on Enforcement and Bankruptcy Law (Regulation Nr. 8043, dated 11/04/2005).
- Tariff on Liquidation Expenses (Tarif Nr. 40104, dated 08/03/2023).
- Regulation on the Documents to be Attached to the Concordat Filings (Regulation Nr. 31239, dated 30/01/2019).
- Regulation on Concordat Administrators and Board of Creditors (Regulation Nr. 31238, dated 30/01/2019).
- Tariff on Advance Payments for Concordat Expenses (Tariff Nr. 39576, dated 17/06/2022).
The Turkish Enforcement and Bankruptcy Law seeks to establish and maintain equilibrium between the interests of the creditor and the debtor.
It was intended to reactivate the concordat institution by using the most recent changes to Swiss Law, which were made in 2013 and went into effect on January 1, 2014, as an example. Amendments were made in the Enforcement and Bankruptcy Law in 2018 to fill the gap left by the institution of “postponement of bankruptcy,” which had been in effect since 2003 and was governed by articles 178-179c of the İİK.
These amendments intended to improve the debtor’s financial situation in addition to easing the requirements for the approval of concordat.
The debtor and the creditors can both benefit from a concordat. In fact, the concordat will protect the debtor from bankruptcy and all of its legal and criminal repercussions if the debtor is subject to bankruptcy.
Additionally, Concordat benefits debtors. Because the concordat allows creditors to receive their receivables without incurring the costs associated with foreclosure and bankruptcy, they can do so to a greater degree.
The amendment provided the creditors the ability to request the start of concordat proceedings and guaranteed equality between the debtor and the creditors as well as among the creditors themselves, or, in other words, the debtor and the creditors’ interests were equally considered in the concordat proceedings.
Nevertheless, in reality, many businesses applied to concordat as soon as the concordat amendments went into effect in order to put off paying their debts for a very long time. As a result, the concordat arrangement came under fire for being abused. It would not be incorrect to state that in practice, the balance has deteriorated in favour of the debtor and against the creditors, even while the legal regulations appear to keep the balance of debtor and creditor in theory.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
In Türkiye, there are two fundamental methods for formal restructuring and liquidation, namely bankruptcy and concordat. The prevalent opinion in Turkish-Swiss legal doctrine is that concordat is a unique and specific form of enforcement method, which resembles bankruptcy as a collective liquidation method. Because of its collective nature, concordat is similar to bankruptcy, although it is separated from the proceedings by the seizure and foreclosure of pledged property. However, there are distinct differences between bankruptcy and concordat in the following aspects:
Bankruptcy decision is made by the court upon the request of either the debtor or one of their creditors. On the other hand, concordat arises from an agreement made between the debtor and the majority of their creditors. In cases where court approval is necessary for the concordat agreement, the debtor can still choose to voluntarily make a concordat agreement with all their creditors without any court intervention, which is known as an out-of-court concordat. Out-of-court concordat is a private law contract, which is completely subject to the Code of Obligations, that the debtor makes with all or some of his creditors within the framework of freedom of contract -without the participation of any official authority. Since this concordat binds only the receivables that are parties to concordat contract and does not bind the creditors who have not accepted the concordat, these creditors can pursue proceedings against the debtor through foreclosure/bankruptcy.
- In contrast to bankruptcy, where liquidation is carried out by bankruptcy bodies at a high cost, liquidation in concordat proceedings is conducted by the debtor at a lower cost.
- Even though the debtor’s power to dispose is entirely abolished by bankruptcy, the power to dispose generally still exists under the concordat.
- As bankruptcy is not a definitive form of liquidation, those creditors who have not fully recovered in bankruptcy proceedings, are provided a certificate of insolvency, and creditors can file new proceedings against a bankrupt who has acquired new property later. The concordat, however, releases the debtor from the debts, and creditors have no longer right to claim for recovery from the debtor for the portion of their receivables that is not covered by the concordat.
- Although it is not required to be a merchant for applying the concordat, only merchants or corporations can initiate the bankruptcy proceedings.
The Concordat framework is subject to several distinctions.
The first of these is the distinction between out-of-court and in-court concordat.
The in-court concordat is separated into three categories: deferral; abatement; and combined concordat. (i) In the deferral concordat, the debtor pledges to pay the debts in full under the terms of the deferred concordat, and in exchange, the creditors grant the debtor a longer payment period or creditors agree that debtor to pay the debts in instalments. (ii) In an abatement concordat, the creditors agree to give up their remaining receivables in exchange for the debtor agreeing to pay a specified percentage of the debts. (iii) A combined concordat is created by combining the deferral and abatement concordats.
Depending on when concordat proceedings are being conducted: (i) Out-of-bankruptcy concordat refers to agreements where debtor party is either those who are not subject to bankruptcy or those against whom court has not yet decided on bankruptcy. (ii) In-bankruptcy-concordat is offered by the bankrupt itself.
Another concordat distinction is (i) ordinary concordat, and (ii) cessio bonorum (concordat by surrender of assets).
In the concordat type by cessio bonorum, it is not aimed to improve the financial situation of the debtor and to continue the operation of the business. In the cessio bonorum, debtor leaves the power of disposition on the assets to the creditors and the creditors collect their receivables from the funds collected by liquidation of the debtor’s assets. By cessio bonorum, the debtor proposes not to pay the debts under certain conditions, but to transfer the power of disposition over the assets to the creditors (or third parties). Unless it contradicts the nature of the cessio bonorum, the provisions of the ordinary concordat shall be applied to cessio bonorum.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
As stated among the non-transferable duties and powers of the Board of Directors under the Turkish Commercial Code, the establishment of the necessary order for accounting, financial auditing, and financial planning, to the extent required by the management of the company, preparation of the annual report and corporate governance statement and submission to the general assembly, and notification to the court in the event of insolvency, are all listed.
The board of directors must call a meeting of the general assembly as soon as it is apparent from the most recent annual balance sheet that half of the total capital and legal reserves are unrequited due to loss. Board of Directors presents the remedial measures it deems appropriate to this general assembly. Unless the general assembly, which is called for an immediate meeting, decides to suffice with one-third of the capital or to complete the missing capital, the company automatically dissolves if it is determined that two-thirds of the total of the capital and legal reserves are unrequited due to loss, as indicated by the most recent annual balance sheet.
If there are indications that raise the suspicion that the company is in debt, the board of directors prepares an interim balance sheet showing the estimated sale prices of the assets in case of bankruptcy. When it is inferred from this balance sheet that the assets are not sufficient to meet the receivables of the creditors of the company, the board of directors notifies this situation to the commercial court of first instance where the company headquarters is located and requests the bankruptcy of the company. If board of directors request the court expert report from the commercial court as evidence that the company is in debt, court will treat this request as if it were a notification and bankruptcy request from the board of directors.
The concordat may also be requested by the board of directors or any creditor concurrently with the bankruptcy request or during the bankruptcy procedures. This is called “concordat request due to insolvency” and is a type of concordat.
“Concordat due to insolvency” is stipulated for joint stock companies and also applicable to limited companies.
For listed companies, the board of directors is obliged to establish an expert committee, run and develop the system in order to early detect the causes that endanger the existence, development and continuation of the company, to implement the necessary measures and remedies, and to manage the risk. For other companies, this committee is established immediately if the auditor deems it necessary and notifies the board of directors in writing and submits its first report at the end of one month following its establishment.
The committee should evaluate the situation in its report, point out the risks, if any, and shows the possible measures and remedies. The committee must forward its report to the board of directors every two months. The report is also sent to the auditor.
There is no specific moment to start the concordat or bankruptcy process. Any debtor who is unable to pay their debts on time or who faces the possibility of not being able to pay on the due date may request a concordat for restructure or for avoidance from possible bankruptcy. Every creditor who may request bankruptcy may request the initiation of concordat proceedings against the debtor with a reasoned petition submitted to the competent court.
A debtor subject to bankruptcy may request bankruptcy from the competent court by declaring its insolvency. The declaration of assets, which lists the names and addresses of all the debtor’s assets and liabilities as well as creditors, must be attached to the bankruptcy petition in this instance. The court will not decide whether to open the bankruptcy unless this declaration of assets is submitted to the court.
A debtor who is subject to bankruptcy is obliged to declare its insolvency and file for bankruptcy at once, when one of its creditors liquidate minimum half of the assts and remaining part of its assets will not recover the due debts or debts becoming due within a year.
Debtor has right to challenge the bankruptcy enforcement action within seven days starting from the receipt of the payment order by submitting the documents showing that debtor is not subject to bankruptcy or has no debt to the creditor to bankruptcy office. Otherwise, the creditor will have right to apply commercial court to start the bankruptcy proceedings.
If there is no challenge by the debtor within the statutory period, the creditor may request a bankruptcy decision from the Commercial Court via petition. The copy of the payment order must be attached to this petition, that the debtor did not challenge the payment order. If the debtor has challenged the payment order, the proceedings are freezes and the creditor may request from the Commercial Court, with a petition requesting the lift debtor’s challenge and starting the bankruptcy proceedings. The right to request bankruptcy elapses one year after the duly service of the payment order to debtor.
2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
Enforcement proceedings commenced prior to the opening of the bankruptcy against the bankrupt stay upon the opening of the bankruptcy and are eventually annulled upon the closing of the bankruptcy decision. (Please refer to question 4.4.)
Debtor has right to challenge the bankruptcy enforcement action within seven days starting from the receipt of the payment order by submitting the documents showing that debtor is not subject to bankruptcy or has no debt to the creditor to bankruptcy office. After debtor’s challenge, bankruptcy enforcement action stays until court lifts the challenge. If no challenge is raised by the debtor, the creditor will have right to apply commercial court to start the bankruptcy proceedings.
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
Enforcement and Bankruptcy law stipulates the transactions/dispositions that can be annulled under three groups, which are not numerous clauses. Therefore, the decision on whether a disposition is subject to annulment is left to the discretion of the judge according to the facts, terms and conditions. The transactions the debtor has conducted with or in favour of other parties to harm the creditors are considered a disposition in this context.
Dispositions subject to annulment can be categorised as follows:
1- Complimentary dispositions Article 278 of İİK
a- Donations and complimentary dispositions: Except for traditional gifts, all donations in cash and complimentary dispositions made by the debtor or bankrupt in the last two years are subject to annulment.
b- Dispositions deemed as donations: Dispositions among close relatives, dispositions that the debtor accepts with a very low price, contracts in which the debtor has established a lifetime income or usufruct right for himself or a third party and contracts of care until death made within the last two years are subject to annulment.
2- Dispositions made during insolvency Article 279 of İİK
a- The pledges made by the insolvent debtor to secure an existing debt within the last one year, except for the cases in which the debtor has previously committed to provide collateral, are subject to annulment.
b- Payments made in any way other than money or the usual means of payment are subject to annulment.
c- Payments made by the debtor for undue debts are subject to annulment.
d- Annotations submitted to the land registry of immovables to strengthen debtor’s personal debts are subject to annulment.
If the third person benefitting from the disposition listed above proves that he/she is not aware of insolvency of the debtor, these dispositions cannot be annulled.
3- Fraudulent dispositions Article 280 of İİK
Fraudulent dispositions, that is, all fraudulent transactions made by a debtor whose assets are not sufficient for recovering the debts, with the intent to harm the creditors, are subject to annulment. For example, if the debtor has transferred a movable property or his receivables to a third party in order not to pay his debts or to disclaimer of the inheritance.
The competent court for annulment cases is the Civil Court of First Instance. If the action for annulment is filed in the form of an action for recovery of property, the court in charge is the enforcement court where the action for recovery of property is pending.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
In case of loss of capital, the board of directors presents the suitable remedial restructuring measures to the General Assembly. (Please refer to question 2.1.)
The debtor may voluntarily conclude a concordat agreement with all his creditors without a court decision. (Please refer to question 1.2.)
There are no obstacles to the participation of mediators in a restructuring process. With the participation of the mediators, an out-of-court concordat agreement can be concluded between the debtor company and the creditors without the intervention of the court.
3.2 What informal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies?
As explained above, in case of capital loss, the board of directors may implement remedial restructuring options and proposals to be submitted to the approval of the general assembly. In addition, the debtor can restructure the debts with an out-of-court concordat agreement with the creditors. In this case, the contract signed with the creditors is evaluated within the scope of the law of obligations and the execution is not subject to the bankruptcy law. Furthermore, debtors and creditors may apply to a voluntarily mediator to establish an agreement on the restructuring of debts.
3.3 Are debt-for-equity swaps and pre-packaged sales possible? In the case of a pre-packaged sale, are there any restrictions on the involvement of connected persons?
In Turkish law, set-off is possible. The set-off provisions in the bankruptcy proceedings in the enforcement and bankruptcy law, are applicable to the concordat proceedings by analogy. (Please refer to question 4. 5.)
3.4 To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
Against the temporary moratorium decision, the creditors may object to the court decision within seven days and request the rejection of the concordat request.
It is not possible to object to the decisions regarding the acceptance of the temporary moratorium request, the appointment of a temporary administrator(s), the extension of the temporary moratorium and the provisional remedies.
Before the court decides on the temporary moratorium, it takes statements and objections of the debtor, creditors, temporary administrator(s) into account during the hearing.
A board of creditors may be formed, with a maximum of seven creditors, after the court has given a final decision of temporary moratorium. The board of creditors convene at least once a month and resolves decisions by majority vote of attendants.
The court invites the board of creditors to the hearing and takes their opinions into consideration for the decision to end the definite moratorium due to the improvement of the debtor’s financial situation.
No legal action can be taken against the decisions regarding the acceptance of the request for a definite moratorium and the rejection of the request for the lifting of the moratorium.
Concordat project can be approved by a majority of more than:
- a) half of the registered creditors and receivables; or
- b) one-fourth of registered creditors and two-thirds of receivables.
The debtor or the creditor requesting a concordat, or other creditors, has/have the right to appeal a concordat decision, within 10 days from the date of first instance court’s approval of concordat decision. An appeal can be made against the decision of the regional court of appeal within 10 days.
The creditors whose receivables have been challenged can file a lawsuit within one month from the date of the announcement of the concordat approval decision.
3.5 What are the criteria for entry into each restructuring procedure?
Any debtor who is unable to pay due debts or is not able to pay on the due date, may request a concordat. Any creditor who may apply for bankruptcy against the debtor may also request the commencement of concordat proceedings. The competent court is the commercial court of first instance. The person requesting a concordat is obliged to deposit the advance payment for concordat expenses and costs itemised in the tariff revealed by the Ministry of Justice.
Below documents must be attached to the concordat request:
- a) Concordat project draft.
- b) Documents showing the status of the debtor’s assets.
- c) A list showing the creditors and receivable amounts.
- d) A table showing comparatively the amount expected to be received by the creditors according to the proposal in the concordat project draft and the estimated amount that could be received by the creditors in the event of the debtor’s bankruptcy.
- e) The audit report and its basis documents.
The debtor is obliged to submit other documents and records that may be requested by the court or the administrator(s) during the concordat proceedings.
3.6 Who manages each process? Is there any court involvement?
The duties of the commissioner are:
- a) To contribute to the completion of the concordat project.
- b) To supervise the activities of the debtor.
- d) Submitting interim reports on the subjects requested by the court.
- e) To inform the board of creditors about the progress of the concordat.
- f) To inform other creditors about the progress of the concordat and the current financial status of the debtor.
- g) To perform other duties assigned by the Court.
The board of creditors overseeing the activities of the administrator(s) can make recommendations to the administrator(s) and provide opinions to the court in cases stipulated by the law. If the creditors board does not find the administrator(s)’ activities sufficient, they may request the court to replace the administrator(s).
3.7 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
Clauses in contracts to which the debtor is a party, stating that “the debtor’s request for a concordat will constitute a breach of the contract, it will be considered a just cause for termination for the other party, and it will make the debtor’s debt due” will be deemed void/null.
The debtor can terminate the indefinite contracts that prevent the concordat from reaching its purpose –with the approval of the administrator(s) and with the approval of the court.
The debtor cannot terminate definite contracts.
Employment contracts cannot be terminated with the request of the debtor.
3.8 How is each restructuring process funded? Is any protection given to rescue financing?
Creditors or debtors requesting concordat are obliged to deposit the advance payment for concordat expense listed in the tariff announced by the Ministry of Justice. In accordance with the Tariff published on 17 June 2022, below payments must be deposited:
- a) Notification/post office expenses.
- b) Turkish Liras, which is the minimum amount of seven advertisements to be published in the Turkish Trade Registry Gazette.
- c) The minimum amount of seven announcements to be made on the official announcement portal of the Press-Advertisement Agency.
- d) Fifty registered postage fees for the notification to be served to the relevant institutions and authorities.
- e) Three times the amount of the fee determined in the Court Expert’s Minimum Wage Tariff for expert panel.
- f) Fees for Administrator(s).
- g) 500,00 Turkish Lira for other miscellaneous work.
- h) 20,000 Turkish Liras bankruptcy expense for debtors who are subject to bankruptcy.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
There are three types of bankruptcy in Turkish law: 1) General (ordinary) bankruptcy procedure (Art. 155-166 of İİK); 2) bankruptcy procedure pertaining to commercial papers and bills (Art. 167, Art. 171-176 of İİK); and 3) direct bankruptcy procedure (Art. 177-181 of İİK).
General (ordinary) bankruptcy and bankruptcy procedure pertaining to commercial papers and bills are very similar. In both bankruptcy proceedings, the creditor first applies to the enforcement office and files a bankruptcy proceeding against the debtor. The enforcement office sends a bankruptcy payment order to the debtor. If the debtor does not pay the debt within five to seven days, the creditor applies to the commercial court and requests the bankruptcy of the debtor. That is, files a bankruptcy case.
For creditors to file a direct bankruptcy case against the debtor, it is not necessary for the creditors to have first filed a bankruptcy proceeding in the enforcement office and sent a payment order to the debtor. In the presence of one of the reasons listed in the law, the creditor may apply directly to the commercial court and request the bankruptcy of the debtor, that is, file a bankruptcy case. Since the creditor can file a bankruptcy case directly in the commercial court without applying to the enforcement office, this bankruptcy method is called direct bankruptcy.
4.2 On what grounds can a company be placed into each winding up procedure?
The Enforcement and Bankruptcy Law does not generally specify what the reason for bankruptcy is. However, examining the various provisions of the law, it can be concluded that the reason for bankruptcy is the non-payment of the debt.
In Turkish law, the debtor’s insolvency is not a general reason for bankruptcy. However, in terms of corporations, the insolvency is also a separate reason for bankruptcy.
If the debtor pays the debt to the creditor who filed the bankruptcy case until the bankruptcy decision of the Commercial Court, the debtor will not become bankrupt. Otherwise, a commercial court will decide on bankruptcy.
On the other hand, after the bankruptcy decision of the commercial court, the debtor can no longer get released from bankruptcy by paying the debt to the creditor who filed the bankruptcy case. After that, the debtor can be released from bankruptcy only by paying the receivables to all creditors or with the consent of all creditors, that is, the bankruptcy of the debtor can be lifted.
4.3 Who manages each winding up process? Is there any court involvement?
- A) official bankruptcy bodies: official bankruptcy bodies are responsible for carrying out the bankruptcy proceedings.
- Enforcement Office: The bankruptcy proceeding begins with a bankruptcy payment order request made by the creditor to the enforcement office.
- Bankruptcy Office: The task of the bankruptcy office begins after the commercial court decides on the bankruptcy of the debtor and the bankruptcy decision is served to the bankruptcy office. The main duties of the bankruptcy office are as follows: notifying and disclosing that the bankruptcy has been opened to the relevant and concerned authorities/parties, keeping the ledgers/registries of the bankrupt’s assets, taking and conducting the liquidations measures, calling the creditors to the first meeting and second meeting, convening and moderating the meetings, supervising the liquidation procedures.
- Enforcement court: The enforcement court also supervises the bankruptcy office. The enforcement court examines the complaints made against the actions of the enforcement and bankruptcy offices in bankruptcy proceedings.
- Commercial court: The commercial court is in charge of bankruptcy proceedings. Furthermore, the task of examining and deciding on the lifting of the challenges to the payment order in the bankruptcy proceedings.
- B) Special bodies of bankruptcy: 1) the first meeting of creditors; 2) bankruptcy administration; and 3) the second meeting of creditors.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
Enforcement proceedings filed before the opening of the bankruptcy against the bankrupt freeze upon the opening of the bankruptcy and are finally terminated with the closing of the bankruptcy decision. Moreover, no new proceedings can be commenced against the bankrupt during the bankruptcy proceeding. The enforcement proceedings that will stay with the opening of the bankruptcy are the proceedings related to the assets of the bankrupt in the bankruptcy estate. Accordingly, the proceedings that will stop with the opening of the bankruptcy are as follows:
1) Enforcement proceedings with judgment and without judgment.
2) Enforcement proceedings pertaining to commercial papers and bills.
3) General bankruptcy and bankruptcy proceedings pertaining to commercial papers and bills.
4) Enforcement proceedings for collection of public receivables.
These proceedings only stay with the opening of the bankruptcy, and these proceedings will not be carried out. For example, confiscation or liquidation cannot be conducted. If the bankruptcy decision becomes final, the proceedings that have been stopped with the opening of the bankruptcy will be finally expire, that is, they will become null and void.
During the bankruptcy proceedings, no new enforcement proceedings can be initiated against the bankrupt. There are three exceptions:
1) Enforcement proceedings pertaining to foreclosure of pledged property.
2) Eviction proceedings without judgment against the bankrupt, which started before the bankruptcy.
3) Eviction and delivery proceedings with judgement pertaining to immovables.
Legal actions that do not stay upon the opening of bankruptcy are as follows:
1) Urgent actions such as eviction cases, actions for the protection of possession, partition cases, employment law related cases files by employees against the employers, provisional attachment, interim injunction, and declaratory cases.
2) Compensation cases arising from infringement of honour and dignity.
3) Compensation cases arising from torts, from personal injuries.
4) Actions pertaining to marital issues.
5) Cases related to personal status.
6) Alimony cases.
7) Actions related to the proceedings pertaining to foreclosure of pledged property.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
Contracts are terminated upon bankruptcy
Usufructuary lease, representation agreement, contract of mandate, ordinary partnership, open account agreement, financial leasing agreement, commission agreement, agency agreement, insurance agreement, are ipso iure terminated due to the bankruptcy of one of the parties. Moreover, joint stock companies and limited companies will terminate upon court decision of bankruptcy.
Contracts are not terminated upon bankruptcy
The sales contract, barter contract, donation contract, lease contract, the loan contract, the employment contract, the work contract, the publication contract, the custody and the trust contract, and the insurance contract are not terminated due to the bankruptcy of one of the parties.
The non-bankrupt party may request the performance of the contract. If this right of claim is a monetary claim, it must be registered to the bankruptcy estate as a bankruptcy claim. If it is not monetary claim, for example, if it is a goods purchased by the other party from the bankrupt, the sum of the money equivalent to the value of the goods is registered to the bankruptcy estate.
In terms of bilateral contracts, the application is as follows:
1) If a non-bankrupt party has fully fulfilled its obligation at the time the bankruptcy is opened, but the bankrupt party has not fulfilled its obligation, the non-bankrupt party registers its receivables to the bankruptcy estate. If the subject of the receivable is something other than money, the non-bankrupt party registers the sum of the money equivalent to the value of the receivable to the bankruptcy estate.
2) If both parties have not fully fulfilled their obligations at the time the bankruptcy is opened, the non-bankrupt party may avoid the performance of its debt until a guarantee is provided to secure the receivable. If this guarantee is not provided by the bankruptcy administration within a reasonable time upon the request, the non-bankrupt party may terminate the contract.
3) If the non-bankrupt party does not terminate the contract, they must pay its debt to the bankruptcy estate and may register its receivable from the bankrupt party to the bankruptcy estate as a bankruptcy claim.
4) The bankruptcy administration is authorised to pursue the bilateral contracts but is not mandatory. Likewise, in cases where performance is more profitable for the bankruptcy office, the bankruptcy administration prefers to pursue and execute the contract.
Under Turkish law, set-off in bankruptcy is permissible. Yet, because set-offs in bankruptcy may provide creditors a better financial condition than other creditors who are not eligible for set-off, it is also possible to abuse the set-off transactions to the detriment of other creditors. While the bankruptcy and enforcement laws permit set-offs during bankruptcy proceedings, it also sets forth provisions that prevent set-off transactions to protect other creditors from unfair advantages.
Bankrupt cannot sett-off its debts in the below cases:
1) If the debtor of the bankrupt became the creditor of the bankrupt after the bankruptcy was opened, it cannot set-off its debt with the receivable gained after the bankruptcy was opened.
2) If the creditor of the bankrupt became the debtor of the bankrupt or the bankruptcy estate after the bankruptcy was opened, it cannot set-off its receivable with its debt accrued after the bankruptcy was opened.
3) If the creditor’s receivable is arising from a bearer promissory note, the creditor cannot set-off this receivable with its debt to the bankrupt estate.
4) In the event of bankruptcy of joint stock companies and limited companies, the shareholders are not permitted to set off their debts related to the outstanding portion of the share price required by the articles of association, or their debts related to unfulfilled capital subscription obligations, with their receivables from these companies.
If the bankruptcy administration considers the set-off is valid in the above-mentioned cases where set-off cannot be made, the creditors or the bankruptcy office may request the cancellation of the set-off from the enforcement court by filing a complaint petition.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
In bankruptcy, secured claims, public receivables in connection with the property such as taxes and the expenses incurred from foreclosure of pledged properties are paid first.
After secured claims, below payments must be paid before the receivables of privileged creditors.
Rankings of Ordinary Receivables
1) Privileged receivables
First row: A) employees’ receivables, including notice and severance pay, which are based on the employment relationship and accrued within one year prior to the opening of the bankruptcy, and the notice and severance pay that they are entitled to upon termination of the employment relationship due to bankruptcy; B) debts of employers to facilities, foundations or associations that have come into existence for the purpose of establishing or maintaining aid funds or other aid organisations for employees; and C) all kinds of alimony receivables arising from family law that have been accrued within one year prior to the opening of the bankruptcy and must be performed in cash.
Second row: All receivables of persons whose properties were left to the debtor due to custody and guardianship.
Third row: Receivables that are stated to be privileged in their special laws are privileged in the third row such as taxes.
2) Unprivileged receivables
Fourth row: All other bankruptcy claims except from the below listed three rows are unprivileged.
4.7 Is it possible for the company to be revived in the future?
After the commercial court’s decision on the closing of the bankruptcy, the company is registered as bankrupt in the trade registry and its status becomes passive and cannot continue its commercial activities. The bankrupt company may appeal against the decision on the closing of the bankruptcy within 10 days from the service of the court decision. With the finalisation of the decision, the task of the bankruptcy administration comes to an end and a new proceeding can be made against the bankrupt.
The bankrupt may propose to file for concordat during the bankruptcy proceeding. After the bankruptcy is approved by the commercial court, the bankruptcy administration requests the commercial court to lift the bankruptcy decision. This is called a concordat after bankruptcy. If the panel of judges of the commercial court approves the concordat after the opening of bankruptcy, a concordat proceeding is started and the debtor’s title of bankrupt deregistered and the debtor becomes as if he had never declared bankruptcy.
5 Tax
5.1 What are the key tax risks which might apply to a restructuring or insolvency procedure?
In the event of bankruptcy, the taxpayer’s right to dispose of assets and income, if any, suspended and all assets and incomes are transferred to the bankruptcy table. It is not possible for the taxpayer to fulfill the duties related to taxation after bankruptcy.
Bankruptcy administration is the legal representative of the bankruptcy desk and responsible for the fulfillment of tax-related duties (including the submission of the declarations during the liquidation period) until the bankruptcy proceedings of the company whose bankruptcy has been decided.
It is possible to send the declarations of a bankrupt company electronically by the bankruptcy administration, which is the legal representative.
In case of insolvency and bankruptcy, the liability continues until the tax-related transactions are completely terminated. In these cases, the liquidation officers or bankruptcy office offers: 1) liquidation or bankruptcy decisions; or 2) the liquidation or bankruptcy is closed, and they are obliged to report separately to the tax office.
The transactions to be made within the scope of the approved concordat project are exempt from the fees subject to the fees law, and the papers to be issued due to these transactions are exempt from stamp tax.
The amounts to be collected by the creditors, under whatever name, are exempt from the bank and insurance transactions tax to be paid in accordance with the expense tax law.
Loans to be made available to the borrower are exempted from the resource utilisation support fund.
The above exemption provisions are applied specifically to the debtor and the creditors within the scope of the project in terms of the transactions specified in the concordat project, and third parties cannot benefit from these exception provisions.
According to the concordat project, the terms of the incentive certificates and export commitment periods belonging to the debtors whose debts are tied to a new redemption plan do not run from the date of the temporary respite decision until the date when the concordat becomes binding.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
Employment contracts are not terminated upon bankruptcy.
After secured receivables and public receivables employment’s claims are in the first row. (Please refer to question 4.6.)
Employment contracts are not terminated in the concordat proceeding either.
During the concordat proceeding, employees have right to claim their employment-law related receivables.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
According to Turkish law, bankruptcy and concordat processes can only be initiated for companies established in Türkiye. According to the enforcement and bankruptcy law, the general jurisdiction is the courts where the debtor’s headquarter is located. For companies established abroad, Turkish courts are not authorised for bankruptcy and concordat. In accordance with the regulation in the enforcement and bankruptcy law, the competent court for companies whose headquarters are located abroad is the enforcement offices and courts in the place where the head office is located, if the branch in Türkiye has more than one branch. As it can be understood from here, bankruptcy and other restructuring processes can be initiated for companies that have a branch or branches in Türkiye but are headquartered abroad.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
The competent authority in the proceedings through bankruptcy is the enforcement office in the place where the debtor’s registered address is located.
The competent authority for companies whose headquarters is abroad is the enforcement office in the place where company’s branch in Türkiye or where the head office is located, if there is more than one branch.
If the debtor and the creditor have appointed the authorised enforcement office by written agreement, the enforcement office of that place and the bankruptcy case must be filed in the commercial court of the place where the debtor’s registered address is located.
Regarding bankruptcy, a court decision regarding a bankruptcy or similar process in a foreign jurisdiction has no legal effect in Türkiye unless it is duly recognised by Turkish courts.
The procedure regarding the recognition of foreign court decisions in Türkiye is governed by Turkish law on private international law and procedural law. Accordingly, for the recognition of foreign court decisions in Türkiye, following criteria must be met:
1) The foreign court decision must be final.
2) The foreign court decision must be regarding a subject that does not fall under the exclusive jurisdiction of Turkish courts.
3) The foreign court decision should not be contrary to public order in Türkiye.
4) In the country where the foreign court decision was made, the counter party must be duly summoned to the court, represented fairly in the court, and the decision should not have been made in counter party’s absence.
Regarding the enforcement of foreign court decisions in Türkiye, the conditions in the provisions of the law on Turkish private international law and procedural law are considered.
For foreign court decisions to be enforced in Türkiye, in addition to the above conditions, there must be reciprocity agreement between the Republic of Türkiye or de facto practise regarding enforcement of the court decisions.
Bankruptcy and concordat decisions for companies established in Türkiye can be taken by authorised Turkish courts. In this regard, Turkish law applies the sovereignty principle. In other words, for companies established in Türkiye, the competent courts for bankruptcy and concordat are Turkish courts. For this reason, in terms of companies established and operating in Türkiye, a bankruptcy or concordat decision cannot be taken in another foreign country and not enforced in Türkiye. The above-mentioned recognition and enforcement processes are applicable for the companies established in and operating in a foreign country to be implemented in Türkiye.
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
Turkish courts have exclusive jurisdiction in the bankruptcy proceedings of companies established in Türkiye. The bankruptcy processes of companies established in Türkiye that have branches abroad or other group companies established abroad, of which they are partners, have no effect on the company in Türkiye. For companies established and operating in Türkiye, separate and independent bankruptcy proceedings must be initiated in Turkish courts. (Please refer to question 7.2.)
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
In Turkish bankruptcy law, bankruptcy processes are carried out separately for each company. There is also no special regulation in Turkish law regarding the bankruptcy of group companies.
9 The Future
9.1 What, if any, proposals exist for future changes in restructuring and insolvency rules in your jurisdiction?
Individual collections are expected to be seized by a judge’s decision only, therefore we expect less on-site collection processes conducted at premises either commercial or residential.
The Law No. 7445 on the Amendment of the Enforcement and Bankruptcy Law and Other Laws (also known as 7th Judicial Reform) was published in the 32154 numbered Official Gazette on 05.04.2023.
According to the new Reform, it is not possible to seizure on the residences without a judge’s decision. Seizure to be made on residences; It will be ensured that the seizure decision made by the executive director can only be fulfilled “after the approval of the judge”. In addition, worship-specific or personal belongings possessed by family members and all household items serving the common use of the family will be included among the goods that are not permissible. Accordingly, items such as refrigerators, washing machines, televisions, and mattresses and plinths in the common use of the family will not be seized. It will be expressly prohibited to make a lien (flood) exceeding the amount that will be the subject of the enforcement proceeding. For example, if the debt is 50 thousand TL, a lien can be made on the goods worth up to 50 thousand TL.
Authors: Att. Berk Çektir & Att. Uğur Karacabey