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Restructuring and Insolvency Law Questions and Answers

Restructuring and Insolvency Law Questions and Answers

1.What domestic legislation governs restructuring and insolvency matters in your jurisdiction?

The Enforcement and Bankruptcy Code regulates concordat, restructuring and bankruptcy proceedings. The Banking Code was revised in 2018 to include new provisions for those who owe money to financial institutions.

2.What international / cross-border instruments relating to restructuring and insolvency have effect in your jurisdiction?

No international legislation applies in this regard. However, restructuring and concordat proceedings are affected by EU law. The Enforcement and Bankruptcy Code was inspired by the Swiss law on enforcement and bankruptcy.

International finance debts are also regulated by the Banking Code. 

3.Do any special regimes apply in specific sectors?

There are no specific regulations for specific sectors. It was intended that the restructuring provisions of the Enforcement and Bankruptcy Code would apply to capital companies and cooperatives. However, due to the lack of application of these provisions, alternative arrangements have been introduced for financial liabilities.

4.Is the restructuring and insolvency regime in your jurisdiction perceived to be more creditor friendly or debtor friendly?

The advantage of the regime for debtors is that they are afforded a longer period of time in which to pay off their debts.  

The advantage of the regime for creditors is that it makes it more likely that their claims will be repaid.

How well established is the legal regime and infrastructure relevant to restructuring and insolvency in your jurisdiction (e.g. extent of recent legislative changes, availability of specialist judges / courts / advisers)? 

The purpose of restructuring is just like in European countries; due to changes in social and economic conditions, it is that some commercial enterprises that are actually able to continue their economic lives do not face the risk of losing their economic assets because they cannot pay their debts or their assets cannot afford their debts. This danger threatens the creditors who face the situation of inability to collect their debts and employees who are facing losing their job as well as the debtors. In conclusion this threat affects regional or national economy. These regulations aim the purposes of; in such cases to protect the assets of commercial enterprises that are actually able to continue their economic lives or reconstructing them, to regulate claims and liabilities of both creditors and debtors. At the same time, it is aimed to prevent attempts to exploit the evil borrowers who use gaps in the current regulation in the Bankruptcy Law regarding restructuring in the past and also to speed up the judicial authorities. 

Accordingly, in recent years, legal arrangements have been realized to benefit of bankruptcy, bankruptcy postponement, radical changes in the concordat institutions to enable the restructuring of the debts of capital companies and cooperatives through reconciliation. Accordingly.

•In order for the debtor requesting the Concordat to carry out the restructuring, the creditors have to accept the restructuring project at half yen and the total receivables of these persons shall exceed two thirds of the total amount of all receivables,

•To apply the Commercial Court of First Instance and ratify the project,

•Under the control of an auditor (commissioner) assigned by the court to perform the payments on the conditions and maturities specified in the project, 

The Execution and Bankruptcy Law provided a link between the provisions of restructuring and the provisions of insolvency. For example, articles of law have been regulated regarding the bankruptcy of the applicant in the following cases.

•If the bankruptcy procedures are necessary to protect the assists of the debtor,

•If understood that the concordat will not success,

•If the debtors act against the notices of the auditor (commissioner)

•If a capital company or co-operative, which is understood to be submerged in debt, waives the concordat request.

Specialized courts have been established for the proper examination of the reconstruction requests by the judicial authorities. Where there are three or fewer Commercial Courts of First Instance, 1 Commercial Court of First Instance, and where there are more than three Commercial Courts of First Instance, 1,2,3 Commercial Courts of first instance are assigned as specialized courts.

The auditors (commissioners) who will examine the reconstruction request are selected among the experts that registered on the list. 

Security

5.What principal forms of security interest are taken over assets in your jurisdiction?

According to Turkish legislation, the creditor can pledge the assets of the debtor in order to secure his/her receivables, considering the risk of non-payment. The right of pledge gives its owner the right to convert the value of the immovable or movable assets or any other assets of the debtor, subjected to the pledge, to money and, take his/her receivable from the converted amount prior to other debtors, provided that the debtor will not pay the debt in due time. For instance:

•The pledge can be established on the immovable assets of the debtor. The pledge on the immovable assets can be established to secure any assets that have occurred or will occur. The liability of the debtor is not limited to the value of the immovable. In other words, the debtor will be liable against the creditor, with all of his/her assets. In case the money to be obtained from the convention of the immovable to money will not fulfil the receivable, the owner of the right of the debt/creditor can resort to the other assets of the debtor. The pledge on the immovable assets shall be established by conducting a formal deed and registration to the land register by the deed officers, in accordance with the Regulation on Land Register.

•The pledge can be established on the movable assets on the debtor. The pledge on the movable assets is a limited real right which established on a movable asset (or right) of the creditor or a third person, for securing a receivable. The pledge on the movable assets will provide the creditor to the right to obtain his/her receivable from the sale value of the pledged movable in case the debtor will not pay his/her debt to the creditor. The pledge on movable assets shall be established by a written pledge agreement. The written form is a validity condition for the establishment of the pledge on the rights. The pledge to be established on the motor vehicles can be registered to the registrar.

•Commercial enterprises can be subjected to the pledge.

•Ships can be subjected to the pledge.

•Ores can be subjected to the pledge.

•Trademarks and other intellectual and industrial property rights can be subjected to the pledge.

6.How can those security interests be enforced (and what factors could complicate or prevent this process)?

If the final regulations regarding a pledge are set aside and a creditor whose claim is secured by a pledge does not grant direct ownership rights, the pledge must be realised. Under Turkish law, execution proceedings can be carried out in order to realise the pledge. Follow-ups that do not stop with the objection of the debtor depend on the execution of procedures such as warning the interlocutor of the debt due to non-payment even though it is due. One of the procedures that extends the cash transfer procedures is the obligation to resolve this objection by filing a lawsuit against the debtor’s objection against the follow-up of the pledge to be realized through general foreclosure. It is not enough for the debtor to make an objection if it has commenced execution proceedings. The debtor must file a lawsuit by claiming such as clearing, offsetting, payment. But even if the debtor sues, the warrant will not cease to have effect. The debtor must also seek an injunction.

Other processes may be the completion of proceedings related to notice law in general.  The debtor may be able to file an appraisal lawsuit by objecting to the value determined in the execution proceedings. Finally, the process may be extended due to termination of the tender, which will be opened within the period following the tender of the hostage.  If the debtor is found to be in the wrong, it will be subject to charges. Under the new regulations on securities pledges, the security may become transferable by agreement in case of default, without the need to pursue any of these avenues.

Restructuring

7.Are informal workouts available in your jurisdiction? If so, what forms do they typically take, and what are the benefits and drawbacks as compared to formal restructuring proceedings?

Currently, mediation is a highly up to date dispute resolution method in Turkey. The agreements conducted before the Mediator, who is authorized and licensed by the government can be enforced like a court decision and will be subjected to the enforcement proceedings without being objected by the counterparty of the proceeding. Within this context, the dispute can be resolved without brought before the courts. Besides, the agreement conducted before the mediator is confidential. The mediation is a faster and low-cost dispute resolution method comparing with the courts.  

What formal restructuring proceedings are available in your jurisdiction, and what are the benefits and drawbacks of each?

The reconstruction methods regulated by the law are as below:

•Bankruptcy

•Adjournment of the Bankruptcy

•Concordat

•Reconstruction of the Corporations by Negotiation

Bankruptcy can be requested by any creditor, while it is necessary to settle with the majority of the creditors for the concordat application.

Bankruptcy and Adjournment of Bankruptcy cost more than the Concordat.

The power of disposition of the debtor will be abolished in bankruptcy while the debtor’s power of disposition remains in force in the concordat.

In case all of the creditors’ receivables cannot be fulfilled by bankruptcy, the creditors will obtain a proof of insolvency. The creditors will be able to initiate enforcement proceedings against the bankrupt through this document in case the bankrupt will obtain new assets. However, the creditors who are the party of the concordat agreement cannot claim their receivables which are not in the scope of the concordat.

The sanctions to be imposed on the bankrupt under the public law will not be imposed on the debtor who applied to the concordat.

Bankruptcy can be requested only by the merchants while being a merchant is not necessary for requesting concordat.

Again only the corporations and cooperatives can request the bankruptcy adjournment. The court will not consider the consent of the creditor to decide on bankruptcy adjournment. However, the consent of the majority of the creditors who attends the creditors’ meeting should be present for the court to approve the request of the concordat.

Only the debtors who are deep in debt can request the adjournment of the bankruptcy while the debtors who cannot pay their debts in due time or debtors who are under the risk of not being able to pay their debts in due time can request concordat.

The term of the concordat can be 29 months while the adjournment of bankruptcy can be extended up to 5 years.

The debtor does not need to be deep in debt for requesting concordat while the corporations must be deep in debt to request the adjournment of the bankruptcy. Concordat is subjected to strict terms and the attendance of the majority of the creditors is necessary. The attendance of the creditors is not required for the adjournment of the bankruptcy. Adjournment of the bankruptcy enables the debtor to save itself from the financial collapse without the attendance of the creditors.

All creditors of the debtor will be affected by the consequences of ‘temporary term’ and ‘final term’ decisions in the concordat, while the consequences and protectiveness of the reconstruction are only in force for the ‘creditors who are affected by the project’. 

Concordat proceedings, including negotiations, proceed under the supervision of the courts while the negotiation of the reconstruction is under the initiative of the debtor and does not proceed under the supervision of the courts.

Request

8.How, by whom and on what grounds are formal restructuring proceedings initiated? What are the main preconditions for success?

 1- Concordat: Any debtor who does not pay his/her debts even though they are due, or who is’ in danger of not being able to pay their debts at maturity‘, may request a concordat to pay their debts by being due or exonerated, or to’ recover from a possible bankruptcy‘. Both the debtor and the debtor's creditors can request a concordat. Unlike bankruptcy in the Concordat, provisions also apply to non-merchant debtors, and non-merchant debtors may also claim the Concordat. It is an agreement that binds even creditors who are not party to the concordat and do not accept it. According to this reason, for the acceptance of the Concordat, there must be two separate majorities in terms of creditor persons and number of receivables. In this context, in order for the Concordat to be implemented, half of the creditors must accept the Concordat; however, the total of their receivables must be more than two-thirds of the total amount of the entire receivables. In order to be succeed, the concordat project must be accepted by the creditors within the periods given by the court and the debts must be paid within the period given by the court as a result of the approval of the agreement provided by the court.

2- Bankruptcy: A capital company or cooperative "to be submerged in debt" (that is, the liabilities to be much more than the assets) in case of company (cooperative) or by the General Assembly have been commissioned and the company (or cooperative) in liquidation, the liquidator or creditors bankruptcy notifying the court of the status of the company's trade request.

3- Bankruptcy Adjournment: The adjournment of the bankruptcy is to give the capital company, which is in financial difficulty, a final period to correct its situation. This institution is in the interest of creditors both because it allows them to stop enforcement proceedings for a certain period of time, to correct their situation and resume business life again - and because it allows debtors to receive more part of their receivables, which does not make them worse than the bankruptcy decision. The improvement project is decided by the court that submitted it. Configuration can be successful if the improvement project is properly implemented.

4- Restructuring of capital companies through consensus: Only capital companies or cooperatives can apply for restructuring through compromise. Pre-condition for application the applicant must be unable to pay due money debts or be unable to meet current and receivables debts or be in danger of falling into one of these situations.

9.What are the effects of the commencement of formal restructuring proceedings, both for the debtor and for creditors? 

The effects of the approval of the concordat request and the delivery of the term, on the debtor and creditors are as below:

•The present enforcement proceedings initiated against the debtor shall stop and new enforcement proceedings cannot be initiated. 

•Precautionary injunction and injunction decisions cannot be enforced against the debtor.

•The period of prescription and time bar stops for the creditors. 

•The debtor can no longer transfer their future receivables. This is a protective provision for the debtor. 

It is possible to include the non-monetary receivables in the table by converting it into money.

10.Does a moratorium or stay apply and, if so, what is its scope? Are there exceptions?

There are cases of adjournment or suspension of payment in the concordat, bankruptcy adjournment and restructuring processes of the Capital Company and Cooperatives.

Adjournment of bankruptcy: Upon request for adjournment of bankruptcy, the court may decide as a precautionary measure to allow creditors to apply enforcement proceedings against to the debtor and to temporarily halt the proceedings that have begun at the same time. This period is stated in the law as a maximum of one year. The court may extend the adjournment period periodically according to the measures to be applied. However, this period can be extended "for a maximum of four more years."

Concordat: First of all, upon the application for restructuring, the court makes a temporary term decision regarding the restructuring process until the borrower receives a final term, during this period, the enforcement proceedings against the debtor cease, the unpaid checks not to be written or the bank letters of guarantee issued have not been compensated. The temporary term is three months. The court may extend the temporary term for a maximum of two more months upon the request of the debtor or temporary commissioner before this quarter period expires, and if the debtor requested the extension, the opinion of the temporary commissioner will be obtained. The total duration of the temporary term cannot exceed five months. The debtor whose project has been approved is given the opportunity to complete the restructuring project afterwards. In this process, depending on the content of the configuration, the maturity of the debt can be extended or a reduction in the debt.

There is no delay or suspension in terms of the following payments.

a) Employees 'receivables including severance pay and severance pay accrued within one year before the request, and the notice and severance pay they deserve upon the termination of the employee’s relationship,

b) Employers ' debts to facilities or associations which have acquired legal entity, and which have been formed for the purpose of establishing or sustaining relief chests or other relief organizations for employees,

c) Any alimony claims arising from family law which have accrued in the last year before the claim and which have to be performed in cash.

11.What process do restructure proceedings typically follow (including likely length of process and key milestones)?

The reconstruction methods regulated by the law are as below:

Concordat: An independent audit examines the financial data and prepares the concordat preliminary project. The preliminary project also reveals whether the company is fit for restructuring or not. A petition is filed in court.  The court will check if the company that will request the concordat carry the conditions and if the company carries the conditions, court will decide a temporary term decision. This phase is important for the restructuring process of the debtor, as it will be blocked to enforcement proceedings within the framework of the measures taken against the debtor who has decided on temporary term. The temporary term decision is announced, and the appeal process is opened. In the context of the configuration project, a final term decision is taken after the creditors are persuaded. Payments are made in accordance with the project approved by the court. This whole process can take two or two and a half years.

Bankruptcy Adjournment: The company prepares an improvement project for the structuring of its debts which are having difficulty in repayment, and together with this project, a bankruptcy adjournment is requested from the court. If the project is accepted in favor of the creditors and not to start the enforcement proceedings the short term and the ongoing enforcement proceedings decision is made. Announcement of the decision and the company is assigned a trustee. Depending on the improvement project, it is applied under the control of the trustee.

12.What are the roles, rights, and responsibilities of the following stakeholders in restructuring proceedings?

(a)The restructuring process and the rights and obligations of the parties and are formed as follows:

(b)Creditor: Enforcement proceedings initiated by the creditors of receivables including reconstruction ceases and also new enforcement proceedings cannot be initiated against the debtor cannot. However, time bar stops. Also, to be noted; the enforcement proceedings initiated only against the debtor are prohibited. The creditor can initiate enforcement proceedings against the joint debtors and the guarantor of the debtor. The creditor who is included to the creditors board as a result of the concordat can obtain information about the course of the restructuring.

(c)Debtor: The ‘power of disposition’ of the debtor may be partially limited in order for not to harm the creditors. It can be decided by the court according to the concrete case, to what extent the debtor's power of disposition will be limited. Some transactions may be subjected to the permission of the supervisor (commissioner), while others can only be performed by the supervisor (commissioner).

(d)The debtor cannot establish a pledge, give warrant, or transfer the permanent installation of the enterprise, even partially, restrict and cannot conclude gratuitous contracts without the permission of the court.

(e)Auditor (Commissioner): The commissioner, after his appointment, makes a book of the debtor's assets and determines the value of the assets. If the debtor has assets elsewhere, this proceeding can be done by the enforcement office of that place. 

(f)The Commissioner shall have his decision on the determination of the value of the pledged assets ready for the examination of the creditors. The appraisal decision shall be notified to the pledged creditors and the debtor prior to the meeting of the creditors. The commissioner contributes to the completion of the concordat project. He/she supervises the activities of the debtor. The commissioners draft interim reports regarding the reconstruction. It informs the creditors’ board about the progress of the reconstruction.

(g)Court: Examines the request for reconstruction and takes measures to ensure a positive outcome of the reconstruction, on request or whenever it deems necessary. The court assigns the commissioner. The court may request reports on the course of restructuring. It decides on the requests of the creditor, debtor, commissioner or third parties. Depending on the course of the reconstruction, it can decide the continuation of the concordat or the bankruptcy of the debtor.

13.Can restructuring proceedings be used to “cram down” and bind dissentient creditors to a transaction supported by other creditors? Are creditors separated into classes for the purposes of voting in the proceedings? What are the relevant voting thresholds? Is “cross-class cramdown” available?

Half of the creditors must accept the concordat for the project to be accepted. However, the sum of their receivables should be more than two thirds of the total receivable. There is no priority in terms of creditors, except for workers and alimony receivables. The person who has the majority of the receivables can represent himself in the creditors' committee and can obtain information and provide guidance on the course of the reconstruction.

14.Can restructuring proceedings be used to compromise secured debt?

Although rare in practice, yes can be used. In agreements with creditors with collateralized receivables, in principle both the market value and the valuation value of the collateral are considered. Creditors will not go down the path of agreement if they are able to cover their receivables with collateral in terms of value. However, if the debtor requesting the concordat requests from the court, it may take an injunction to prevent these guarantees from being cashed, and such a decision may be used as a force to compel the debtor to restructure.

15.Can contracts / leases be disclaimed or otherwise addressed through restructuring proceedings?

Turkish law contains no provisions in this regard. However, commentators suggest that claims relating to ongoing rent do not generally fall within the scope of the concordat; although rental claims that accrued before the process began may fall within its scope. In this regard, the lease enforcement proceedings initiated before the restructuring process will stop within the given period of time, but in terms of the debts within the period of the lease receivables and lease receivables will be able to request for eviction..

16.Can liabilities of third parties (e.g. guarantors) be released through restructuring proceedings?

The parties must reach agreement in this regard. Liquidation is also possible but is not a preferred option. The general approach of creditors is not to release guarantors.  However, it is possible to terminate bail, remove guarantees on assets owned by third parties and waive third-party obligations such as the return of letters of guarantee by agreement.

 17.Is any protection and/or priority afforded to the providers of new money in the context of restructuring proceedings (i.e. is “DIP financing” available)?

No. Investors that do not have clear protection under the legislation can protect their investments by providing security in the form of the transfer of shares in the company in which they have invested, or through a transfer of claims according to the freedom of contract.

18.How do restructuring proceedings conclude? 

In general, concordat results in bankruptcy but restricting is a new process. The number of applications initially increased when the new concordat regulations were introduced in 2018 and 2019. However, the courts generally issued negative reports which caused concordat proceedings to end in bankruptcy.  Therefore, the number of concordat applications has dropped since the second quarter of 2019.

Half of the creditors must accept the concordat for the project to be accepted. However, the sum of their receivables should be more than two thirds of the total receivable. There is no priority in terms of creditors, except for workers and alimony receivables. The person who has the majority of the receivables can represent himself in the creditors' committee and can obtain information and provide guidance on the course of the reconstruction.

Insolvency

19.What types of insolvency proceeding are available in your jurisdiction, and what are the benefits and drawbacks of each?

9. The answer to this question is given in detail in the question 9. The concordat, insolvency adjournment, insolvency and restructuring institutions are regulated by law. To briefly re-specify.

Concordat is advantageous for debtors that are experiencing short-term difficulties in paying their debts due to problems with their current assets. However, in practice, many companies cannot benefit from this advantage, because the debtors who request a concordat in Turkey do not have any receivables and assets that will meet and enable the restructuring.

Creditor financial institutions play an important role in restructuring proceedings that take place under the Banking Code. Their chosen approaches can lead to both advantageous and disadvantageous situations. In general, the collection of claims can be a disruptive factor in such agreements.

Upon entering into restructuring proceedings, the debtor ceases to operate. Priority is given to 

preferential debts. Employee’s claims can be collected. Secured claims are given priority. For ordinary claims, the remaining balance is distributed proportionately, and all ordinary creditors can participate in the collection and distribution in a balanced manner.

20.How, by whom and on what grounds are insolvency proceedings initiated? Can the instigating party (or any other parties) select the identity of the relevant insolvency officeholder?

If a debtor is deep in debt, in other words, if the value of its passive is more than the value of its assets, the debtor may request his own bankruptcy, or if the conditions are met the creditor can directly or after the finalization of the execution proceedings, can request from the court the bankruptcy of the debtor. The competent bankruptcy office cannot be determined by the debtor or creditor.

The court at which the bankruptcy petition must be filed is determined by the bankruptcy administration rules. The parties cannot simply choose their preferred court. The creditors’ committee is appointed by vote among the creditors themselves.

21.What are the effects of the commencement of insolvency proceedings, both for the debtor and for creditors? 

The property and rights of the debtor which becomes form a community after the bankruptcy petition, are included in the bankrupt’s estate, and the debtor's power of disposition on these property and rights are eliminated. In sense of the creditor, the aim is to prevent the debtor from going into more debt by limiting the power of his/her disposition and to get his/her receivable in accordance with the order table which is made from the income to be obtained as a result of sales and other transactions to be made as a result of bankruptcy. Also, if the debtor determinant as an insolvent, this will affect his/her business life that is why this forces the debtor to pay off the debt. 

22.Does a moratorium or stay apply and, if so, what is its scope? Are there exceptions?

According to Turkish law, bankruptcy proceedings will commence as soon as the court has issued a bankruptcy order; technically, there is no way to prevent this. The debtor may appeal this provision, although any appeal will not result in a stay of the bankruptcy proceedings. 

If a creditor seeks to register a claim without sufficient grounds, the request for registration can be rejected by the liquidators. If this happens, the creditor may seek to remedy this through the courts. If funds are obtained during bankruptcy proceedings, then creditors whose claims have been rejected but whose cases remain ongoing will also be allocated a share thereof. If the court upholds the claim, the share allocated will be paid in proportion thereto. If the claim is rejected, the creditor’s share will be allocated to the remaining creditors instead.

23.What process do insolvency proceedings typically follow (including likely length of process and key milestones)?

The process begins with the issue of an order of bankruptcy and the commencement of bankruptcy proceedings and continues with registration of creditors’ claims and liquidation of the debtor’s assets following the creditors’ meetings.  

In local proceedings, the liquidators will issue a report setting out their views on whether the liquid and non-liquid assets of the debtor are sufficient to meet its short and long-term liabilities. This report is important for the outcome of the proceedings and decisions will be made based on its findings.

The debtor’s assets are recorded upon the commencement of bankruptcy proceedings, while the registration of claims takes place at the second creditors’ meeting. Thus, all parties to the proceedings will be known by the second creditors’ meeting.

24.What are the respective roles, rights, and responsibilities of the following stakeholders during the insolvency proceedings?

(a)Debtor

The debtor will cease to operate, and its representative bodies will no longer have the authority to represent it. 

(b)Directors of the debtor

No more acting of disposal can be made by the directors of the debtor company whose bankruptcy is requested. The management of this debtor company will be carried out by the administration of bankruptcy.

(c)Shareholders of the debtor

These have no active role, rights, or responsibilities.

(d)Secured creditors

The claims of secured creditors must have been registered prior to commencement of the proceedings.

(e)Unsecured creditors

The claims of unsecured creditors must be registered in the record of claims during the bankruptcy proceedings. 

(f)Administrators

Administrators have no role in bankruptcy proceedings.

(g)Employees

The claims of employees must have been registered prior to the commencement of bankruptcy proceedings. 

(h)Pension creditors

There are no regulations in this regard.

(i)Insolvency officeholder

The liquidators will commence the proceedings, compile, and publish the record of claims, and determine the order in which claims will be satisfied. 

(j)Court

The court will issue the bankruptcy order. 

25.What is the process for filing claims in the insolvency proceedings? 

In terms of debtor, this process commences with the request of the creditor or people who are appointed as an administration and representative of the Company or cooperative. After the request, the court examines the file in accordance with the simple trial procedure and decides to declare the bankruptcy petition if there is no objection to the bankruptcy payment order. This announcement is made with one of the newspapers whose circulation is more than fifty thousand (50.000) and distributed at the country level, together with a newspaper in the place where the debtor's procedure centre is located and the Trade Registry Gazette. 

The court conducts a review about the debtor has not objected to the bankruptcy payment order within the time period in the enforcement office and has objected to the bankruptcy payment order within the period in the enforcement office. In either situation, if the court finds that the debtor is qualified to bankruptcy and is indebted and pay off the debt, the court asks the debtor to pay the debt or store it in the court cashier within seven days, with interest and enforcement expenses. If this decision is not fulfilled, the debtor's bankruptcy is decided.

26.How are claims ranked in the insolvency proceedings? Do any claims have “super priority” and is there scope for subordination by operation of law (e.g. equitable subordination)?

There is no priority in this regard until bankruptcy proceedings have commenced. Thereafter, claims such as employee claims, alimony claims and public claims enjoy priority and will be satisfied in advance of the claims of ordinary creditors. In addition, security over assets to be liquidated is subject to special orders relating to such assets. The claims of secured creditors will therefore be satisfied from the proceeds of liquidation of such assets, in advance of unsecured creditors. 

27.What is the effect of insolvency proceedings on existing contracts? Is the counterparty free to terminate? Can they be disclaimed?

Contractual provisions on bankruptcy are permitted under the freedom to contract and bankruptcy constitutes justifiable grounds for termination. The effect of bankruptcy on default has also been acknowledged. Under certain contracts – especially those concluded with financial institutions – a creditor may have grounds to terminate not only due to the commencement of bankruptcy proceedings, but also due to the filing of a bankruptcy petition or the announcement of a concordat. This can prove problematic in cases where the debtor also has other financial institution creditors.

28.Can transactions entered into by the debtor prior to be insolvency be challenged and set aside? What are the relevant grounds / look-back periods / defences?

If the debtor has the aim of deceiving the third party with transactions which are made before bankruptcy, the cancellation of these disposals can be requested. The existence of a deceptive secret agreement is considered as a rule in all act of disposal which covering the last two years, between the managers and partners of those whose bankruptcy is requested and their close relatives. The proof of the opposite of this situation belongs to the people who make this deceptive process.  The proof of the existence of the act of disposal which is made outside of relatives and aiming to deceive the third party can be put forward within 5 years by the creditor who requested bankruptcy. It can be decided by the courts to cancel the act of disposal which are low in wages, do not comply with the normal flow of life.

29.How do the insolvency proceedings conclude? Can any liabilities survive the insolvency proceedings?

The termination of proceedings results in the liquidation of the debtor’s assets and the issue of a certificate of insolvency. If a bankruptcy order is not issued, the debtor’s legal personality and representative bodies will not be affected. Where a bankruptcy petition has been granted, the representative bodies of the debtor will lose the authority to represent it. If there is no additional property available once the bankruptcy assets have been liquidated and the claims of creditors have not yet been satisfied in full, an incapacity certificate regarding the certificate of insolvency will be issued.

Cross-Border / Groups

30.Can foreign debtors’ avail of the restructuring and insolvency regime in your jurisdiction?

Foreign or domestic person’s bankruptcy whose carrying out commercial activities in Turkey, can be requested without any differences. 

31.Under what conditions will the courts in your jurisdiction recognise and/or give effect to foreign insolvency or restructuring proceedings or otherwise grant assistance in the context of such proceedings? 

Insolvency cases must be file where the debtor’s centre of operations, according to legal regulations in Turkey regarding to matter of bankruptcy.  Therefore, the decisions of the foreign court which are about bankruptcy, cannot recognise and enforcement in Turkey. Foreigners, who are obliged to provide assurance for their requests, can pursue enforcement and bankruptcy procedures after the necessary assurance is given regarding their requests. A guarantee exemption agreement is valid between the Turkey and the country, which is creditor’s from, this obligation cannot be fulfilled. Also, in this regard, the decisions of foreign courts can be recognized and enforced by local courts.

32.To what extent will the courts cooperate with their counterparts in other jurisdictions in the case of cross-border insolvency or restructuring proceedings?

Foreign court’s bankruptcy decisions cannot be recognised and enforced in Turkey. Therefore, the court of the companies’ trade centre must be the one for bankruptcy petition for the companies whose bankruptcy is requested and who carry on a business in Turkey.

33.How are corporate groups treated in the context of restructuring and insolvency proceedings? If there is no concept of a group proceeding (or consolidation), is there any regime through which insolvency officeholders must / may cooperate?

Bankruptcy files are opened individually, based on the merchant’s debts. Concordat and financial restructuring can also be requested for group companies. 

34.How is the debtor’s centre of main interests determined in your jurisdiction?

35.How are foreign creditors treated in restructuring and insolvency proceedings in your jurisdiction?

There is no legal difference between local and foreign creditors.

Liability Risk

36.What duties do the directors of the debtor have when the company is in the “zone of insolvency” (or actually insolvent)? Do they have an obligation to commence insolvency proceedings at any particular time?

If, for example, the directors of the debtor fail to file for bankruptcy, fraudulently file for bankruptcy or reduce the assets available to creditors, a public lawsuit may be filed against them through a complaint. However, there will be no lawsuit in the absence of such complaint. For this reason, the directors should determine whether it is necessary to file for bankruptcy; if not, they should not fraudulently file for bankruptcy with the aim of avoiding debts and harming creditors.

37.Are there any circumstances in which the directors could incur personal liability in the context of a debtor’s insolvency? 

Under Turkish law, the criminal responsibility of a company rests with its representatives. Directors who fail to fulfil their responsibilities in this regard will be investigated upon the complaint of a creditors. If the crime is found to be serious, they will be tried.

38.Is there any scope for any other party to incur liability in the context of a debtor’s insolvency (e.g. lender or shareholder liability)?

The directors of the company have a responsibility of the fraudulent and reckless bankruptcy. They also have financial responsibilities for the debtor’s tax liabilities. In the case of diminishing assets of the debtor, anyone who has taken the assets of the debtor will be held liable for its debts in proportion to the value of those assets if he or she loses the case. 

Other

39.Is it possible to affect a “pre-pack” sale of assets, and is it possible to sell the assets free and clear of security, in restructuring and insolvency proceedings in your jurisdiction?

Yes.  Asset management companies can assume problematic claims from financial institutions by means of portfolio sales, although these must be secured claims – they have no authority to do so in the case of unsecured claims. There is no limitation on who can take over such claims, other than asset management companies.

40.Is “credit bidding” permitted?

Credit bidding is not permitted, but other restrictions are possible. Special additions have been made to the legislation regarding the restructuring processes regulated under the Banking Code. It is also possible to provide financing within the framework of a concordat; in such cases the approved credit can be availed of without being included in the concordat.

Trends and Predictions

41.How would you describe the current restructuring and insolvency landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

In general, bankruptcy proceedings are still the most common proceedings in Turkey. Changes to the concordat regime are also anticipated, while the restructuring provisions were recently revised. It is thought that additional new arrangements will be inevitable, as the existing regime does not fully provide for the survival of financially distressed companies.  

Tips and Traps

42.What are your top tips for a smooth restructuring and what potential sticking points would you highlight?

The most important factor is to understand the structure of the debtor and then determine the most appropriate proposed solution on that basis. This can be achieved through a specific assessment of the debtor’s profile. If the profile of the debtor is carefully analysed, it is also possible to successfully execute concordat and restructuring proceedings, despite the inherent difficulties. Sometimes bankruptcy can also be advantageous for the debtor.

 


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