Bankruptcy and Concordat -- Conditions, Process and Creditor Rights

Financial difficulties, an inevitable reality of commercial life, can push businesses into bankruptcy or concordat proceedings. The Execution and Bankruptcy Law No. 2004 (EBL) regulates bankruptcy provisions in Articles 154-166 and concordat provisions in Articles 285-309. These two institutions are legal mechanisms serving different purposes for debtors who cannot pay their debts or are in financial difficulty. While bankruptcy aims to liquidate the debtor's assets to satisfy creditors, concordat enables the debtor to continue its activities and pay creditors within a certain plan. In this article, we will comprehensively examine both institutions in terms of their conditions, processes, and creditor rights.

What Is Bankruptcy and Who Can Go Bankrupt?

Bankruptcy is the process of liquidating all assets of a debtor who cannot pay their debts through compulsory execution to satisfy the creditors' claims. As bankruptcy is a collective liquidation procedure, unlike individual enforcement proceedings, all of the debtor's assets are allocated to the satisfaction of all creditors.

Pursuant to EBL Art. 43, the persons subject to bankruptcy are limited. Those subject to bankruptcy include: merchants (any person who operates any kind of commercial enterprise in their own name pursuant to the TCC), commercial companies (joint-stock, limited liability, collective, commandite and cooperative companies), those who have abandoned commerce (within one year from the date of abandonment), and persons specifically made subject to bankruptcy by law. Ordinary debtors (non-merchants) are not subject to bankruptcy as a rule, and individual enforcement proceedings are conducted against them.

The important consequences of bankruptcy include: all assets of the debtor enter the bankruptcy estate, the debtor's disposal authority is restricted, debts not yet due become due, interest accrual stops (EBL Art. 196), creditors are ranked between creditors with in rem rights and privileged creditors, and liquidation is carried out by the bankruptcy administration.

What Are the Bankruptcy Procedures?

Three basic bankruptcy procedures are regulated in the EBL: enforcement-based bankruptcy (ordinary bankruptcy procedure), direct bankruptcy (without enforcement), and the debtor's bankruptcy petition.

1. Enforcement-Based Bankruptcy (Ordinary Bankruptcy Procedure - EBL Art. 155-166): This is the most common bankruptcy procedure. The creditor first initiates enforcement proceedings through bankruptcy against the debtor. If the debtor does not object to the payment order or if the objection is removed/annulled and the debt is not paid within the specified period, the creditor requests the commercial court to issue a bankruptcy order. The court gives the debtor at least 7 days to pay the debt; if not paid, the court issues a bankruptcy order.

2. Direct Bankruptcy (Without Enforcement - EBL Art. 177-181): In certain cases, a bankruptcy order may be requested directly from the commercial court without initiating enforcement proceedings through bankruptcy. Cases requiring direct bankruptcy include: the debtor's residence being unknown, the debtor embezzling assets from creditors, the debtor having ceased payments, and the concordat not being approved or its annulment being decided. In these cases, the creditor can apply directly to the court without any enforcement proceedings.

3. Debtor's Bankruptcy Petition (EBL Art. 178): The debtor may request their own bankruptcy by declaring that they are unable to pay their debts. In capital companies and cooperatives, in case of insolvency (assets not covering debts), the management body has an obligation to notify the court (TCC Art. 376). This obligation is of great importance for the protection of creditors.

How Does the Bankruptcy Process Work?

The bankruptcy order is issued by the commercial court. The bankruptcy order is final and is immediately enforced (EBL Art. 164). With the bankruptcy order, the following procedures are initiated:

Formation of the Bankruptcy Estate: All assets of the debtor as of the date of the bankruptcy order constitute the bankruptcy estate. All attachable goods, rights and receivables are included in the bankruptcy estate. Assets acquired by the debtor after bankruptcy also enter the bankruptcy estate. Non-attachable goods are not included in the bankruptcy estate.

Commencement of Duty of Bankruptcy Administration: With the bankruptcy order, the bankruptcy office commences duty and carries out the initial proceedings. The bankruptcy administration (three persons) elected by the creditors' meeting assumes the management and liquidation of the bankruptcy estate. The bankruptcy administration identifies the estate assets, keeps the registry, examines the creditors' claims and prepares the ranking schedule.

Filing of Creditors' Claims: The bankruptcy order is published in the Trade Registry Gazette and a local newspaper. Creditors must file their claims with the bankruptcy administration within one month from the date of publication. Delay in filing the claim may affect the ranking of the claim.

Ranking Schedule and Distribution: The bankruptcy administration examines the filed claims and prepares the ranking schedule. Pursuant to EBL Art. 206, creditors are divided into four ranks: first rank (workers' claims, alimony claims, etc.), second rank (state claims, tax and social security claims), third rank (claims secured by pledge are paid before the pledge amount), and fourth rank (other claims - ordinary claims). The proceeds from the sale of estate assets are distributed according to this ranking.

What Is Concordat and How Does It Differ from Bankruptcy?

Concordat is a legal institution that enables a debtor who cannot pay their debts when due or faces the danger of not being able to pay when due to restructure their debts or pay them within a certain plan by reaching an agreement with creditors. It is regulated in EBL Art. 285-309.

The fundamental differences between concordat and bankruptcy are as follows: while bankruptcy aims to liquidate the debtor's assets, concordat aims for the debtor to continue its activities and pay its debts within a plan. While the debtor loses all disposal authority over their assets in bankruptcy, in concordat the debtor can continue to manage their affairs (under the supervision of the commissioner). While the satisfaction rate of creditors is generally very low in bankruptcy, a higher rate of satisfaction is expected in concordat.

Concordat is examined in two basic types: ordinary (out-of-bankruptcy) concordat and post-bankruptcy concordat. Ordinary concordat is an institution that any debtor can apply to regardless of whether they are subject to bankruptcy. Post-bankruptcy concordat is a mechanism that enables a bankrupt debtor to reach an agreement with creditors for more effective liquidation.

Concordat Application and Provisional Moratorium

The concordat application is made to the commercial court of first instance at the debtor's place of residence or headquarters. Pursuant to EBL Art. 285, the debtor themselves or creditors who can request bankruptcy may file for concordat.

The documents required to be submitted with the concordat application are listed in EBL Art. 286: concordat preliminary project (plan showing how and at what rate the debts will be paid), documents showing the status of the debtor's assets (balance sheet, income statement, cash flow statement), list of creditors (creditor name, claim amount, nature of the claim), financial statements for the last two years, independent audit report (for companies within the scope of audit), and financial analysis report showing that the concordat will succeed.

The court examines the application and issues a provisional moratorium decision pursuant to EBL Art. 287. The provisional moratorium period is three months, and the court may extend this period for a maximum of two more months (total five months). Along with the provisional moratorium decision, the court appoints one or more provisional concordat commissioners. The provisional moratorium decision is final and is immediately enforced.

The effects of the provisional moratorium include: the debtor's assets are protected, all enforcement proceedings against the debtor's assets are stayed (EBL Art. 294), attached goods are not sold, precautionary attachment and precautionary injunction decisions are not enforced, and the debtor continues to manage their affairs under the supervision of the commissioner.

Definitive Moratorium and Concordat Commissioner

During the provisional moratorium period, the court evaluates the likelihood of success of the concordat. Pursuant to EBL Art. 289, if the court is convinced that it is possible for the concordat to succeed, it issues a definitive moratorium decision. The definitive moratorium period is one year and may be extended by six more months if deemed necessary (total eighteen months).

Along with the definitive moratorium decision, the court appoints the definitive concordat commissioner. The duties of the concordat commissioner include: supervising the debtor's activities, preparing or revising the concordat project, examining the creditors' claims, organizing the creditors' meeting, and regularly submitting reports to the court.

During the definitive moratorium period, certain transactions by the debtor are prohibited or subject to the commissioner's approval. Pursuant to EBL Art. 297, the debtor cannot create pledges, provide suretyship, transfer immovable property and movable property that are not important for the continuation of the enterprise, or make negotiable instrument commitments without the court's permission. If these transactions are made without court permission, they are invalid.

Creditors' Meeting and Acceptance of the Concordat Project

Pursuant to EBL Art. 302, the concordat commissioner calls the creditors to a meeting to vote on the concordat project. At the creditors' meeting, discussions are held on the concordat project and voting is conducted.

For the concordat project to be accepted, the quorums determined in EBL Art. 302 must be met: it must be accepted by a majority exceeding half of the registered creditors and two-thirds of the claim amount, or by a majority exceeding one-quarter of the registered creditors and two-thirds of the claim amount. It is sufficient for one of these quorums to be met.

Creditors who cast negative votes at the creditors' meeting or who do not attend the meeting are also subject to the concordat project. Following the acceptance of the concordat project, a ratification review is conducted by the court. If the court is convinced that the conditions determined in EBL Art. 305 exist, it ratifies the concordat.

The conditions required for ratification of the concordat include: the proposed amount being proportional to the debtor's resources, creditors obtaining at least as much as they would obtain in bankruptcy liquidation, the concordat project being in compliance with the law, and the required quorums having been met.

Annulment of Concordat and Its Consequences

If the ratified concordat is not fulfilled due to the debtor's own fault, any creditor may request the annulment of the concordat from the court that issued the ratification decision (EBL Art. 308). With the annulment decision, if the debtor is subject to bankruptcy, a bankruptcy order may be issued. The annulment decision produces effects and consequences for all creditors.

If the concordat is not ratified, the court orders the debtor's bankruptcy (provided the debtor is subject to bankruptcy). An appeal may be filed against the non-ratification decision.

If the concordat process is successfully completed, the debtor makes payments at the rates and within the periods determined in the concordat project. After paying their debts according to the payment plan, the debtor is released from their debts within the framework of the concordat and continues their activities normally.

Creditor Rights and Protection Methods

Creditor rights are of great importance in both bankruptcy and concordat proceedings. The legal mechanisms for the protection of creditors include:

Creditor Rights in Bankruptcy Proceedings: Creditors have the right to file their claims with the bankruptcy administration within the specified period, the right to object to the ranking schedule (EBL Art. 235), the right to object to the proceedings of the bankruptcy administration, the right to participate in the creditors' meeting and vote, the right to elect bankruptcy administration members, and the right to request the inclusion of assets that should be included in the bankruptcy estate.

Creditor Rights in Concordat Proceedings: Creditors have the right to object to the concordat project, the right to vote at the creditors' meeting, the right to monitor the activities of the concordat commissioner, the right to object to the concordat ratification decision, and the right to request the annulment of the concordat. Furthermore, secured creditors are, as a rule, not affected by the concordat and can exercise their security rights.

Annulment Action (EBL Art. 277-284): Dispositions made by the debtor before bankruptcy or the concordat process with the aim of harming creditors may be subject to an annulment action. Gratuitous dispositions (up to two years before the bankruptcy date), dispositions made while insolvent, and dispositions made with the intent to harm creditors may be annulled. This action is an extremely effective mechanism for creditor protection.

Abolition of Bankruptcy Postponement and Concordat

Until 2018, the institution of bankruptcy postponement existed in Turkish law, which over-indebted companies could apply to (former TCC Art. 377 and EBL Art. 179). However, the institution of bankruptcy postponement was abolished by Law No. 7101 and replaced by a strengthened concordat institution. The main reason for this change was the misuse of the bankruptcy postponement institution in practice and the insufficient protection of creditors' rights.

The new concordat system contains stricter supervisory mechanisms compared to the old bankruptcy postponement system. The appointment of the concordat commissioner, active participation of creditors in the process, regular supervision by the court, and time limitations are among the leading mechanisms. However, it is observed in practice that the concordat process also faces some problems; improvements are needed particularly regarding the selection of concordat commissioners, supervision of the debtor, and informing creditors.

Disclaimer: This article has been prepared for general informational purposes and does not constitute legal advice. It is recommended that you consult a lawyer specialized in execution and bankruptcy law for specific situations you may encounter in bankruptcy and concordat proceedings.