Under the Code of Enforcement and Bankruptcy dated June 9, 1932 and numbered 2004 (the “Code”), the companies established under the Turkish Commercial Code dated January 13, 2011 numbered 6102 (the “TCC”) and persons who are bound by the provisions for the tradesmen of the TCC are subject to bankruptcy when their debts exceed their assets. In such an event, declaration of bankruptcy should be requested from the court by those who are authorized representatives of such persons or entities (e.g., the board of directors for joint stock companies).
The Code allows those who face financial difficulties prior to a declaration of bankruptcy a temporary grace period, referred to as a “postponement of bankruptcy.” By its most widely accepted legal definition, postponement of bankruptcy is a stipulation enabling an insolvent company or person to avoid declaring bankruptcy if and to the extent that its financial situation is improvable. According to Article 179 of the Code, parties may submit an outline of a proposed project for improvement in the financial situation of the company to the court, along with a request for postponement of bankruptcy. The court may accept this request and grant the postponement should the proposed project be deemed as critical and compelling. As implied by this condition, evaluation of the project would be undertaken by the court, which has full discretion to determine its criticality and cogency. Companies should prepare their projects with valid and enforceable measures for recovery of their situation and financial resources (e.g., for equity companies, an injection of cash capital from a viable resource). Moreover, another criterion to be considered during evaluation of the project is the expected benefit to the creditors, since, according to the provisions of the Code, the plan should protect them.
If the court finds the company insolvent but the submitted project critical and compelling, it may grant the postponement. In such a case, no execution proceedings can be pursued against the company/cooperative, and the pending proceedings would stop. The maximum period of postponement is one year – though that period can, at the end of that year, be extended at the discretion of the court. In any case, the period of postponement cannot exceed a total of four years.
Under the State of Emergency regime approved by the Parliament of the Republic of Turkey on July 21, 2016, some laws and regulations have been amended, and Article 179 of the Code regarding the procedure of postponement of bankruptcy has been set out in more detail. Furthermore, pursuant to the statutory decree adopted on July 31, 2016 with number 669 (the “Decree”), requests for postponement of bankruptcy during the State of Emergency regime will be denied by the court, meaning that this relief is, for the time being, not available to companies and cooperatives. However, a similar (though not identical) procedure, referred to as concordatum (i.e., arrangement of bankruptcy) is outlined in detail under the Code, although in practice it has not been used for a long time, due to a prevailing preference for postponement of bankruptcy procedures. Briefly, concordatum is a means of settlement between an insolvent company/cooperative and its creditors, which is arranged by way of a payment schedule and is available where the party has settled with two thirds of its creditors, paid at least fifty per cent of its debts, and prepared a payment schedule for the remaining amount.
Currently, no decree under the State of Emergency regime has been issued regarding concordatum, and therefore some applications are being made as an alternative by companies in financial difficulties.
Most likely, depending on the regulations under the State of Emergency regime, the final status and practice of these procedures will become clearer and better outlined in the coming months.
By Sena Apak, Partner, and Selen Tan, Associate, Gur Law Firm
This Article was originally published in Issue 3.5 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
