Types of liquidation and reorganisation processes

Voluntary liquidations

What are the requirements for a debtor commencing a voluntary liquidation case and what are the effects?

A debtor who is subject to bankruptcy may submit a petition to the extent that it is unable to pay its debt to a competent commercial court requesting that a decision should be taken for its bankruptcy.

Furthermore, the persons authorised to represent a capital company or a cooperative (for example, the board of directors in the joint-stock companies) may request a decision for bankruptcy of the company or cooperative attaching the balance-sheet indicating that the liabilities of the company or cooperation are more than the assets thereof. The commercial court will decide for bankruptcy of the company if it believes that the liabilities of the company or cooperation are more than its assets thereof.

 

Bankruptcy liquidation

Concurrently with the bankruptcy decision, bankruptcy liquidation is initiated leading to the following consequences that may not be stopped even if the decision is appealed:

  • any and ll seizable assets, receivables and rights of the debtor will automatically constitute the bankruptcy estate;
  • the right to initiate a claw-back action granted to the creditors for the cancellation of donations and fraudulent actions made by the debtor for the purpose of concealing the properties from the creditors prior to the seizure of the properties or a decision is taken for bankruptcy of the debtor will pass to the bankruptcy estate and such actions of nullity will be initiated by the bankruptcy estate;
  • the debtor’s power of performing any act over his or her properties will cease;
  • as a rule, the proceedings initiated against the bankrupt prior to the initiation of the bankruptcy will be stopped upon initiation of the bankruptcy and they will be terminated following finalisation of the bankruptcy decision;
  • no new proceeding may be initiated against the debtor during the bankruptcy liquidation;
  • the civil lawsuits initiated prior to the bankruptcy and to which the bankrupt is a party as a plaintiff or defendant will cease to be in effect concurrently with the opening of the bankruptcy;
  • the overdue receivables of the debtor ­– except those that are secured under a mortgage or pledge – will become due and payable concurrently with the opening of the bankruptcy;
  • the non-pecuniary receivables will be converted into the pecuniary claims by the creditors thereof;
  • interest will continue to accrue in the receivables included in the bankrupt’s estate; and
  • in certain cases, the creditor may exchange his or her receivable with the receivable from the debtor.

 

Liquidation through composition with creditors

Another method of voluntary liquidation is liquidation through composition with creditors where the debtor leaves its property holdings to the creditors and requests that these property holdings should be liquidated by the creditors. This method of liquidation is also in favour of the debtor since it protects the debtor against bankruptcy. Moreover, the debtor will get rid of its debts and be discharged contrary to the debtor, who is liquidated within the framework of the current bankruptcy procedure.

 

Dissolution

Another method of voluntary liquidation is liquidation as described in the Turkish Commercial Code 6102. The company whose activity is terminated due to any reason other than bankruptcy will enter the process of liquidation within the scope of the TCC. In general, the liquidation is managed by the liquidator appointed from among the partners. If it is understood that the company is over-indebted, the liquidator should request the bankruptcy of the company under the same conditions.

 

Voluntary reorganisations

What are the requirements for a debtor commencing a voluntary reorganisation and what are the effects?

Any debtor (individual traders, companies, etc.) may prevent its bankruptcy by initiating composition proceedings, subject to the below conditions, allowing it to restructure, reschedule or reduce its debt by concluding a composition agreement with its creditors.

A debtor with actual or future inability to pay its debts as they fall due may commence composition proceedings before the specialised commercial courts by submitting the following to the court:

  • a provisional restructuring plan;
  • Documents showing the status of its assets and its financial statements;
  • its profit and loss statements;
  • its creditors’ list;
  • a liquidation analysis; and
  • an audit report that provides reasonable assurance as to the likelihood of success of the proposed provisional restructuring plan.

 

During the provisional and definitive moratorium, all debt enforcement proceedings are stayed. No new enforcement proceedings can be commenced during the moratorium except for secured debts, debts owed to the employees and debts that arose during the composition with the administrator’s consent.

During composition proceedings, the debtor, as a debtor in possession, is entitled to manage its activities and business with a restriction on transactions, such as asset transfers, subject to the court’s pre-approval.

No interest would accrue on the unsecured debts after the definitive moratorium unless the restructuring project states otherwise.

All assignments of receivables made prior to the provisional moratorium regarding the debtor’s future receivables that arose during the provisional or definitive moratorium period are deemed invalid.

Ipso facto clauses will not apply following a debtor’s application for composition proceedings. In the scope of a restructuring plan, the debtor may terminate the agreements preventing the composition proceedings from succeeding by obtaining court approval.

 

Successful reorganisations

How are creditors classified for purposes of a reorganisation plan and how is the plan approved? Can a reorganisation plan release non-debtor parties from liability, and, if so, in what circumstances?

Composition proceedings mainly include unsecured creditors and non-priority creditors. However, the debtor may initiate a separate negotiation with each of its secured creditors within the same application.

Court approval of a composition proposal is subject to the following conditions:

  • The proposal must be more favourable for creditors than the recovery to be reached in the bankruptcy liquidation.
  • The proposal amount must comply with the debtor’s resources.
  • The proposal must be accepted with an affirmative vote by a quorum of either:
  • half of the creditors representing half of the total debt; or
  • one quarter of the creditors representing two thirds of the total debt.
  • Security for the claims of employees and the debts that arise during the moratorium must be provided.
  • The judicial costs of the proceeding and composition duty (1.14 per cent of the total composition amount) must be paid in full by the debtor.

 

If the debtor initiates a separate negotiation with its secured creditors within the same application then two-thirds of the secured creditors representing two-thirds of the total secured debt must accept the proposal of the debtor.

During composition proceedings, the debtor is also given the opportunity to include secured debts in the proceedings. The negotiations with secured creditors will take place separately and for a successful debt restructuring, the debtor should conclude individual agreements with secured creditors representing at least two-thirds of the total amount of secured debts.

Non-debtor parties do not enjoy the protection of composition proceedings unless they have jointly with the debtor or separately applied for composition.

Involuntary liquidations

What are the requirements for creditors placing a debtor into involuntary liquidation and what are the effects? Once the proceeding is opened, are there material differences to proceedings opened voluntarily?

If a creditor’s receivables are dependent on a bill of exchange (cheque, policy or bond), the creditor will refer to the procedure of (special) bankruptcy particular to bills of exchange; otherwise, the creditor will refer to the procedure of general (ordinary) bankruptcy.

Ordinary bankruptcy will be commenced with the bankruptcy proceeding claim submitted by the creditor to the execution office. The bankruptcy proceeding will be terminated if the debtor pays his or her debt within seven days (or five days in a special bankruptcy) following the receipt of the payment order; if not, the creditor will initiate a bankruptcy lawsuit in the commercial court requesting that a decision should be taken for the bankruptcy of the debtor.

The commercial court may decide for depository injunction. Based on this depository injunction, the court will instruct the debtor to pay its debt together with the interests and executive costs thereof or to deposit the equivalent of the debt and the accessories thereof in the court’s pay office within seven days. If, following the depository injunction, the debtor fails to pay his or her debt (or does not deposit the equivalent of the whole debt) and the creditor deposits the necessary expenses in advance, the commercial court will decide for the bankruptcy of the debtor at the first hearing following the depository injunction.

The creditor may also directly initiate a bankruptcy lawsuit in the commercial court without sending a bankruptcy payment order based on the following reasons:

  • if the residential address of the debtor is not known;
  • if the debtor escapes in order to get rid of his or her commitments;
  • if the debtor commits fraudulent acts violating the rights of his or her creditors or attempts to commit such an act;
  • if the debtor conceals his or her assets during a proceeding through attachment;
  • if the debtor suspends the payment of his or her debts;
  • non-approval of the composition proposed by the debtor or the removal or fully termination of the duration for composition;
  • full termination of the restructuring of a capital company or cooperative through mutual consent;
  • any failure in paying a receivable based on a judgment, although the same is requested through an execution order; and
  • any occurrence where the assets of the capital companies and the cooperatives cannot meet the liabilities thereof.

 

If the Commercial Court determines the existence of the receivable and the above-mentioned reason of bankruptcy as a result of the investigation, it will directly decide for the bankruptcy of the debtor without rendering the depository injunction for the debtor.

 

Concurrently with the bankruptcy decision of the commercial court, the liquidation in bankruptcy regarding the debtor will have been commenced. Thereafter, the bankruptcy office will begin the liquidation process. 

Involuntary reorganisations

What are the requirements for creditors commencing an involuntary reorganisation and what are the effects? Once the proceeding is opened, are there any material differences to proceedings opened voluntarily?

Although this is not observed frequently, creditors may also apply composition regarding the debtor under the conditions specified below. However, creditors are not obliged to submit the commercial books, balance sheets and income statements of the debtor, as well as not being obliged to provide a composition project.

Composition proceedings mainly include unsecured creditors and non-priority creditors. However, the debtor may initiate a separate negotiation with each of its secured creditors within the same application.

Court approval of a composition proposal is subject to the following conditions:

  • The proposal must be more favourable for creditors than the recovery to be reached in the bankruptcy liquidation.
  • The proposal amount must comply with the debtor’s resources.
  • The proposal must be accepted with an affirmative vote by a quorum of either:
  • half of the creditors representing half of the total debt; or
  • one quarter of the creditors representing two thirds of the total debt.
  • Security for the claims of employees and the debts that arise during the moratorium must be provided.
  • The judicial costs of the proceeding and composition duty (1.14 per cent of the total composition amount) must be paid in full by the debtor.

 

If the debtor initiates a separate negotiation with its secured creditors within the same application then two-thirds of the secured creditors representing two-thirds of the total secured debt must accept the proposal of the debtor.

During composition proceedings, the debtor is also given the opportunity to include secured debts in the proceedings. The negotiations with secured creditors will take place separately and for a successful debt restructuring, the debtor should conclude individual agreements with secured creditors representing at least two-thirds of the total amount of secured debts.

Non-debtor parties do not enjoy the protection of composition proceedings unless they have jointly with the debtor or separately applied for composition.

 

Expedited reorganisations

Do procedures exist for expedited reorganisations (eg, ‘prepackaged’ reorganisations)?

Under Turkish law, there is no defined procedure for expedited reorganisations. Separate restructuring agreements concluded prior to the composition proceedings do not have any legal effect on the standard procedure.

Unsuccessful reorganisations

How is a proposed reorganisation defeated and what is the effect of a reorganisation plan not being approved? What if the debtor fails to perform a plan?

If the composition is rejected then the court will decide on the bankruptcy of the debtor if the debtor is subject to bankruptcy and if there are reasons for the direct bankruptcy of the debtor.

If the debtor fails to perform the approved plan then any creditor affected by non-performance can initiate the termination of the plan limited to its receivable.

The approved plan may also be terminated fully by proving that the debtor has acted maliciously.

Corporate procedures

Are there corporate procedures for the dissolution of a corporation? How do such processes contrast with bankruptcy proceedings?

Commercial partnerships are liquidated in two ways according to the provisions of EBL) and the provisions of the Turkish Commercial Code 6102. If the company goes bankrupt, the liquidation of the company will be realised in accordance with the provisions of the EBL. In the other cases of termination, the provisions of the Turkish Commercial Code 6102 will apply. The liquidation procedures will be realised through two procedures: through the way of liquidation or without liquidation. A company merger is regarded as a termination without liquidation.

Contrary to liquidation through bankruptcy, liquidation according to the Turkish Commercial Code 6102 is not subject to the approval of a court.

Conclusion of case

How are liquidation and reorganisation cases formally concluded?

In liquidations, there are two ways for a formal conclusion:

  • if the debtor submits a statement to the extent that all of its creditors have withdrawn their claims or a document indicating that all receivables are paid off or the executed composition is approved, the court will decide for the removal of the bankruptcy and for the return of his or her assets in order to ensure the free disposal of them by the debtor; or
  • after the monies are distributed, the bankruptcy administration will give a final report to the court that has taken a decision for the bankruptcy. Following receipt of this report and once it is understood that the liquidation is complete, the court will decide on the closing of the bankruptcy.