Law No 7101 on Amendments to the Enforcement and Bankruptcy Law and Other Laws (“Law No 7101”) has been published in the Official Gazette dated 15 March 2018. Law No 7101 i) abolishes the postponement of bankruptcy procedures, ii) introduces a new composition procedure for insolvent companies and iii) improves secured creditors’ rights in bankruptcy.
Lifting of Postponement of Bankruptcy
Up until recently, upon the insolvent company’s application to the commercial courts to postpone its bankruptcy, the courts would usually issue an order to suspend all debt collection and bankruptcy proceedings against the company, appoint trustees to oversee the company’s daily business and postpone the insolvent company’s bankruptcy up to a period of five (5) years, until the company’s financial situation improved or it became clear that the company would become bankrupt.
As the insolvent company’s creditors could only object before the court, without any voting rights, this procedure has been met with the criticism that it served to shield the insolvent company against its creditors until bankruptcy and even misused by creditors to refrain from or postpone their payment obligations.
Applications for postponement of bankruptcy had already been suspended for the duration of the state of emergency declared in Turkey shortly after the failed military coup attempt on 15 July 2016. Now, with the changes introduced by Law No 7101, this procedure was abolished and instead replaced with an improved form of composition procedure.
New Composition Procedure
Pursuant to the amendments made to the Enforcement and Bankruptcy Law No 2004 (“EBL”), the new composition procedure is basically as follows:
- Any debtor that cannot pay or is at risk of not being able to pay its debts in due time may apply for composition (konkordato) in order to release itself from a potential bankruptcy by way of extension of due dates or payment of less than the whole amount of the debt.
- The applicant (company) must submit certain documents to the commercial court at the time of application in order to prove its insolvency and that the composition project is likely to be successful. These documents include the preliminary composition project, balance sheets, list of creditors and an independent audit firm’s financial analysis report confirming that the composition project is viable.
- Upon submission of the aforementioned documents, the court grants a provisional grace period of three (3) months, which can be extended for two (2) additional months. During the provisional grace period, the provisional composition officer appointed by the court would review the merits of the composition offer made by the applicant. No debt collection or bankruptcy proceedings may be filed against the applicant during the provisional grace period, except for foreclosure proceedings.
- In the event that it is concluded that the composition is likely to save the company from insolvency, the court grants a final grace period of one (1) year, which can be extended for up to six (6) additional months, during which:
- No debt collection or bankruptcy proceeding may be filed against the applicant during the grace period, except for foreclosure proceedings.
- The composition procedure is overseen by the composition officer and the board of creditors, consisting of up to seven (7) creditors of the applicant company.
- No further interest would be incurred on unsecured receivables, unless otherwise provided for in the composition project.
- The establishment of any pledges, mortgages or guarantees, transfer or limits to the rights of property or business or any unilateral transactions shall be null and void, unless approved by the court.
- The composition officer’s main tasks are to make an appraisal of the applicant company’s assets, oversee the composition process and the applicant company’s activities and report any progress to the court within the intervals as decided by the court. Besides such supervisory role, however, the court may subject the applicant company’s decisions to the composition officer’s approval or grant decisive powers to the composition officer for the continuation of the company’s daily business. If the applicant company does not comply with the composition officer’s instructions, upon the report of the composition officer, the court shall decide on the company’s bankruptcy.
- The composition officer invites the creditors to notify their receivables via notifications to their addresses and announcements in the Trade Registry Gazette and on the Press Release Institution’s website. Upon the review of these notifications, the creditors shall be invited to a creditors’ meeting via a second announcement, in which the creditors vote on the composition project.
- The composition project is deemed to be approved by the creditors if it is signed by a majority of affected creditors, such majority consisting of either:
- Over 50% (fifty percent) of the registered creditors and receivables;
- Over one-fourth (1/4) of registered creditors and two-thirds (2/3) of the receivables.
The secured creditors can vote only for the portion of their receivable that would not be paid off via foreclosure proceedings.
- Upon the composition officer’s submission of the relevant documents to the court, including the composition project approved by the creditors, the court would review a number of criteria, including whether (i) the composition project is proportional; (ii) the composition project provides for a payment that is comparably better than bankruptcy; and (iii) the composition project is proportional to the applicant company’s resources. If such criteria are met, the court approves the composition project and announces the decision. The court may appoint a trustee to oversee the implementation of the approved composition project.
If the court rejects the composition project, it may declare the applicant company’s bankruptcy only if the conditions of bankruptcy are met. Similarly, if the composition project is partially or fully terminated by the court for any reason, this shall not result in the applicant company’s bankruptcy per se.
- The secured creditors shall be invited for composition negotiations separately on their secured receivables. A composition project is deemed to be approved between secured creditors if it is signed by secured creditors representing over two-thirds (2/3) of the receivables. Secured creditors that disagree with the approved composition project shall have their secured receivables subjected to the longest due date agreed with other secured creditors.
- Any pending postponement of bankruptcy or composition procedures at the time of the entry into force of Law No 7101 shall not be affected.
The amendments introduced by Law No 7101 are united in terms of securing creditors and expediting legal proceedings. The new composition system aims for a balanced approach between creditors and insolvent companies, whereas the improvement in foreclosure proceedings reduces the taxation risks in securing receivables via assets located in Turkey.