Execution and Bankruptcy Law (“EBL”) enables a company in financial difficulty to propose a composition to its creditors to restructure its debts. However, EBL only provides formal proceedings and does not provide out of court workouts. As a result, courts do not have the authority to order a creditor to cooperate with an informal composition. Therefore there is a lack of safeguards in favour of debtors with regards to any informal composition proceedings under the current legislation.

This update gives brief information on the current practice of formal and informal composition process in Turkey.

Current Legislation

In order to prevent a bankruptcy, companies can formally offer a composition to their unsecured creditors. This composition offer usually includes a postponement of payment and/or debt deduction.

A debtor or any of its creditors can initiate the launch of a composition. Under EBL a term of 3 months can be given to the debtor to negotiate its composition offer with its unsecured creditors. This term can be extended to 2 months (in total 5 months maximum) if the negotiations cannot be concluded within the given term.  During these terms, an automatic stay will be effective for the proceedings against the debtor. In practice, the debtor’s operating ability is generally restricted by the court. The debtor may pursue its business under the supervision of a commissioner who is appointed by the court and entitled to manage the negotiations with registered creditors and responsible to report the court.

The voting on the composition takes place at creditors’ meeting which will be managed by the commissioner. Only votes of registered unsecured creditors can be taken as the basis for the calculation. A composition requires approval by at least 2/3 in the value of creditors who vote on the composition, being also at least a majority of the creditors. 

If the creditors are voted in favour of the composition, the composition should be approved by the Commercial Court which will declare the composition generally binding (i.e. also on dissenting creditors). However, the court may refuse to declare the composition generally binding if, amongst other reasons, the composition is found to be unreasonable because the creditors will receive less than what they most likely will receive if the company is declared bankrupt or if the compliance with the composition by the company is found to be insufficiently ensured.

Pitfalls of Composition

Comparing to “postponement of bankruptcy” application which is still prohibited due to the state of emergency period which began just after the coup attempt, debtors are considering composition proceeding;

-automatic stay terms;

-As complex and difficult to successfully conclude where the composition highly depends on inclusion of creditors to the proceeding and a good communication of the composition offer with creditors.

In practice, there are also few issues which might also be considered as blank areas, amongst others, which have came up in a recent case, such as scope of interim injunctions, ipso facto clauses, application of group companies and jointly and severally liable debtors. (In this recent case, a retailer company with 6500 employees and 248 stores in Turkey applied for composition proceeding. The application also included the group companies and individual shareholders who are jointly and severally liable debtors. Once the court received the application, it granted an automatic stay with an interim injunction and later revoked this decision considering the objections of the creditors. Ultimately the court accepted the application of the company and gave a term of 3 months, however rejected the rest of the applicants. Now the company commence negotiations with its creditors.)

One may criticize the above decisions and applied procedures by the court but this case ultimately shows that there is a huge demand for reform and modernisation of restructuring legislation allowing debtors and its group companies to commence informal restructuring negotiations and safeguard their assets within the given term.         

Informal Composition

Distressed companies generally commence informal debt restructuring negotiations and desire to conclude amicable settlements with their creditors. However as EBL does not recognize and provide safeguards in favour of the debtor and due to the lack of a systematic positive communication among the stakeholders, most of these informal workouts turn out to be unsuccessful.

Expected Changes on Current Legislation

Ministry of Justice has formed a commission which consists of scholars and practitioners in insolvency law field in 2015. The commission has already begun its work and a legislative proposal is expected very soon. Our expectation is that this expected legislative proposal will be one of the measures proposed in the context of a more comprehensive legislative program with the objective, amongst others, to strengthen the restructuring possibilities of distressed companies.


Prohibition on postponement of bankruptcy applications, lack of safeguards in informal restructurings and pitfalls of current legislation are ultimately showing that composition proceeding needs to be reformed in specific to below issues:

-Recognition of informal restructurings and safeguards in favour of the debtor during the negotiation period,

-Joint applications by group companies and other jointly and severally liable debtors such as shareholders and/or executives,

-Safeguards for the applicants starting from the application date,

-Application of Ipso Facto clauses.