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What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?
As per the law, a bankruptcy decision can be rendered only against merchants or persons subject to merchant provisions. In this respect, the following are subject to bankruptcy pursuant to Article 18 of the Commercial Code:
- collective companies;
- commandite companies;
- joint stock companies;
- commandite companies with share capital;
- limited liability companies;
- foundations and associations operating a commercial enterprise in order to achieve their goal; and
- institutions and corporations established by the state, a special provincial administration, municipality, village or other public legal entity, for the purpose of being managed or commercially operated in accordance with the private law provisions pursuant to their own laws of establishment.
What are the primary procedures used to liquidate an insolvent company in your jurisdiction and what are the key features and requirements of each? Are there any structural or regulatory differences between voluntary liquidation and compulsory liquidation?
Bankruptcy by demand of creditor
A creditor may initiate proceedings through the execution office (indirect bankruptcy) or directly submit a petition demanding the bankruptcy of the debtor before the commercial court (direct bankruptcy) in the presence of the statutory conditions.
Indirect bankruptcy If the debtor does not pay the debt within the period specified in the bankruptcy payment order issued by the execution office and sent to the debtor, the creditor may submit a bankruptcy petition before the commercial court. The commercial court decides for depository injunction. Based on this depository injunction, the court will instruct the debtor to pay the debt within seven days. If, following the depository injunction, the debtor fails to pay (or does not deposit the equivalent of the whole debt), the commercial court will decide on the debtor’s bankruptcy at the first hearing following the depository injunction. In this respect, failure to pay the debt is sufficient for a bankruptcy decision.
Direct bankruptcy The creditor may directly initiate a bankruptcy lawsuit before the commercial court without sending a bankruptcy payment order to the debtor by initiating a proceeding before execution office based on the following reasons:
- if the residential address of the debtor is unknown;
- if the debtor evades its commitments;
- if the debtor commits or attempts to commit fraudulent acts violating the rights of its creditors;
- if the debtor conceals its assets during a proceeding through attachment;
- if the debtor suspends the payment of its debts;
- non-approval of the composition proposed by the debtor or the removal or full 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 cooperatives cannot meet the liabilities.
If the commercial court determines the existence of the debt and the reason for 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.
Bankruptcy by demand of debtor A debtor may submit a petition before the commercial court requesting bankruptcy to the extent that it is unable to pay its debts. This bankruptcy request is not compulsory as per law.
However, debtors are obliged to request their bankruptcies as per law in the following cases:
- If a creditor initiates a proceeding through attachment against the debtor and if this results in the disposition of half of the assets pertaining to the debtor and the remaining assets are insufficient to meet the other debts that may become due within one year, then the debtor must promptly disclose its insolvent status and request bankruptcy before the commercial court.
- In cases where the assets of a capital company or cooperative do not meet its liabilities, the persons entitled to represent the capital company or cooperative (board of directors in joined stock companies) should request bankruptcy of the capital company or cooperative, pursuant to Article 376 of the Commercial Code. Failing to do so may result in imprisonment of between 10 days and three months.
How are liquidation procedures formally approved?
Bankruptcy decisions are rendered by the commercial courts. The commencement of liquidation is stipulated in the decision with the date and hour. The bankruptcy office is notified of the decision. The bankruptcy office automatically notifies the land registry, trade registry, customs and postal administrations, the Banks Association of Turkey, local chambers of commerce, chambers of industry, stock exchanges, the Capital Market Board and other necessary authorities. The bankruptcy office also publishes the decision in:
- a national newspaper with circulation in excess of 50,000;
- a local newspaper at the debtor’s centre of main interest; and
- a trade registry gazette.
What effects do liquidation procedures have on existing contracts?
As a general rule, agreements are not terminated automatically on the bankruptcy of one party. The law states that the following exceptional agreements are deemed to be terminated on the bankruptcy of one party:
- usufructuary lease agreements;
- attorney agreements;
- commission agreements;
- agency agreements;
- life annuity agreements;
- ordinary partnership agreements; and
- current account agreements.
In other agreements, commencement of bankruptcy liquidation may have important effects aside from termination and this should be evaluated in terms of each agreement. For example, pursuant to the Code of Obligations, in an agreement burdening mutual debts, if a party goes bankrupt, the other party should refrain from fulfilling its obligations until its performance is secured. Therefore, in such agreements, if a bankruptcy administration does not provide security, the other party can terminate the agreement. In this respect, bankruptcy administrations are entitled to continue the agreements which are in favour of the bankruptcy estates, but they are not obliged to do so.
What is the typical timeframe for completion of liquidation procedures?
The Execution and Bankruptcy Law allows for a six-month period for completion of liquidation procedures. However, this may be extended by the execution court. In practice, liquidation processes may be lengthy and the liquidation period is extended annually.
Role of liquidator
How is the liquidator appointed and what is the extent of his or her powers and responsibilities?
Liquidation is ordinarily executed if the debtor’s assets meet the liquidation costs. Ordinary liquidation is managed by the bankruptcy administration, which consists of three persons appointed by the execution court from the six nominees nominated by each creditor in the first creditors’ meeting. The powers and responsibilities of the bankruptcy administration are limited to those stated in the Execution and Bankruptcy Law. In this respect, the authority and company responsibility for unstated matters remain under the Execution and Bankruptcy Law. Bankruptcy administration should be separately authorised by creditors to sell the assets by way of negotiation rather than auction.
What is the extent of the court’s involvement in liquidation procedures?
The courts are involved in appointing the bankruptcy administration, hearing complaints against transactions of the bankruptcy administration, closure of liquidation and hearing requests for the termination of bankruptcy decisions.
What is the extent of creditors’ involvement in liquidation procedures and what actions are they prohibited from taking against the insolvent company in the course of the proceedings?
Creditors cannot initiate a new proceeding against the debtor during the bankruptcy liquidation. However, the secured creditors may continue the selling process of the pledged property. As per the law, creditors are entitled to:
- nominate the bankruptcy administration;
- authorise the bankruptcy administration to sell by way of negotiation;
- decide on the composition offer of the bankrupt and suspend the liquidation;
- decide on the continuation of litigations;
- object to the rankings determined by the bankruptcy administration; and
- complain about the transactions of the bankruptcy administration.
Creditors may also continue the litigations that are not followed by the bankruptcy administration.
Director and shareholder involvement
What is the extent of directors’ and shareholders’ involvement in liquidation procedures?
Directors and shareholders of the debtor are obliged to show the debtor’s assets to the bankruptcy office and comply with its requests. The authority and responsibilities of directors and shareholders continue only for the matters over which the bankruptcy administration has no power or responsibility. Shareholders can also request the termination of the bankruptcy decision when the debts are paid.
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