What is the Future of Bankruptcy Proceedings in Turkey After the Covid-19 Lockdown?

Introduction:

The legal and economic side effects of the Covid-19 outbreak will continue for some time across Turkey. A major area of interest for the future health of the Turkish economy is bankruptcy law. In this context, we aim to explain bankruptcy proceedings in Turkey in general and predict what will be expected in the future in the eye of Turkish insolvency law. This article will discuss (i) Pre-Covid-19 Turkey from the perspective of bankruptcy proceedings, (ii) Suspension of bankruptcy, bankruptcy postponement and concordat proceedings and cases in Turkey due to Covid-19, (iii) Expected changes in commercial life after Covid-19 and their reflection on enforcement and bankruptcy processes in Turkey respectively.

Pre- Covid-19 Turkish Bankruptcy Proceedings

Creditor’s or Debtor’s Request for Bankruptcy

In Turkey, bankruptcy proceedings are divided into two forms: (i) non-direct bankruptcy (bankruptcy proceedings over commencing execution proceedings); and (ii) direct bankruptcy, according to the Turkish Enforcement and Bankruptcy Law ("EBL"). In direct bankruptcy, a request for the bankruptcy of company from the commercial court is made directly without pursuing bankruptcy proceedings through the enforcement office, if particular conditions are satisfied. These proceedings can be initiated either at the request of creditors (Article 177 of EBL) or at the application of a debtor (Article 178 of EBL). In non-direct bankruptcy, a creditor sends a payment order to a debtor, and upon the finalization of payment order proceedings, the creditor requests that the commercial court commence a bankruptcy for the debtor.

If a debtor pursues their own bankruptcy proceedings, a declaration of goods showing the names and addresses of all creditors and information regarding assets must be submitted. Creditors can object to a bankruptcy request by intervening or appealing the case within 15 days of its announcement, alleging a debtor intends to delay execution of proceedings and payment of their debts. If the court does not find these objections reasonable, it will grant the bankruptcy decision unless the debt is not paid or deposited to the court within seven days.

Until 2018, creditors or debtors could also request that bankruptcy be postponed on the grounds that a debtor company’s financial situation could be improved.

Postponement of Bankruptcy

The Postponement of Bankruptcy process was in effect in Turkey from 2003 until 2018. The process was established to protect the interests of companies whose poor financial circumstances could reasonably be expected to improve within a certain timeframe. The regulation gave companies experiencing financial difficulties a last chance to prevent bankruptcy.

As a rule, the court would decide in favor of bankruptcy if a company or cooperative was reported to be in debt by its creditors or directors and this was confirmed by the court under  Article 179 of the Turkish Commercial Code. However, postponement of bankruptcy could be requested by authorized directors or creditors by presenting one or several projects that indicated a realistic possibility of improving the company’s financial situation.

Unfortunately, the postponement of bankruptcy proceedings did not work as well as had been expected when they were introduced in 2003. Practical and commercial reasons, such as the complexity and longevity of the procedure, resulted in problems with applying the process in the commercial setting. Companies became mired in the procedure, expected outcomes were not realized and both debtors and creditors were almost equally disrupted. In response, new proceedings called the “concordat” were introduced in 2018.

Concordat Proceedings

The provisions of Law No. 7101 entirely repealing the postponement of bankruptcy and amending the provisions of concordat set forth in EBL were published in the Official Gazette dated 15.03.2018. The concordat is an institution that aims to prevent the bankruptcy of companies in poor financial standing, to ensure that creditors receive payment within a certain timeframe, and that the commercial life of a company is not interrupted through the restructuring of debt.

There are significant differences between the postponement of bankruptcy and the concordat processes. Unlike the postponement of bankruptcy process, the concordat process aims to save the debtor and restructure its financial status. The concordat allows companies in debt to fix their financial circumstances much more easily and practically. Through the concordat proceedings: (i) creditors are able to control the process of a debtor’s restructuring by establishing a creditors’ board; (ii) debt structuring requires creditors’ approval allowing debtors to foresee the path to their debt structuring; and (iii) the time given to debtors is extended and, allowing them to complete the concordat proceedings more comfortably.

The main difference between the concordat and bankruptcy postponement in terms of legal procedure is that bankruptcy postponement required the balance sheets to prove the existence of a project capable of improving a company’s finances, whereas the concordat only requires the existence of a formally agreed or duly concordat project. The concordat project must be endorsed by an accountant, which provides a high degree of reliability to the project.  

However, as the Covid-19 pandemic has spread across the world, bankruptcy proceedings under the concordat process have been affected.  

Suspension in bankruptcy proceedings and concordat proceedings in Turkey due to Covid-19 

Covid-19 has spread rapidly in Turkey, as it has around the world. For this reason, with the decision of the President No. 2279 in the Official Gazette dated February 22, 2020, enforcement and bankruptcy proceedings were suspended with the authorization granted by the Article 330 of EBL that states: "in case of a pandemic, a common calamity or a war, enforcement proceedings may be suspended for a certain period in some parts of the country or in favor of an economic class through the President of the Turkish Republic’s decision."

Aside from enforcement proceedings for child support payments, the President’s Decree originally suspended all pending enforcement and bankruptcy proceedings, new enforcement and bankruptcy proceedings and interim attachment proceedings until April 30, 2020. However, due to the ongoing effects of Covid-19 the duration was extended to June 15, 2020. As of that date all proceedings have restarted.

Expected changes in commercial life after Covid-19 and their reflection on enforcement and bankruptcy processes in Turkey

The reintroduction of enforcement and bankruptcy proceedings since June has prompted much discussion regarding current procedures and the possibility of future amendments in Turkey.

Serious economic crises due to the pandemic are predicted both globally, and in Turkey, that will cause a dramatic increase in the number of the companies facing bankruptcy. Creditors, who have previously been legally prevented from collecting their receivables, will inevitably initiate bankruptcy proceedings.   

The expected number of companies that will be subject to bankruptcy proceedings indicates a deluge of work for enforcement and bankruptcy offices that will naturally slow down proceedings. This increased workload will affect both the physical circumstances of enforcement and bankruptcy offices and subsequent legal proceedings and will therefore likely affect the overall domestic economy adversely.

Economic sensitivity is high. The widespread domino effect of Covid-19 is strongly felt in all industries. The total collapse of economies is rumored across the world, including in our region. For this reason, there is a clear preference amongst all stakeholders to reach settlements prior to court proceedings, including the concordat. Although there had been an expectation of amendments from the authorities, driven by the real and increasing risk that many SMEs who comprise a significant part of the economy could be damaged irrevocably, in this pandemic environment the use of voluntary and obligatory mediation has skyrocketed. Parties are more sympathetic towards reaching settlements rather than commencing enforcement and bankruptcy proceedings, thereby avoiding the strict procedures of bankruptcy and concordat processes in such a chaotic period of time.

This article was created for the American Bankruptcy Institute (ABI Young & New Members Fall Newsletter 2020). You can see their website here