Insolvency 2022 Comparisons

Restructurings

According to the latest data released by the Banks Association of Türkiye (BAT), as of August 2022 and for the term between October 2019 and August 2022, the number of companies in each sector for which financial restructuring agreements have been conducted out of a total of 280 companies mainly operating in the manufacturing and construction sectors are as follows:

• agriculture, fishing, hunting and forestry – 4;
• mining and quarrying – 6;
• manufacturing industry – 61;
• energy – 6;
• construction – 52;
• wholesale and retail trade, motor vehicle services and personal and household products – 33;
• tourism – 30;
• transport, storage and communication – 25;
• real estate commission, rental and management activities – 8;
• education – 5;
• health and social services – 7;
• other services sector – 5; and
• companies in other sectors – 48.

Framework Agreements

A Framework Agreement is an agreement to be signed by and between the creditor institutions, the debtor and its insurers using a preformatted text approved by the Board of Directors of the BAT in due consultation with the Participation Banks Association of Türkiye and the Association of Financial Institutions.

The purpose of the Framework Agreement is defined as ensuring that debtors that are believed to add value to the economy and that temporarily fail in their financial debt repayments are able to continue their economic operations and fulfil their debt repayment obligations to the financial sector and to other creditors, including those in the public sector, under reasonable conditions and within the prescribed period of time to be determined by the creditor institutions.

The following restructuring agreements have been concluded as per the data referred to above.

• Within the scope of the Large-Scale Implementation of the Financial Restructuring Framework Agreement, 290 companies and TRY89.9 billion in debt was restructured.
• Within the scope of the Small-Scale Implementation of the Financial Restructuring Framework Agreement, 33 companies and TRY409 million in debt was restructured.

Concordats and Bankruptcy Applications

Throughout 2020 and the early part of 2021, the number of corporate insolvencies and concordats remained lower than expected due to the measures and financial support provided by Turkish government. However, recent changes in the exchange rate and financial problems, particularly those arising from the ongoing effects of COVID-19 and global financial issues, definitely had a huge impact on the volume of insolvency filings and led to a rising wave of concordat requests. There is no officially announced data regarding concordat and bankruptcy applications filed in Türkiye in recent years. Having said that, there have been quite a number of investments and new establishments despite the uncertainties in economy. According to the data in the report of the Union of Chambers and Commodity Exchanges of Türkiye dated 23 September 2022 (Report), in the year of 2022, 13,798 companies were closed while 87,775 new companies were established.

COVID-19 and Currency Fluctuations

The restrictions regarding COVID-19 are no longer in place; however, the ongoing effects of COVID-19 effects together with the currency fluctuations may be still considered as primary factors in restructurings, concordat applications and bankruptcies. Despite the drop in the value of the Turkish lira against foreign currencies, and the global impacts of climate change, the war in Ukraine and sanctions against Russia, Türkiye is still trying to uphold its position as one of largest and fastest-growing economies in this region.

The Report highlights the following findings in relation to the Turkish market:

• The number of companies established in the first eight months of 2022 increased by 23.3% compared with the same period of the previous year.
• The number of companies established increased by 38.5% compared with the same month of the previous year.
• In August 2022, 1,943 foreign joint venture companies were established.

Under Turkish law, the collection of receivables, bankruptcy and restructuring procedures are mainly governed by the Execution and Bankruptcy Law (Law No 2004) (EBL).

The postponement of bankruptcy provisions, enabling an insolvent company or person to avoid declaring bankruptcy if and to the extent that its financial situation is improvable, was abolished by the Law Regarding Amendments on the Execution and Bankruptcy Law and Certain Other Laws (Law No 7101) (ACL) amending the EBL.

Thereafter, recent significant changes were made to the EBL with The Amendment of the Execution and Bankruptcy Law and Certain Laws (Law No 7327), which includes provisions especially for the concordat process. The Amendment of the Execution and Bankruptcy Law and Certain Laws includes regulations especially regarding the concordat process to clarify some uncertain practices, such as:

• in accordance with the concordat project, if a pledged asset is not intended to be used by the operation or if its value will decrease or if it will be costly to keep the asset, the asset’s sale may be permitted;
• the parties will continue to perform their contracts during the temporary and definite period of concordat;
• a restriction regarding the transfer of those movable assets that are significant for the continuation of the operation has been included in the EBL, and the debtor may not proceed with a transaction without permission as of the temporary period decision granted by the court; and
• debts generated with the permission of the concordat commissar after the temporary period decision may be subject to execution proceedings even during the concordat process in the case of default, and these debts will be paid in priority to others.

Detailed regulations regarding financial restructurings/reorganisations and liquidations/insolvencies are also included in the Turkish Commercial Code (Law No 6102) (TCC).

The Amendment Communiqué on the Procedures and Principles Regarding the Implementation of Article 376 of the TCC (Communiqué No 31346) (Amendment Communiqué) obliges filing of insolvency under certain conditions in the case of a loss of capital. For further information, please see 2.3 Obligation to Commence Formal Insolvency Proceedings.

The Banking Law (Law No 5411) (BL) states provisions with regard to the insolvency of banks, and the Turkish Criminal Code (Law No 5237) regulates certain crimes concerning bankruptcy such as fraudulent bankruptcy and reckless bankruptcy.

Under Turkish law, bankruptcy, concordat, amicable restructuring and liquidation are the available insolvency and restructuring regimes.

Bankruptcy

Bankruptcy may be requested as follows.

• Ordinary bankruptcy – this involves a creditor bringing bankruptcy proceedings against a debtor.
• Special bankruptcy – where a creditor that holds negotiable instruments can bring special bankruptcy proceedings for negotiable instruments against the debtor.
• Direct bankruptcy – this is possible where the debtor’s liabilities are greater than its current assets; individuals authorised to manage and represent those companies, co-operatives, or any of the creditors, can apply for the debtor’s bankruptcy.

Concordat

The most common type of restructuring is concordat. Concord restructuring is proposed by the debtor or a creditor to reach a compromise over certain liabilities in accordance with a plan. The key aim is to present a probable success through a concordat plan, with no intention to cause any damage or loss to the creditors. The restructuring can be implemented in three different ways: (i) ordinary concordat, (ii) concordat in bankruptcy, and (iii) concordat through asset abandonment. Some restrictions are imposed on creditors enforcing their rights over companies under the temporary and definite period of concordat. During this temporary and definite period, no proceedings may be filed against the company and any proceedings previously initiated are suspended. Prescription periods and statutes of limitation shall be suspended.

Concerning the concord restructuring, if the court does not approve the concord or cancels the concord period, it will decide on the bankruptcy of the debtor upon the report of the concordat commissar.

Amicable Restructuring

In a restructuring by compromise, a corporation continues its existence despite its deteriorated financial situation by agreeing a certain payment plan and project with its creditors.

With respect to liquidation, a voluntary liquidation can be granted by resolution of a general assembly of a company, and a compulsory liquidation arises when a court approves a liquidation request.

Pursuant to Article 178/3 of the EBL, in the event that half of the debtor’s assets are confiscated by its creditors for their outstanding debts and the remainder is not sufficient to pay the debtor’s remaining outstanding debts and debts that will become due within one year, the debtor is obliged to declare insolvency and file a request for its own bankruptcy. As per Article 179 of the EBL, in the event it is determined that the company is in a state of indebtedness as per its interim balance sheet, the bankruptcy of the company shall be announced without any filing of execution proceedings.

Article 376 of the TCC provides that compulsory measures should be taken by the companies in the case of a loss of capital and insolvency, also known as technical bankruptcy:

• in the event that the capital and two-thirds of a company’s share capital and legal reserves are lost due to previous years’ losses as per the last annual balance sheet, the board of directors invites the general assembly to a meeting immediately, and remedial measures are rendered by the general assembly;
• in the event that at least two-thirds of the total share capital and legal reserves of the company are not sufficient to satisfy its debts as per the last annual balance sheet of the company, the company shall be terminated in the absence of a general assembly resolution agreeing to continue the business with its one-third of the share capital or inject capital corresponding to the lost capital; and
• if it is understood that the assets of the company fail to cover the debts of the company as per the annual and interim financial statements and the audit reports, the board of directors notifies this situation to the Commercial Court of First Instance where the company headquarters are located and requests the bankruptcy of the company.

In addition, notifying the court of insolvency is among the inalienable and indispensable duties of the board of directors of joint-stock companies.

Article 553 of the TCC states that members of the board of directors and officers and liquidation officers are liable for any loss incurred due to their negligence or breach of duties arising out of Turkish law or the articles of association of the company.

It is also worth noting that the board of directors and liquidation officers may face imprisonment if they fail to file an application for the bankruptcy of the company by indicating that the assets of the company are not sufficient to cover the debts.

Provided that the debtor is among those eligible to be subject to execution proceedings through bankruptcy, the creditor first applies to the execution office and files a bankruptcy proceeding. The payment order shall:

• state that the creditor may apply to the court for bankruptcy in the absence of a payment within seven days;
• note that, if the debtor has an objection claiming that it is not indebted and is not among those subject to bankruptcy, it shall notify the execution office accordingly; and
• remind the debtor that it may offer a concordat.

Bankruptcy may be demanded from the Commercial Court if no objection is raised within the time period stipulated in the payment order.

An appeal which may be filed against the bankruptcy decision made by the court after the trial process does not suspend the execution of the bankruptcy decision and the formation of the bankrupt’s estate. 

Upon commencement of the bankruptcy proceedings, all the attachable assets of the bankrupt party shall constitute an “estate”, wherever they may be, and shall be allocated towards payment of claims. All the assets that come into the possession of the debtor until the end of the bankruptcy proceedings shall be added to the estate. Interest shall continue to accrue on the claims that fall under the bankrupt’s estate. Bankruptcy proceedings shall commence with a judgment, and the commencement date of proceedings shall be specified in such judgment. The bankruptcy office shall notify the decision to those authorities stipulated by the law, such as the Title Deed Register, the Trade Registry, the BAT, stock markets and the Capital Market Board.

After the distribution of the monies, the bankruptcy office shall submit a final report to the court that gave the bankruptcy decision. Following recognition by the court that the bankruptcy proceedings have been completed, it shall close the bankruptcy proceedings and such closing shall be announced.

Bankruptcy lawsuits can be directly filed before the Commercial Court by a creditor in the presence of certain conditions specified by the EBL such as:

• the uncertainty of the debtor’s place of residence;
• the debtor refraining from fulfilling its commitments by suspending payments; or
• the debtor’s fraudulent acts violating the rights of the creditors.

Insolvency is not a precondition for commencing voluntary or involuntary proceedings. Having said that, the company’s indebtedness exceeding its assets is a reason for bankruptcy specifically indicated for capital companies and co-operatives.

The existence of a debt shall be legally sufficient to file an execution proceeding through bankruptcy. The scope and status of the assets shall not have any effect on initiating the proceeding. Execution proceeding through bankruptcy can be filed only against trading companies. In the bankruptcy lawsuit which may be filed by the creditor after the failure of the debtor to pay the debt subject to a payment order and the execution proceeding, the court grants a decision for bankruptcy if the debtor whose debt is determined through a trial process fails to pay the debt within the period granted by the court, regardless of its being indebted.

Indebtedness and insolvency are reasons indicated in the EBL as a condition for the filing of a direct bankruptcy lawsuit.

As per Articles 177 and 178 of the EBL and Article 376 of the TCC, insolvency is a requirement for a debtor’s request for its own bankruptcy.

There are specific restructuring and insolvency regimes applicable to banks, insurance companies and other financial institutions regulated by various laws such as the BL, Insurance Law No 5684, Financial Leasing Law No 6361 and Capital Markets Law No 6362.

With the new financial restructuring programme (Financial Restructuring Programme) implemented by the Banking Regulation and Supervision Agency (BRSA) since 2018 and Provisional Article 32 of the BL (PA 32), the out-of-court restructuring process has been widely accepted and implemented in Türkiye. The implementation period of PA 32 was extended for additional two years by a Presidential Decision dated 15 July 2021.

Debtors with large-scale financial obligations (an aggregate principal financial debt equal to or more than TRY100 million) and with small-scale financial obligations (an aggregate principal financial debt under TRY100 million) will be able to apply for restructuring under the respective terms and conditions indicated in the Framework Agreements prepared by the BAT with the mutual understanding of financial institutions and banks.

The following points are regulated within PA 32:

• the procedures and principles regarding financial restructurings will be determined by the Framework Agreements prepared in accordance with the provisions of the regulation issued by the BRSA; and
• debtors that are in a credit relationship with banks, financial leasing companies, factoring companies, and financing companies operating in Türkiye and other financial institutions defined in PA 32 and determined in the Framework Agreements may be subject to restructuring as a whole or in part with other debtors in their risk group.

The advantages of financial restructuring are that it is less procedural and more flexible, and the acceptance of indebtedness before a court is not compulsory. It is important that the concordat and financial restructuring can be harmonised, and a joint application can be more beneficial.

If a company is not able to pay its debts, if its receivables are not enough to recover its debts, or if it is under the threat of indebtedness, it may request an amicable restructuring or apply to its major creditors to benefit from the Framework Agreement.

Creditors and debtors may choose, subject to the approval of the court, one or more interim auditors with the necessary qualifications, knowledge and experience, who will personally undertake the management and administration of the activities of the debtor or supervise those activities until a decision regarding approval or rejection of the restructuring project is given.

It is also possible for the court to appoint a project auditor, whose authority shall be limited to supervising certain projects and regularly reporting the status of the same to the creditors.

Standstills and Waivers

Necessary measures – such as extending the maturity dates of loans, renewing the terms of loans, providing additional loans, reducing or giving up (partially or completely) the principal, interest, default interest, delay penalties and dividends and any other receivables arising from the loan relationship and reducing collateral – can be taken within the scope of financial restructuring.

The creditors may not, during the standstill period, take action to enforce security, make demands or speed up loan or other debt claims, bring legal proceedings against the company or, in certain circumstances, exercise rights of set-off.

Pursuant to paragraph 6 of PA 32, transactions within the scope of the Framework Agreement are exempt from certain taxes and fees.

Provisions in contracts classifying restructuring and/or the application of the debtor for restructuring as a default and/or a breach of the contract shall not be applicable.

If the restructuring is not eventually accepted by the court, the measures given by the court shall be terminated, and the pending lawsuits and proceedings shall continue.

The Role of Creditors

Creditors are classified on the basis of a number of principles such as:

• receivables that are essentially similar are placed in the same class;
• similar receivables may be placed in different classes for economic or commercial reasons;
• a creditor may be placed in more than one class due to the nature of its receivables;
• there will be separate classes for secured and unsecured creditors; and
• if the value of a pledged asset covers only a part of a secured receivable, the unsecured part is classified as an unsecured receivable.

It is not obligatory to make additional facilities available to a debtor under a Framework Agreement. However, if it is at any time deemed fit and necessary after the signing of such an agreement, any one or more of the creditor institutions may individually make additional facilities available to the debtor in compliance with the provisions of such agreement.

Additional collateral must be established in favour of all creditors unless those creditors that will not benefit from the collateral approve the granting of such collateral to other creditors.

In the case of a large-scale financial restructuring agreement, the approval of creditors that will not benefit from the collateral will not be sought if additional collateral will secure any additional loan to be granted to the debtor.

Creditors are obliged to act in good faith during the restructuring process and refrain from transactions that aim to harm other creditors’ rights.

The debtor is also prohibited from executing transactions aimed at providing a benefit to one or some of its creditors. For further information, please see 11.1 Historical Transactions.

Simulated contracts are bound to be declared void, and the debtor should refrain from transactions aimed both at reducing the debtor’s assets and at creating additional debt in the register.

With respect to restructuring to be implemented through the Financial Restructuring Programme, it is obligatory to restructure all receivables by all the creditor institutions in the event an agreement with a debtor under a Framework Agreement is signed by the majority of the creditors constituting at least two-thirds of the total receivables.

A cram-down mechanism may be agreed and implemented with the consensus of the creditors and debtor in an amicable restructuring.

Immovable Pledge

Security can be created for any kind of debt, present, future or contingent, by registering a mortgage over a real property in the records of the relevant Title Deed Registry where the real property subject to the mortgage is registered. The perfection of a mortgage requires a mortgage agreement to be entered into between the mortgagor and mortgagee at the Title Deed Registry and, thereafter, registration of the mortgage with the same.

Mortgages can be registered in first and subsequent degrees. The rank and the security amount of a degree are determined in the mortgage agreement. However, once the amount of the security is determined and registered, it cannot be increased without the consent of the mortgagees that have been registered in the subsequent degrees.

A mortgagee’s rights depend upon the degree in which they have been established, and this is naturally of particular importance in relation to foreclosure proceedings. Initially, the first-degree mortgagee receives its receivables in an amount equal to the security amount written in that degree from the proceeds of the foreclosure proceedings. If there remain any proceeds, the second-degree mortgagee receives the remaining part up to an amount equal to the security amount in the second degree. Payment of the foreclosure proceeds continues in such manner.

Mortgages registered in different degrees shall not be treated pari passu.

Where mortgages of different degrees have been created over the same real property and one of them is paid off or de-registered, the mortgagee next in order of priority is not entitled to move up to the vacant place in the register, unless the mortgagor and the mortgagee have agreed in the mortgage agreement that the mortgagee at the subsequent degree would move to higher degrees. This system granting the mortgagees at the subsequent degrees to move automatically to the higher degrees in case of de-registration of the prior degrees is known as the “Free Degree System”.

A mortgage registered over a real property constitutes an encumbrance over the real property subject to mortgage, yields, rents, and all buildings thereon including the integral parts and accessories.

Movable Pledge

A movable pledge is a type of pledge established on movable property, animals, rights or receivables in order to secure a receivable.

Physical possession of such movables is required to be transferred to the pledgee to perfect the pledge.

In respect to a pledge over a movable that is legally required to be registered with a private registry, such pledge is required to be registered with the relevant registry and in such cases physical possession of the movable is not required to be transferred to the pledgee.

Due to the lex commissoria prohibition, any kind of provision with respect to the transfer of title of a movable in case of default is null and void under Turkish law.

Pledge over vehicles and animals

Delivery is not a requirement provided that the registration of the pledge to the registry is required. Publicity is ensured by the registration in the registry for such a movable.

Pledge over rights and claims

A pledge over present and future revenues and/or receivables can be created by a pledgee and pledger entering into a written pledge agreement. Such a pledge agreement is not required to be registered with any register or authority; however, the debtors of the revenues and/or receivables are required to be notified of the pledge. A pledge over a bank account is possible and requires completion of the same procedure. Notification to the debtors is not a condition in respect to the perfection of the revenue lien but rather a condition for payment by each debtor to the pledgee.

Pledge over company shares

A pledge over the shares of a company can only be established by entering into a written pledge agreement and, in order to ensure the legal validity and enforceability of the pledge over the shares, physical possession of the pledged shares is required to be delivered to the pledgee, save as to further provisions in the articles of association of the company whose shares are subject to the pledge. If no share certificate representing the shares of the shareholders has been issued, then execution of a pledge agreement and annotation of the pledge in the share book of the company will suffice.

Pledge over bank accounts

An account pledge may be created and perfected by entering into a written account pledge agreement without registering it with any registry or authority but via notification to the account bank.

Pledge over Commercial Enterprise

Under Turkish law and in principle, in order to create a pledge over a movable, physical possession of such movable is required to be transferred to the pledgee in order to perfect the pledge. The purpose of the Establishment of Movable Pledge in Commercial Transactions Law (Law No 6750) (Pledge on Movable Properties Law) is to extend the exercise of the right of pledge on movables without their delivery as a security, to expand the scope of such pledgeable movable properties, to ensure the explicitness of pledges on movables, and to facilitate financing through alternative methods in converting the pledge into cash.

Movable properties on which a right of pledge may be established are listed in the Pledge on Movable Properties Law as numerus clausus.

The right of pledge may be established on existing or future movable properties of commercial enterprises or on proceeds from those properties. If a pledge is established on the entire commercial enterprise, all kinds of properties allocated for the activities of such enterprise will be deemed as pledged at the time of establishment of the pledge.

Other Securities

In addition to the aforementioned securities (most commonly used in Turkish commercial life), there are some other securities that might be issued by a debtor in favour of its creditor as a security for the payment and performance of its obligations such as a letter of guarantee from a bank or an assignment of receivables with security purposes.

A pledgee whose debt is not paid has the right to initiate execution proceedings pursuant to the EBL and to demand that the pledged property be sold and turned into cash through an auction. The procedure that the pledgee must follow in order to obtain the receivable varies depending on the type of pledge.

Under Turkish law, the pledgee is required to initiate judicial foreclosure proceedings. The lex commissoria provision prohibits the insertion of any provision into the pledge agreement enabling the pledgee to become title owner of the pledged property in case of default. Due to the lex commissoria principle mentioned in 4.1 Liens/Security, the pledgee may not gain the title of the property automatically; however, the pledgee may enter the auction sale to be conducted by the execution office and purchase the property.

Foreclosure of pledged property in relation to a non-performing loan shall be conducted by an execution office, and certain legal requirements (notification process, valuation expertise for the property, etc) have to be followed.

The provisions requiring the pledgee to file a foreclosure proceeding is not a mandatory provision of Turkish law regarding the pledge over shares, and if the parties agree to do so in the pledge agreement, the pledgee may foreclose the pledge over the shares privately without requiring a judicial proceeding.

In the event of the debtor’s bankruptcy, all existing assets and rights of the debtor are included in the bankruptcy estate, and as a rule, the properties, claims and rights to be acquired by the bankrupt, until the closing of the bankruptcy, are also included in the bankruptcy estate.

Pursuant to the Article 185 of the EBL, except for pledges established by third parties for the debt of the debtor, pledged properties are also included in the bankruptcy estate with the priority right of the pledgee since the pledgee will first collect its receivable after the sale of the pledged property and the deduction of the sale cost from the sale price.

Even if the debt that has been secured with a pledge is among those subject to bankruptcy, the creditor may only proceed by way of foreclosure of the pledge; however, in the case of insufficiency of the pledge amount, proceeding through bankruptcy or attachment shall also be possible.

In the event that a bankruptcy decision is granted against the debtor during the execution proceedings for the liquidation of the pledge, the pledgee shall continue the proceedings against the bankruptcy administration.

Receivables of preferred creditors are taken into consideration first by the bankruptcy office.

The liabilities of the bankruptcy estate are determined by a schedule of ranking.

In the first rank are the receivables of the employees, including severance and notice pay arising from the employment relationship and accrued in the year before the opening of the bankruptcy together with the severance and notice pay they earn due to the termination of the employment relationship due to bankruptcy. Also included are the debts of the employers to the foundations and institutions which have been established to form provident funds or other aid institutions for the employees and in order to perpetuate such. All sorts of alimony receivables arising from family law which accrued in the year before the opening of the bankruptcy are also counted in the first rank.

In the second rank are the receivables of persons whose properties are entrusted to the debtor because of parentship and appointed guardianship.

In the third rank are receivables which have been determined as preferential receivables.

In the fourth rank are unprivileged claims.

All the creditors in a rank must be paid before creditors in the following rank are paid.

The expenses of the bankruptcy administration have priority over insolvency receivables.

It is legally not possible for the bankruptcy administration to alter the order of priority.

Provided that the bankruptcy administration accepts the creditors’ claims and includes them in the rank of creditors, unsecured trade creditors’ claims are met in accordance with the principles explained in 5.1 Differing Rights and Priorities.

The secured and unsecured creditors will have influence in decision-making processes such as the second creditors’ meeting, which decides whether the bankruptcy administration shall continue its work, claims of ownership, whether the suspended lawsuits shall continue, and the sale of certain goods by bargaining. Likewise, any creditor may delay proceedings through filing objections and lawsuits against the liquidation transactions.

Please note that preliminary attachment decisions are classified as temporary measures granted by courts if there is a clear possibility that the claimant has a risk which cannot be removed in the future if such interim measure has not been granted.

The creditor of a “money debt” which has not been secured with a pledge and has not matured yet, may preliminarily attach the (i) movable or immovable assets held by the debtor or a third party, (ii) receivables, and (iii) other rights.

A preliminary attachment order shall be given in the following two circumstances:

• if the debtor does not have a definite place of residence; and
• if the debtor plans to hide his or her assets or run away with an intent to abandon his or her undertakings or does run away or acts fraudulently for this reason in a manner infringing upon the rights of the creditor.

Since the debtor may have potential damages arising from such interim measures which shall be applicable until the completion of the trial process, Turkish courts usually request security from the claimant to grant a preliminary attachment.

The receivables that are pledged, are granted the right of priority over the sales amount.

New-money claims may have priority depending on the terms of the restructuring project and payment plan. Provided that the secured creditors have agreed to terms granting priority rights to new-money claims, new-money claims may even have priority over the secured creditors. 

Further information in relation to priority claims in restructuring and insolvency proceedings is provided in 5.1 Differing Rights and Priorities.

A concordat is an agreement ensuring the payment of the debtor’s ordinary debts within a certain period of time in line with the offer, as a result of the acceptance of the project by the majority of the creditors and the approval of the court.

Concord and Amicable Restructuring

The main types of restructuring are concord restructuring and amicable restructuring.

Concord restructuring is proposed by the debtor or a creditor to reach a compromise over certain liabilities in accordance with a plan. The key aim is to present a probable success through a concordat plan, with no intention to cause any damage or loss to the creditors. The restructuring can be implemented in three different ways: (i) ordinary concordat, (ii) concordat in bankruptcy, and (iii) concordat through asset abandonment. During the temporary and definite period of concordat, no proceedings may be filed against the debtor and any proceedings previously initiated are suspended. Prescription periods and statutes of limitation shall be suspended.

In the case of a concord restructuring, if the court does not approve the concord or cancels the concord period, it will decide on the bankruptcy of the debtor upon the report of the concordat commissar. Creditors may apply to the court for the termination of the concord restructuring if it is found that the debtor acted in bad faith in having the restructuring proposal approved or that the debtor breached the provisions of the concord.

In the case of an amicable restructuring, if the restructuring project is successful, the debtor will continue to operate. If the debtor breaches the terms of the restructuring, the debtor should seek to agree with creditors and to have an amendment approved by the court to the restructuring proposal. In the absence of an agreement, the court may decide on bankruptcy.

Concordat Procedure

The concordat commissar invites all creditors to negotiate the debtor’s principal reduction, interest reduction, maturity, or other payment offers within the definite period.

If the debtor’s project is accepted with a majority of more than two-thirds in terms of the amount of receivables, the pledgee(s) that did not conclude an agreement with the debtor shall be subject to the longest maturity of the agreements made with the other pledgee(s), by applying the pre-default interest rate agreed in the contract between the parties, from the date of the concordat request.

Every pledgee whose payment has not been made in accordance with the agreement may appeal to the court against the approval decision and may request the termination of the project regarding the pledged claim from the court.

The concordat process, including the negotiation section, operates under supervision of the court.

Ordinary concordat may be examined under five headings as set out below.

Concordat by request

Any debtor unable to pay its due debts or in danger of not being able to pay on the due date may request a concordat in order to restructure its debts or avoid possible bankruptcy. The request shall be presented to the court with the concordat preliminary project, the list of the creditors, the amount of debt, and the privileged status of the creditors.

Temporary period decision

The court will immediately grant the temporary period decision upon the submission of the required documents by appointing a temporary concordat commissar in order to examine the chances of success of the concordat. The temporary period is three months, which may be extended by a maximum of two months upon request. The temporary period provides coverage for the results of a definite period.

The temporary period decision is announced in the Trade Registry Gazette and the official announcement portal of the Press Advertisement Institution and notified to the necessary third parties by the court.

Definite period decision

If it is understood that the concordat project is likely to be successful, a one-year definite period is given by the court. The court invites the debtor and, if any, the creditor(s) requesting the concordat to the hearing so that a decision can be made about the definite period. A board of creditors may be established by the court together with the definite period decision or within the definite period.

Transactions regarding the meeting of creditors

Within the definite period, the creditors are invited to declare their receivables within 15 days from the date of the announcement made by the concordat commissar. The debtor may accept, reject or partially reject the claims. The concordat commissar invites the creditors to a further meeting to discuss and negotiate the concordat project after the preparation of the same. The report with respect to the financial status of the debtor shall be provided to creditors at this meeting. The debtor is obliged to attend this meeting.

Approval of the concordat

In principle, the approval of the concordat project depends on the fulfilment of the following conditions as per Article 305 of the EBL.

• If it is understood that the offered amount in the ordinary concordat will be more than the possible amount that can be collected by the creditors in the event of the debtor’s bankruptcy.
• If it is understood that the collected amount in the case of cash conversion, or offered by a third party, will be more than the probable amount that would be available to the creditors in the event of the debtor’s bankruptcy.
• The offered amount should be commensurate with the debtor’s assets and resources.
• The concordat must have been accepted by the necessary majority.
• Unless the creditors expressly renounce this, sufficient security must have been provided for the receivables stipulated in Article 206/1 of the EBL.
• Expenses and fees required for approval must be reserved.

If the court finds the concordat project insufficient, necessary corrections may be requested. The approval decision is announced by the court and notified to the relevant authorities and third parties.

The debtor will continue its activities and business during the restructuring process. Agreements bearing perpetual liabilities may be terminated by the debtor if such agreements create a risk for the successful completion of the concordat/restructuring. There are also certain restrictions on performing a set-off. The court may decide that certain transactions are valid only with the permission of the commissar or if the commissar should carry out the operating activity in lieu of the debtor.

The restructuring shall not create a just legal ground for third parties to terminate their contracts with the debtor. Contracts excepting concordat request as a breach of the contract or just cause for termination or triggering the payment of the debt shall not be applicable. The principle behind these restrictions is to ensure a free environment for the debtor to continue its business without being under pressure from creditors.

With respect to amicable restructuring, the restructuring project’s terms will override all agreements executed with creditors affected by the project.

There are some restrictions on the rights of the creditors within the definite period such as (i) not being able to take execution proceedings against the debtor and the execution proceedings that have already been started being suspended, and (ii) interim injunction and precautionary attachment decisions not being applied. Exceptionally, execution proceedings regarding secured receivables and securities may be initiated or continued during the definite period; however, the pledged goods may not be preserved and sold.

Unless the approved concordat project contains a contrary provision, interest will cease to accrue on any unsecured receivables as of the definite period.

The debtor may not establish a pledge, be a guarantor, transfer the permanent assets of the company or perform gratuitous disposal of assets without the permission of the court. Before the court grants its permission for these transactions, the opinion of the concordat commissar and the approval of the board of creditors shall be obtained by the court.

The decisions concerning the insolvency are adopted by a qualified majority of creditors; in this regard, the creditors with major receivables will have influence in the decision-making process. A creditors’ meeting is the most authoritative organ for determining the principles and directions of liquidation. The resolutions of these meetings are binding not only on the creditors that attend the meeting but on all of the creditors.

The most important duty of the first meeting of creditors is to nominate candidates for the bankruptcy administration. Apart from this, urgent decisions for liquidation of bankruptcy shall also be taken.

The second meeting of creditors decides on whether the bankruptcy administration shall continue to its work, claims of ownership, whether the suspended lawsuits shall continue, sale of certain goods by bargaining, etc.

Creditors that did not approve the concordat will have the opportunity to claim their receivables against the persons jointly responsible for the debt as if the concordat had not been made. This option will be available only to the creditors that did not consent to the concordat.

As mentioned in 6.1 Statutory Process for a Financial Restructuring/Reorganisation, a pledgee that did not conclude an agreement with the debtor shall be subject to other arrangements.

In the restructuring process, the debtor is required to obtain the consent from the commissar and the competent court if it wishes to sell its assets or even the entire business during the concordat.

A payment to a creditor may not be made in the following circumstances:

• if the debtor of the debtor becomes the creditor of the debtor after the announcement of the temporary period;
• if the creditor becomes a debtor against the debtor after the announcement of the temporary period; or
• if the creditor’s receivable arises from a bearer instrument.

The share prices, or the capital share which has not been paid, may not be subject to any set-off and deduction transaction.

There is no specific regulation on this subject under Turkish law. Having said that, the creditors of a corporate group and the corporate group may agree on a private agreement aiming a combined restructuring.

Although a bankruptcy completely abolishes the power of disposition of the debtor, as a rule, the debtor’s power of disposition remains in a concordat.

As discussed in 6.2 Position of the Company, permission from the concordat commissar is required for some transactions as a condition of validity and the concordat commissar has supervisory duties. In the event that the debtor violates Article 297 of the EBL regarding the consequences of the definite period for the debtor or the warnings of the concordat commissar, the court may cancel the debtor’s power of disposition over its assets or may decide to reject the concordat request and initiate bankruptcy.

Please see 6.7 Restrictions on a Company’s Use of Its Assets.

Please see 4.1 Liens/Security.

Debts concluded with the permission of the concordat commissar after the temporary period decision, including loans given by credit institutions, are not subject to concordat terms in the ordinary concordat.

Under Article 297 of the EBL, the debtor cannot establish a pledge without the permission of the court as of the definite period. For further information, please see 6.2 Position of the Company.

Under Article 302/6 of the EBL, the court decides whether litigious receivables or receivables subject to delay conditions or indefinite maturity shall be considered in the calculations and the ratio of their participation in those calculations.

Creditors whose claims are objected to may file a lawsuit in this regard. The court confirming the concordat may grant a further decision to reserve the litigious receivables at the bank account until the finalisation of the concordat. Creditors that have not filed lawsuits may not demand payment, and the deposited amount shall be returned to the debtor’s estate.

Moreover, as indicated in 6.1 Statutory Process for a Financial Restructuring/Reorganisation, the debtor may question and challenge the claims made by creditors in the meeting.

Please see 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

The definite period and temporary period decision only have consequences for the execution proceedings that have been or will be initiated against the debtor. Third parties guaranteeing the debt cannot benefit from the concordat period.

Please see 6.5 Trading of Claims Against a Company.

The debtor has to pay its debts subject to the concordat in accordance with the concordat conditions at the time of the payment plan. Otherwise, the creditors of the concordat may apply to the court for the annulment of the concordat. This situation shall be possible as a result of the partial termination of the concordat. If the concordat is terminated completely, the court shall decide on bankruptcy.

According to lex commissoria, a pledgee may not take ownership of pledged assets. Payment of the debt by the debtor or turning pledged assets into cash is necessary.

Equity owners may retain ownership under a composition agreement, subject to the restrictions of such agreement.

Please see 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership, 2.3 Obligation to Commence Formal Insolvency Proceedings and 2.4 Commencing Involuntary Proceedings.

Under the TCC, a company may request its own bankruptcy from the competent court under certain conditions, or the liquidation of the company can be commenced upon a general assembly resolution. Thereafter, the assets of the company shall be sold, the debts shall be paid to the extent possible and eventually the company shall be terminated.

As per Article 166 of the EBL, the bankruptcy proceedings will start with the notification of the bankruptcy decision to the bankruptcy office. Further information notices are sent by the bankruptcy office to various official bodies such as the Land Registry Office and the Trade Registry. The bankruptcy decision is also announced in the newspapers and in the Trade Registry Gazette.

When the liquation decision is taken by the general assembly, this decision is registered with and announced to the Trade Registry by the board of directors, and the company enters the liquidation process.

The liquidation ends with turning the assets of the partnership into cash, collecting the receivables, distributing the net assets remaining as a result of the payment of the debts to the shareholders, and deleting the trade name from the registry.

During the liquidation, the legal personality of the company continues. The purpose of the company automatically turns into the purpose of liquidation. As a rule, the company cannot engage in any new transactions and activities. The phrase “In Liquidation” is added to its trade name. During liquidation, the duties and powers of the company’s organs become limited to those transactions that cannot be performed by the liquidator.

The bankruptcy office may encounter three situations after the estate in bankruptcy book is kept.

• If no estate belonging to the bankrupt is found, the liquidation will be suspended.
• If the value of the estate is not sufficient to cover the ordinary liquidation costs, then the simple liquidation procedure will be applied.
• If the value of the estate is sufficient to cover the ordinary liquidation costs, the ordinary liquidation procedure will be applied.

In bankruptcy proceedings, the purchaser of distressed assets has to follow strict procedural rules with regard to the realisation of those assets. Although there may be exceptions, the usual process shall include value assessment and public auction tages, and the property shall be sold to the highest bidder.

Assets in the bankruptcy estate are sold by the bankruptcy administration after the second meeting of creditors. However, the bankruptcy administration may sell certain assets immediately if such assets would be costly to preserve or would lose their value.

Both in restructuring and insolvency proceedings, the purchaser acquires the assets free and clear of any claims and liabilities.

Security cannot be released without creditor consent.

Pledged assets are turned into cash as soon as possible, and after deducting the preservation and selling costs, the pledged creditors are given rights in advance, in accordance with Article 185 of the EBL.

With respect to pre-packaged sales, unless decided otherwise by the general assembly, the bankruptcy administration can perform the sale of the active assets of the company by way of negotiation.

The creditors are invited to a meeting with the announcement of the ordinary liquidation. In this meeting, which is called the first meeting of creditors, the members of the bankruptcy administration are elected and urgent decisions are made for the liquidation of the bankruptcy. The authorisation of the second meeting of creditors is broader, and the second meeting of creditors may decide on all matters regarding the bankrupt’s estate.

Foreign Judgments

Turkish courts do not recognise insolvency judgments of other jurisdictions given for a Turkish entity. A judgment given for a foreign entity may be enforced in Türkiye following the enforcement and recognition process.

Turkish courts will only enforce a final judgment of a foreign court if the relevant judgment is not against the public policy rules of Türkiye and does not fall within the exclusive jurisdiction of the Turkish courts. A trading company against which enforcement is sought should not raise any objection before the Turkish courts to the effect that it was not duly summoned to, or represented at, the foreign court or that the judgment was rendered in its absence in violation of the laws of the foreign country.

Under Turkish law, compulsory execution is accepted as an absolute authority granted to the state within the boundaries of that country and is construed as a consequence of the state’s exercise of its sovereignty. Accordingly, the authority of the bankruptcy bodies is an issue of public policy and is within the exclusive jurisdiction of the Turkish courts.

Judicial powers are vested in and exercised by the courts where the registered addresses of the subject entities are in relation to insolvency filings. The competency of the court pertains to the matter of public order and is exclusive.

Foreign Debtors in Turkish Insolvency Proceedings

As a consequence of the principle of territoriality and the above traditional notion of the Turkish Civil Procedural Law, a debtor incorporated elsewhere shall not be subject to an insolvency proceeding in Türkiye. The branch office of a foreign entity may be subject to insolvency proceedings in Türkiye limited with its assets.

Depending on the type of its presence and provided that the foreign debtor has assets in Türkiye, it may be subject to restructuring proceedings.

The International Private and Procedural Law

The International Private and Procedural Law (Law No 5718) (IPL) is the principal law with respect to the recognition and enforcement of foreign judgments.

Article 50 of the IPL sets forth that enforcement of foreign court judgments regarding civil suits that have become final in accordance with the laws of the relevant foreign country is subject to an enforcement judgment to be issued and granted by the competent Turkish court.

According to Article 54 of the IPL, the competent Turkish court shall grant enforcement judgment subject to the following conditions.

• Existence of a reciprocity agreement between the Republic of Türkiye and the state in which the foreign court judgment was given, or existence of a current law provision or actual practice which enables enforcement of the Turkish court judgments in that foreign country.
• The foreign court judgment should have been given on a subject which does not fall within the exclusive jurisdiction of the Turkish courts, or if the defendant objects to it, the foreign court judgment should not have been given by a foreign court alleging to have jurisdiction though it has no real relation to the subject matter of – or the parties to – the suit.
• The foreign court judgment should not be explicitly contrary to the public order.
• The person against whom an enforcement order is requested should have been duly summoned to or represented in the court.

For a foreign judgment to be recognised and enforced, it should be a final and binding judgment.

The party requesting enforcement in Türkiye should file a certified copy of the judgment bearing an annotation regarding its finality and confirmed by an apostille.

As per Article 54 of the IPL, a judgment of a court established in a country other than Türkiye may not be enforced in Turkish courts unless:

• a treaty is in effect between such country and Türkiye providing for the reciprocal enforcement of judgments;
• there is de facto reciprocity in the field of enforcement of judgments between such country and Türkiye; or
• there is a provision in the law of such country which provides for the enforcement of judgments of the Turkish courts.

Türkiye is a party to several international treaties and has entered into bilateral treaties with several countries for the reciprocal recognition and enforcement of foreign judgments and judicial assistance in respect of commercial and civil matters.

Neither the UNCITRAL Model Law on Cross Border Insolvency nor the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments have been adopted by Türkiye.

Türkiye is a party to the following international conventions and, accordingly, co-ordination in cross-border cases should be arranged as per the terms of the same:

• the Convention on the Taking of Evidence Abroad in Civil or Commercial Matters; and
• the Convention on Civil Procedure.

Please see 8.1 Recognition or Relief in Connection With Overseas Proceedings and 8.2 Co-ordination in Cross-Border Cases.

In any suit or action against a Turkish counterparty in Turkish courts, a foreign party, as a foreign plaintiff, may be required to deposit security for court costs (cautio judicatum solvi), unless the plaintiff is considered to be a national of one of the contracting states of the Convention Relating to Civil Procedure made at The Hague on 1 March 1954 (ratified by the Republic of Türkiye by Law No 1574) or a national of a state that has signed a bilateral treaty with Türkiye duly ratified, containing, inter alia, a waiver of the cautio judicatum solvi requirement on a reciprocal basis.

Please see 8.1 Recognition or Relief in Connection With Overseas Proceedings.

The statutory officers shall be as follows:

• liquidator for liquidation proceedings;
• bankruptcy administration for bankruptcy proceedings; and
• concordat commissar for concordat proceedings.

Liquidator

Liquidators are the legal representatives of companies in liquidation. Liquidators are jointly and severally liable for any damage they cause by acting in violation of the TCC and articles of association. While the right of recourse to the partners in terms of tax originals is reserved, the liquidators’ responsibility is limited to the distributed amount. The liquidators may be liable against:

• shareholders (and possibly creditors), in the event that the assets of the company are liquidated below fair market values;
• creditors, in the event that announcements to creditors are not carried out properly or registered receivables are not duly paid; and/or
• the company, in the event that the liquidator fails to protect benefits for the company and causes damages which may even require sanctions.

The duties of the liquidator can be summarised as:

• taking necessary precautions, and completing the liquidation as soon as possible;
• determining the real financial situation of the company;
• turning the assets into cash properly;
• ensuring the payment of debts;
• applying to the shareholders in case the debts are more than the current and receivables; and
• distributing the net assets of the company among the shareholders.

Bankruptcy Administration

The principal duty of the bankruptcy administration is to complete the payments to the creditors by considering the interests of the bankruptcy estate and to properly report on all transactions and all requests/statements. A summary of further duties is stated below:

• deciding on receivable requests and action for recovery claims;
• collection of a bankruptcy estate’s receivables;
• examination of bankruptcy receivables, drafting of the list regarding the ranking of creditors;
• sale of the bankruptcy estate’s assets; and
• distribution of the money to the creditors as per the ranking and drawing up of the certificate of insolvency.

Concordat Commissar

The concordat commissar has to fulfil his or her duties personally, and prepare a report of all the transactions. The concordat commissar is obliged to treat all concordat parties equally. The concordat commissar may not disclose the secrets of the debtor without a legal obligation and a justification.

The main duties of the concordat commissar may be listed as follows:

• supervising the activities of the debtor;
• keeping the debtor’s assets book; and
• submitting interim reports on the subjects requested by the court.

Liquidator

One or more liquidators, who will carry out the liquidation process, may be appointed by the general assembly of the company or by the court. The liquidator(s) may be chosen from among shareholders or third parties; however, at least one of the liquidators must hold Turkish citizenship and reside in Türkiye.

Bankruptcy Administration

According to Article 223/1 of the EBL, a bankruptcy administration must consist of three individuals. At the first meeting of creditors, six candidates with sufficient knowledge and experience are selected to be presented to the execution court. The bankruptcy administration has no legal personality. However, the authority of the bankruptcy administration to represent the bankruptcy estate cannot be transferred to another individual.

Concordat Commissar

After the definite period decision, one or more Turkish citizens with the necessary knowledge and experience are appointed as the concordat commissar by the Commercial Court that examined the concordat request. Since the decision regarding the appointment of the concordat commissar is an ex parte proceeding decision, an appeal can be made against this decision. The commissar should have an undergraduate degree from a four-year university or from an equivalent foreign or local institution as per the Board of Higher Education and a minimum of five years of professional experience. Those individuals who have been dismissed from a profession or the civil service and banned from public service may not be appointed as a concordat commissar.

The members of the board of directors should:

• act prudently and diligently in performing their duties and managing the company;
• keep information confidential at all times during and after their term of duty;
• protect the interests of the company and its shareholders;
• not perform any transaction of a commercial nature within the scope of the company in their accounts unless so authorised by the general assembly as per Article 396 of the TCC; and
• refrain from participating in board of directors’ meetings related to matters concerning an interest of their own.

If the members of the board of directors do not fulfil their obligations arising from law or the articles of association, the directors are liable to the company and to the shareholders and creditors of the company for any losses incurred. In addition, there are also special liability cases such as tort liability and liability stemming from false statements regarding the capital of the company.

Examining the books and records of the company, proposing measures when necessary, calling the general assembly, issuing an interim balance sheet, negotiating with creditors, and requesting bankruptcy are among the non-transferable duties and authorities of the board of directors, and the members of the board shall be liable for any damage they cause to the company, shareholders and creditors in the event of a breach of their obligations. The board of directors may avoid responsibility by proving that they fulfilled their duties with due care and attention.

As explained in 2.3 Obligation to Commence Formal Insolvency Proceedings, Article 376 of the TCC, which regulates the compulsory measures that companies must take in case of loss of capital and insolvency, also assigns a special duty to the members of the board of directors.

Along with legal responsibility, the directors also have criminal liabilities such as failing to apply for bankruptcy despite knowing that the company is in a state of indebtedness.

In the event that the records, financial statements and balance sheets of a company are found to be false, incorrect, fraudulent, deceptive or misleading, the board of directors shall be liable for damages sustained as a result of such and similar non-compliances.

In addition, as per Article 333/a of the EBL, individuals who have management authority in companies and do not pay the debts of the commercial enterprise partially or completely with the intention of harming the creditors, shall be sentenced to imprisonment and fines in the event of damage if these transactions and actions do not constitute another crime, and upon the complaint of a creditor.

In accordance with Article 513 of the TCC, in the event of the company’s bankruptcy, the members of the board of directors are obliged to return any money that they received in return for their services under a profit share or similar scheme, where these exceeded the market price. Such payments must have been made within the three years prior to the announcement of bankruptcy.

As mentioned in 10.1 Duties of Directors, members of the board of directors are liable for any damage that the company, its shareholders and the company’s creditors incur if they violate their obligations arising from the law and the articles of association through their own fault. Any creditor of the company and/or the statutory officers may request damages from the board in such a case, provided that the compensation shall be payable to the company.

There is no limitation on the debtor’s assets and rights before the bankruptcy is initiated. Therefore, sometimes debtors may perform dispositive transactions in cases where there is a possibility of a bankruptcy decision or a judgment that they had the intention to smuggle assets from creditors or through suspicious transactions, even if there is no such intention. These dispositive transactions of the debtor are valid as there are no restrictions during this period. If the creditors cannot receive their receivables from the debtor’s other assets, the creditors may file an action for annulment in order to cancel the suspicious dispositive transactions made by a debtor before bankruptcy in order to smuggle assets from its creditors.

The debtor’s pre-insolvency transactions can be challenged within the hardening periods.

The one-year hardening period applies to:

• a security interest if such security interest is created to secure an existing debt and the security collateral provider has not committed to provide a security interest at the time of incurring a debt;
• payments made via instruments other than cash or ordinary payment instruments;
• payments made before their due date; and
• certain annotations to the title deed registers.

These transactions must have been made within one year prior to the bankruptcy of the debtor or the attachment of its assets in order for these transactions to be annulled.

The two-year hardening period applies to donations or gifts.

The five-year hardening period applies to transactions made by the debtor with one of its creditors with the aim of harming its other creditors provided that the creditor with whom the transactions were made was aware of the insolvency and the aim of the debtor at the time of the transaction.

Upon the decision of the court granted for the cancellation of the transaction, the assets subject to the decision shall again be involved to the debtor’s assets. The rights of a third party that has acquired title for an asset of the debtor in good faith shall be protected and the transaction shall not be cancelled.

As explained in 11.1 Historical Transactions, the debtor’s dispositive transactions subject to cancellation are divided into three groups as per the EBL.

The look-back periods are periods of prescription and therefore they are taken into account ex officio.

The bankruptcy administration files actions for annulment as the legal representative of the bankruptcy estate. If filing an action for annulment by the bankruptcy administration is considered unnecessary at the second meeting or any subsequent meetings of creditors, the right of filing a lawsuit may be given to the creditor or creditors that request it.