Effects of The Law No. 7101 on The Amendments in Enforcement and Bankruptcy Law and Certain Laws on The Institution of Concordat

ADMD Law Firm
Lara Turkay

I. OVERVİEW

The Law No. 7101 on the Amendments in Enforcement and Bankruptcy Law and Certain Laws (“Law No. 7101”) was published in the Official Gazette dated March 15, 2018 and numbered 30361. The Law No. 7101 stipulated important amendments in Enforcement and Bankruptcy Law No. 2004 (“EBL”) regarding the institution of postponement of bankruptcy and institution of concordat particularly.

While the postponement of bankruptcy is abolished, the application of concordat as a compulsory peaceful agreement is rendered more applicable.

A concordat period dominated by ban of taking proceeding against the debtor and debtor’s assets are taken under protection in order to achieve success in concordat. On the other hand, creditors benefit from the institution of concordat which is more advantageous than bankruptcy institution by waiving from their receivables partially or postponing the maturity date.

II. APPLICATION TO CONCORDAT

Any debtor whose financial situation has deteriorated and who is unable to pay the matured debt or under the risk of nonpayment of the debt even if it is due may request concordat in order to take advantage of the concordat provisions or to avoid a possible bankruptcy.

The concordat can be requested with a reasoned petition by creditors who are eligible to request bankruptcy of a debtor.

The competent court for application and approval of the concordat is the commercial court of first instance where the debtor's treatment center is located, and the competent court for the debtor who is not subject to bankruptcy is, commercial court of first instance in the debtor's settlement.

In order to benefit from the concordat provisions, a reasoned petition and the documents listed in the Law No. 7101 are attached to the application request. The date of the financial statements may be up to 45 (forty-five) days before the application date.

In case the application is made by one of the creditors, a period is given to creditor to submit the necessary documents. If the documents are submitted within the time, a temporary concordat period is given otherwise temporary concordat period is not given and the concordat request is rejected.

III. TEMPORARY PERIOD

With the Law No. 7101, a temporary and definitive period distinction was made. If the competent authority for the concordat application determines the existence of the prerequisites and competence of the documents, a 3 (three) month temporary period is given to debtor.

Upon opinion of the concordat commissioner or the application of debtor with the opinion of the commissioner, the temporary period can be extended for another 2 (two) months before the 3 (three) month period expires. The total temporary period cannot exceed 5 (five) months.

A temporary concordat commissioner is appointed to check whether the concordat will be succeeded or not. Precautions can be taken to protect the debtor's assets during this period if it necessitates.

The ban of taking proceeding against the debtor begins with the temporary period decision. It becomes effective and results like the definitive period. According to this, provisions between Article No. 294 and 297 regarding the definitive period in the EBL find application area for the temporary period too. Transactions that violate the ban of taking proceeding are considered invalid.

Ban of taking proceeding only applied for debtor therefore creditor may apply to joint debtors and guarantors. Since the ban of taking proceeding is only valid during the temporary and definitive periods, with the expiration of these periods, proceedings may be commenced again.

The debtor who applies for concordat within the temporary period and the creditor who requests concordat are invited to the hearing. The temporary period commissioner submits his written report before the hearing and if it is deemed necessary, he is invited by the court to the hearing to give a declaration.

IV. DEFINITIVE PERIOD

The court decides upon definitive period in the temporary period. If concordat is expected to be successful, 1 (one) year definitive period is given to debtor.

In difficult situations, the definitive period can be extended up to 6 (six) months by the court upon the commissioner's reasoned report and request that explains this situation, or upon the request of the debtor by taking the opinion of the commissioner. Therefore, the temporary period and definitive period are calculated as maximum 23 (twenty-three) months.

a. Results of Definitive Period in Terms of Creditors

a1. Execution proceedings are not appeared during the definitive period including the proceedings in Law on the Collection Procedure of Public Receivables No. 6183 too.

Therefore, it is not possible to send a payment order, to seize and to make sales.

Thus, it enables debtor to make concordat preparation easily and without liquidation of asset.

As a rule, a lawsuit can be filed against the debtor according to provision which bans only proceeding but it is accepted that bankruptcy case cannot be opened during the period because the bankruptcy case is not independent from the execution proceeding.

a2. The continuing proceedings stop, and existing attachments are preserved.

Even if the proceedings stop, the attachments continue because attachments are lifted only if the concordat is approved.

Although debtor may use the attached properties, a concordat commissioner may be appointed to eliminate the risks of depreciation of value in case the concordat period is lifted.

a3. Provisional injunction and provisional attachment are not applied otherwise they will be invalid.

a4. Prescription which is interrupted by a proceeding and final term do not process.

This provision aims to protect the creditors against the ban of taking proceeding which is in favor of the debtor. The concordat period is added to prescription and final term, but these terms continue to process in terms of the transactions that creditors can do in the concordat period.

a5. If there is no contrary provision in the confirmed concordat project, interest does not charge on the receivables that have been not pledged from the date of definitive period.

Parties may agree on charging interest. As a rule, interest charges in favor of pledged receivables which are regulated exceptionally.

a6. If a contract on transfer of future receivable has been made before the concordat period and the transferred receivable was born after the concordat period, this transfer becomes invalid. In this case, as the transfer agreement will be invalid, the receivable is not transferred to transferee.

The ban of taking proceeding arises with the decision of the concordat period, but there are exceptions.

a7. Attachment proceeding is allowed for the privileged receivables listed in the first rank of Article 206 in the EBL as workers’ receivables including severance and notice pay, employer’s debts to associations and claim for maintenance arising from family law. This provision prevents the bankruptcy proceedings by stating that attachment proceeding is allowed.

a8. During the concordat period, proceedings through converting the pledge into money due to pledged receivables may be initiated or proceedings that have already begun may continue but protective measures cannot be taken, and pledged goods cannot be sold because of these proceedings.

The aim of this provision is protection of pledged creditors. Since the concordat is not obligatory for pledged creditors, even the approval of the concordat will not prevent converting pledge into money.

a9. The ban of exchange in the bankruptcy is valid in concordat period too.

a10. Receivables except for money are converted into money on a par with the receivable by creditor. Commissioner is informed by the creditor.

b. Results of Definitive Period in Terms of Contracts

b1. Regardless of whether the counterparty of the contract is affected by the concordat project or not, contracts which debtor is a party and which are important for the continuity of the enterprises’ operations are not terminated due to violation of the contract, just cause or maturity of debt in case debtor requests concordat.

b2. The concordat period does not affect the validity of the contracts on its own.

b3. If there is a permanent debt relationship that prevents the concordat success, it may be terminated with the opinion of the commissioner or with the approval of the court.

c. Results of Definitive Period in Terms of Debtor

c1. The debtor can continue his work under the supervision of the commissioner. The court may decide that some proceedings are made only with the permission of the commissioner, or the commissioner will continue the business instead of the debtor.

c2. As of the decision of the court, debtor cannot establish a pledge, be a guarantor, transfer the immovable and enterprise permanently or even partially, cannot make installments and make gratuitous acquisition without the permission of the court; otherwise the transactions will be invalid.

c3. If the debtor acts against this provision or the warnings of the commissioner, the court may remove the debtor's power of disposition over his assets.

If the third person, who is party of the legal relationship, knows or needs to know the contradictory acts, third person is not considered as bonafide person.

If the debtor's financial situation improves while the definitive period continues or if the concordat request is rejected and bankruptcy is opened, the definitive period must end early. In case of the following situations, concordat request is rejected, and bankruptcy is opened:

• If it is necessary to open bankruptcy to protect the debtor's assets for the debtor who is subject to bankruptcy,
• If it is understood that the concordat cannot be successful,
• If the debtor acts in contradiction with the Article No. 297 of the EBL (provisions relevant to results of definite concordat period in terms of debtor),
• Presence of intention of damage in debtor’s acts or
• If an equity company or a cooperative waive the request for concordat in the case of excess of liabilities over assets.

The former Enforcement and Bankruptcy Law was observing the debtor's truth and honesty in his business in terms of concordat period. The early termination of the concordat period in the presence of intent of damage indicates that the honesty principle is sought implicitly.

V. CONCORDAT COMMISSIONER AND BOARD OF CREDITORS

The concordat commissioner, whose duties are listed in the article 290 of the EBL, completes the procedures for the approval of the concordat within the definitive period and returns the file to the court including his report. According to the Regulation on the Concordat Commissioner and the Board of Creditors, 3 (three) commissioners can be appointed to a company according to the size of the company. A person cannot serve as commissioner or temporary commissioner in more than 5 (five) files at the same time.

Complaints about the commissioner's transactions are resolved by the commercial court of first instance. The board of creditors oversees the commissioner's activities; advises the commissioner and if it is required by law, gives opinion to the court. If the board of creditors does not find the commissioner's activities adequate, creditors may request court to replace the commissioner with a reasoned report. The court decides on board of creditor’s request after listening the debtor and commissioner.

VI. APPROVAL OF CONCORDAT

a. Conditions for Approval of Concordat

To approve the concordat, concordat project must be accepted with the working majority. The concordat project is deemed to be accepted if it has been signed by a majority exceeding half of the recorded creditors and receivables or quarter (1/4) of the recorded creditors and 2/3 of the receivables. Only creditors who are affected from the concordat project may vote in the concordat project voting.

The amount offered in the ordinary concordat shall be more than the possible amount that the creditors may receive from the bankruptcy. In the concordat as general assignment for the benefit of creditors, the revenue obtained by converting into cash or the amount offered by the third parties shall be more than the amount that may be obtained with the liquidation in bankruptcy. Therefore, concordat shall be more advantageous for creditors than bankruptcy.

The proposed amount shall be proportional to the debtor's resources. The fate of the expected rights is appreciated by the court. Minimum amount is not sought. The fact that the concordat is obligatory for creditors who have not accepted the concordat project and have not announced the receivables, make proportionality important.

Unless privileged creditors renounce explicitly, their receivables should be collateralized. With the Law No. 7101, the collateral obligation of the debtor was alleviated. Each of the creditors may waive the guarantee in terms of their own receivables. A conviction shall be carried on the ownership of right in order to provide collateral for receivables having indefinite term and contested or conditional receivables.

Costs of trials and fee must be deposited to the court cash desk.

b. Results of Concordat Approval

Concordat becomes binding with the approval.

Concordat becomes obligatory for creditors. The receivables are unprivileged receivables which are not pledged.

The moment of concordat’s birth determines the creditors who are affected from concordat. Concordat is obligatory for the receivables that were born before the announcement of the concordat period and receivables which are not secured with pledge or the receivables that were born until the approval of the concordat.

Pledged receivables and table debts are not affected by the concordat. Pledged creditors acquire their receivables primarily when the pledged goods are converted into cash.

Approval of the concordat removes the attachments, which were initiated before the temporary period and which have not yet been converted into money. Thus, the debtor gains the power of disposition again.

Debtor’s commitments made one of the creditors and exceeding the agreed amount in the concordat project are invalid. This provision stems from the principle of pars condition creditorum (treating creditors equally). Debtor shall not reconcile the concordat by promising more than negotiated amount.

If concordat is not approved, the court decides to reject the concordat request. In the presence of a debtor who is subject to bankruptcy and one of the reasons for direct bankruptcy, the court will decide the debtor's bankruptcy ex officio.

VII. WITHDRAWAL OF THE CONCORDAT

Concordat can be partially or completely terminated.

In partial withdrawal, every creditor who cannot collect her/his payment in accordance with the concordat project may withdraw the concordat project that affects her/him by applying to the court that approved the concordat, while retaining the new rights which have been acquired in accordance with the concordat.

In complete withdrawal, each creditor may request the withdraw of the concordat, which has been malformed as a result of bad faith, from the court that has given the approval decision.