Concordat, which means the postponement of debts, is the situation where the debtor settles their debts by agreeing with the creditors in the manner prescribed by law. The primary aim of the concordat institution is to allow the debtor, who is unable to pay or is in danger of being unable to pay their due debts, to settle their debts by reaching an agreement with their creditors, while ensuring that the creditor receives the amount owed to them.
According to the law; any debtor who is unable to pay their debts when they fall due or who is in danger of being unable to pay, may request a concordat in order to pay their debts through the extension of the payment term or a reduction of the debt (concordat) or to avoid a potential bankruptcy. (Turkish Enforcement and Bankruptcy Code, Art. 285/1). As can be understood from the relevant text of the law, filing a request for concordat depends on certain conditions being met.
One of these conditions is the existence of a debtor who is unable to pay their debts when due or is under the risk of being unable to pay. It is necessary for the debtor to be eligible for the concordat process, possess the financial resources necessary for the restructuring of the debt, and be in a position to make payments to the creditors. Another condition is the request of the debtor and the approval of the creditors. The request must be made by the debtor through the court, and if accepted by at least half of the creditors or in certain cases by two-thirds of them, the concordat procedure may begin. The request should be submitted to the Commercial Court of First Instance at the location of the company’s headquarters if the debtor is subject to bankruptcy, or to the court at the debtor’s place of residence if not. It is also important to note that the right to file for concordat is not solely granted to the debtor, as a creditor who has the right to request bankruptcy also has the right to file for concordat if the debtor is subject to bankruptcy (Art. 285/2). Similarly, the party requesting the concordat is also required to deposit the concordat expense advance as specified in the tariff issued by the Ministry of Justice. (Art. 285/4).
Documents Required to File a Concordat Request under Turkish Law
When filing a concordat request with the court, certain documents must be submitted to the court. These documents are:
a) Preliminary concordat project: This is the project that shows when, how, and in what manner the debts will be paid and how the necessary resources will be obtained.
b) Documents showing the debtor’s financial situation: These include the balance sheet, income-expense statement, documents showing receivables and payables, and any other documents showing the debtor’s assets.
c) List of creditors: A list showing the creditors, the amounts owed, and the privileged status of the debts.
d) Comparison table between the preliminary concordat project and assets: A table that compares the amount creditors are expected to receive according to the offer in the preliminary concordat project with the potential amount they could receive in the case of the debtor’s bankruptcy.
e) Financial analysis reports: Reports and supporting documents prepared by independent audit organizations that show that the preliminary concordat project is feasible. This condition does not apply to small businesses under Article 28 of the Law No. 635 on the Organization and Duties of the Ministry of Science, Industry, and Technology, issued on June 3, 2011.
The dates of the submitted financial statements can be up to 45 days before the date of application.
Types of Concordat in Turkish Law
According to the law, there are three types of concordat, which are: ordinary concordat, concordat after bankruptcy, and concordat by surrendering assets.
1)Ordinary Concordat: Regulated under Articles 285-308 of the Turkish Enforcement and Bankruptcy Law (İİK), the ordinary concordat is when a debtor requests a concordat before bankruptcy and the request is approved. For this reason, the ordinary concordat is also referred to as a bankruptcy-preventing concordat. The ordinary concordat itself is divided into three types: reduction concordat, term concordat, and hybrid concordat. The reduction concordat, or percentage concordat, is when creditors waive a certain percentage of their receivables, and the debtor makes the payment based on this percentage. The term concordat is a type of concordat that foresees the payment of the entire receivable in different and specific terms. The hybrid concordat is a type of concordat in which both the creditor and the debtor reach an agreement regarding both the percentage of the receivable and the terms of payment.
2)Post-bankruptcy Concordat: This type of concordat occurs when the debtor requests a concordat after a bankruptcy decision has been made, and upon acceptance of the request, the bankruptcy decision regarding the debtor is completely lifted.
3)Concordat through the Surrender of Assets: A concordat through the surrender of assets is a type of concordat where the debtor grants creditors the authority to dispose of some or all of the debtor’s assets.
Moratorium in the Concordat Process in Turkish Law
The provisional moratorium decision is a decision given by the court between the submission of the concordat request and the confirmation process, with the aim of protecting and bringing the debtor’s assets under control. In order for this decision to be issued, the required documents must be fully and completely submitted to the court, and once this is done, the court is obligated to issue a provisional moratorium decision, with no discretion in this regard. (Bankruptcy and Enforcement Law, Art. 287)
If the court issues a provisional moratorium decision, a provisional concordat commissioner is assigned to closely examine whether the concordat will be successful. Depending on the number and amount of claims, three commissioners may be appointed. The default duration of the provisional moratorium is 3 months, but before this period expires, an extension may be requested by the debtor or the provisional commissioner appointed by the court, with a justification. The provisional moratorium decision can be extended for up to 2 additional months. If the person requesting the extension is the debtor, the opinion of the provisional commissioner will also be considered when evaluating the request. There is no legal recourse against the acceptance of the provisional moratorium request, the appointment of the provisional commissioner, or the decision to extend the provisional moratorium. However, in the public announcement regarding the provisional moratorium decision, creditors will be informed that they can object within seven days from the publication date by submitting a petition, asserting that there is no condition that requires the granting of a concordat moratorium, along with their evidence, and request the court to reject the concordat request. (Bankruptcy and Enforcement Law, Art. 288/2)
The final moratorium decision is issued when, during the provisional moratorium period, the debtor or, if applicable, a creditor who has requested a concordat is invited to a hearing. Before the hearing, the provisional commissioner submits a report, and if deemed necessary, the provisional commissioner will be present at the hearing to provide their statement. During the evaluation, objections raised by creditors are considered, and if it is determined that achieving the concordat is possible, the court will issue a final moratorium decision for a period of 1 year. This period may be extended for up to 6 more months if deemed necessary.
Once the final moratorium decision is issued, the debtor can continue their business under the supervision of the commissioner. However, the court may decide that certain transactions can only be carried out with the commissioner’s approval or that the commissioner will carry on the business activities on behalf of the debtor. (Amended second paragraph: 9/6/2021-7327/5 Art.) The debtor, without the court’s permission, cannot establish liens, act as a guarantor, or make gratuitous dispositions after the moratorium decision; they cannot transfer or encumber immovable property, movable property crucial for the continued operations of the business, or essential business equipment. Any such transactions are invalid. The court must obtain the commissioner’s opinion before making a decision on these transactions.
The court may also approve the establishment of a creditors’ committee when issuing the final moratorium decision. This committee can consist of a maximum of 7 creditors representing different types of claims and ensures the protection of the creditors’ rights. The creditors’ committee meets at least once a month and makes decisions by a majority vote. The committee can make suggestions to the commissioner and the court and may request the removal of the commissioner if necessary.
If the intended improvement of the concordat occurs before the expiration of the final moratorium, the commissioner must inform the court with a written report, and the court can revoke the final moratorium and reject the concordat request.
At the end of the final moratorium period, the concordat commissioner publishes an announcement for creditors to report their claims. Creditors who do not respond to the announcement cannot participate in the negotiations regarding the concordat proposal. After the announcement, the commissioner will request the debtor to provide an explanation about the claims presented. Following the review of the claims, the debtor’s explanations, and documents, the commissioner will prepare a report regarding the claims. After this process, the commissioner will invite the creditors to a meeting to discuss the concordat proposal. Creditors can review the documents before the meeting. The meeting is chaired by the commissioner, and the debtor must also be present to provide explanations. The concordat proposal can be accepted if it is approved by more than a quarter of the creditors whose claims are lost and two-thirds of their claims, or by more than half of the lost creditors and their claims. Creditors whose claims are not affected by the concordat proposal cannot vote at the creditors’ meeting.
Once the concordat proposal accepted at the creditors’ meeting is approved by the court, the effects of the concordat begin. One of these effects is that any high-value promises made by the debtor, as stated in the concordat proposal, become invalid. Another effect of the concordat is that any liens imposed before the provisional moratorium decision that have not been converted into money will be lifted.
Legal Recourses Against the Concordat Decision in Turkish Law
According to Article 287 of the Enforcement and Bankruptcy Law (İİK), no legal recourse can be made against the acceptance of the temporary suspension request, the appointment of the temporary commissioner, the extension of the temporary suspension, and the decisions regarding precautionary measures. Similarly, pursuant to Article 293 of the İİK, no legal recourse can be made against the acceptance of the suspension request or the rejection of the request to lift the suspension.
As a result of the evaluation of the request for a final suspension, if the debtor, against whom no bankruptcy decision has been made, is rejected for the concordat request, the debtor or the creditor who requested the concordat (if any) has the right to file an appeal within two weeks from the notification of the decision. (İİK Art. 293/2) The decision made by the Regional Court of Appeal is final. However, in the case of a bankruptcy decision being made against the debtor and the rejection of the concordat request, the provisions regarding legal recourse against the bankruptcy decision will apply.
Court of Cassation Decisions in Turkish Law
“…Bankruptcy postponement (concordato) is a legal remedy through which a debtor who is unable to pay their debts when due, or any debtor, reaches an agreement with their creditors under certain conditions to pay off their debt, which is then validated by the competent commercial court (Turkish Legal Dictionary, Ankara 2021, p. 709). Although bankruptcy postponement is not defined in the Turkish Bankruptcy and Enforcement Law (İİK), the doctrine explains it as a collective enforcement mechanism where, with the approval of the authorized authority (court), a debtor’s entire unsecured debts are accepted by creditors with a qualified majority under the law, and the debtor may be relieved from part of their debt and/or the method of payment may be altered in their favor, replacing harsher enforcement methods like garnishment and bankruptcy (Kuru, Baki: Bankruptcy and Enforcement Law, Vol. IV, Istanbul 1997, p. 3585; Tanrıver, Süha/Deynekli, Adnan: Concordato Approval, Ankara 1996, p. 29; Kale, Serdar: Questions on Concordato (Non-Bankrupt and Bankruptcy Concordatos), Istanbul 2017, p. 2; Pekcanitez, Hakan/Erdönmez, Güray: Concordato under Law No. 7101, Istanbul 2018, p. 4; Altay, Sümer/Eskiocak, Ali: Concordato and Restructuring Law, Istanbul 2019, pp. 10, 15). Different types of concordato are distinguished, such as non-judicial and judicial concordatos. Judicial concordatos are classified into three types: maturity, reduction, and hybrid concordatos. According to the classification, a maturity concordato occurs when the debtor promises to pay the debt in full and creditors allow a payment period or agree to a payment in installments; a reduction concordato occurs when the debtor promises to pay only a percentage of the debt, and creditors forgive the rest; a hybrid concordato combines elements of both reduction and maturity concordatos. Based on timing, there is also distinction between bankruptcy-bound debtors (bankruptcy-related concordato) and those not yet declared bankrupt (non-bankruptcy concordato). Another classification involves ordinary (simple) concordato and the one involving the surrender of assets, where the debtor’s aim is not to improve their financial situation or continue operations. There are two forms of concordato involving asset surrender: one where the debtor transfers control of their assets to the creditors, and the creditors sell the assets to recover debts, and another where the debtor agrees to pay creditors in installments while transferring all or part of their assets to a third party, allowing creditors to recover their debts from the proceeds. In the asset-surrender concordato, the debtor does not propose to pay their debts but instead offers to transfer control of their assets to the creditors (or a third party). Unless it contradicts the nature of the asset-surrender concordato, the provisions for ordinary concordatos apply (İİK Articles 285 to 308/g) (Pekcanitez/Erdönmez, p. 6 et al.).
Judicial ordinary concordato is regulated in İİK Articles 285 and subsequent, and the persons who may apply for concordato are explained in Article 285, where “any debtor” is allowed to apply, and thus, both legal entities and individuals are eligible to file for concordato. According to Article 285/2 of the İİK, the application for concordato is not limited to the debtor alone; any creditor who can request bankruptcy may also apply for the commencement of concordato procedures by submitting a reasoned petition…” (General Assembly of the Court of Appeals, 2022/387 E., 2022/695 K., 18.05.2022)
“…The request concerns the issuance of temporary and final suspension orders, along with the request for the approval of the concordato plan for the debtor company and its authorized representative, under the provisions of İİK Articles 285 and following.
Article 304/1 of İİK stipulates that the court’s decision regarding concordato must, in principle, be made within the final suspension period. The second paragraph states, ‘If it is determined that a decision cannot be made within the final suspension period, the court may, if deemed necessary, continue the suspension provisions until the decision is made, after obtaining a reasoned report from the commissioner.’ This provision indicates that in cases of special difficulties, if it is impossible to issue a decision within the final suspension period, the court may decide to extend the suspension provisions until the concordato decision is reached. If no decision is made within the final suspension period, it might result in the removal of the prohibition on enforcement, thus hindering the purpose of the concordato.
The first paragraph of Article 304 contains a regulatory provision with no direct consequence. Furthermore, the second paragraph allows a six-month period for the judge to decide. The lawmaker does not act without purpose. If there were to be consequences for not making a decision on the concordato within the final suspension period, that should be included in the law. Moreover, the next paragraph does not grant a six-month period to the judge…” (Court of Cassation 6th Civil Chamber, 2021/5708 E., 2022/714 K., 10.02.2022)
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