Recent Developments on the Enforcement and Bankruptcy Law and Concordat

Introduction

A significant part of the
recent legislative amendments to improve the investment environment are made to
Enforcement and Bankruptcy Law (“EBL”) numbered 2004. The amendments made
within the scope of Law numbered 7101 on the Amendments in Enforcement and
Bankruptcy Law and Certain Laws[i] (“Law
numbered 7101”) and the Law numbered 7078 on the Ratification of the Statutory
Decree on Certain Regulations within the Scope of State of Emergency with
Alterations[ii] (“Law
numbered 7078”) shall be addressed.

[i]              Official
Gazette (OG), No. 30361, March 15, 2018.

[ii]             OG,
No. 30354, March 8, 2018 (bis).

Regulations Regarding Suspension of Bankruptcy and Concordat

A concordat aims to
protect both the debtors in poor financial standing, as well as their creditors.
In the event that a debtor and a creditor agree on a concordat, the debtor
clears his/her debts by paying the debt in line with the agreement stipulated
under the concordat. Therefore, a concordat may be defined as a reconstruction
agreement between the debtor and his/her creditors[1].

The most significant
amendment stipulated by Law numbered 7101 is the abrogation of suspension of
bankruptcy and reformation of the provisions regarding the concordat. In the
preamble of the amendment, creditors’ disability of being influent in the
process regarding suspension of bankruptcy, a debtor’s and the court’s active role
in the process of suspension of bankruptcy and problems occurring during adjudication
in this respect are specified as the reasons behind the abrogation of the suspension
of bankruptcy[2].
Accordingly, the reformation of the provisions which take into consideration the
problems stated, above, intend to render the concordat, which consists of an
agreement between the creditor and the debtor and court’s approval regarding
this agreement, a more efficient and functional institution. In this respect, the
procedures and principles regarding preparation and acceptance of the concordat
project are covered by this law.

Within this framework, the objective is the continuance in the debtor’s
commercial activities, as well as the contractual relations during the term of the
concordat. It is clearly regulated that even if the parties agree that the
contract will be terminated, or that the debt will mature in case of a concordat,
this contractual provision shall not apply.

The most remarkable amendment is the change of the competent court on concordat
transactions. Whereas the enforcement courts were formerly the competent courts
to hear the request of concordat prior to Law numbered 7101 coming into force,
the commercial courts of first instance are now determined as the competent
courts pursuant to Law numbered 7101.

Law numbered 7101 defines the term “temporary term of concordat,” and it
is stipulated that the temporary term of a concordat, which bears the same
legal consequences with the definitive term of a concordat is, in principle,
three months, and may be extended for two more months. Furthermore, in the
event that the concordat may be accomplished, in particular situations, the one
year definitive term granted to the debtor may be extended up to six months. In this manner, the concordat term is limited to
a maximum of 23 months, including the extended temporary term and the
definitive term. It shall be noted that the regulation stipulates that should
the financial condition of the debtor of the concordat turn to the positive, the
term of the concordat may be abolished under Law numbered 7101.

With respect to the provisions regarding an ordinary concordat, the
court ruling on the definitive term of a concordat may establish a board of
creditors, limited to seven creditors, to whom no payment will be made. The
board of creditors may be established with the decision on the definitive
concordat, or at a time deemed appropriate within the definitive term, provided
that the opinion of the commissar is taken. In this respect, the duties of the
commissar of the concordat and the board of creditors are regulated under Law
numbered 7101.

Law numbered 7101 stipulates that the foreclosure proceedings of the
pledged property may be commenced or continued for the receivables ensured by the
pledged property during the definitive term, but the pledged property may not
be attached or sold. Law numbered 7101 regulates the appeal procedure of the
decision of the concordat. Accordingly, the debtor or the creditor who has
demanded the concordat decision may appeal to the Regional Court of Appeal
within 10 days as of the notification of the decision, while the 10-day appeal
period commences as of the announcement of the confirmation decision for the other
creditors. The decision of the Regional Court of Appeal may be appealed within
10 days to the Court of Cassation. That being said, the decisions that uphold the
request of the definitive term of the concordat, and which reject the request
of the removal of the term, may not be appealed.

It shall be noted that pursuant to Law numbered 7101, the provisions
that were in force at the time of the request of suspension of bankruptcy and the
concordat shall continue to apply to the pending requests upon the date the Temporary
Article 14 of the EBL came into force.

Possibility of Selling Goods
and Rights that Constitute the Entirety as a Whole

Another regulation in favor of the creditors stipulated under Law
numbered 7101 is related to the goods and rights that constitute a commercial
and economic entirety. In this respect, goods and rights constituting a
commercial or economic entirety, or which appear to yield a higher income when
sold as a whole, shall be converted into money as a whole.

Amendment in the Priority
Order of the Receivables

Pursuant to the Law, the priority order of the receivables under Article
206 of the EBL is also altered. In this regard, the Law stipulates that only after
the receivables that are ensured by pledged property are covered, certain
public receivables, such as customs duties, shall be paid on a priority basis as
to other receivables.

Shortening of the Terms
Regarding Liquidation of Bankruptcy

As the liquidation of bankruptcy takes a long time in practice, the term
of deciding on whether the liquidation shall be made according to the regular
or the simple procedure after the notification of the decision of bankruptcy is
reduced from three months to two months. Thus, it is stipulated that the
liquidation will be completed within a shorter period[3].
In addition, three months’ principal term and three months’ extended term
stipulated for preparation of the alignment list are reduced to two months in
order to prevent prolonging of the liquidation in the bankruptcy[4].

Amendments Regarding the Matters
that are Subject to Administrative Jurisdiction

Pursuant to Law numbered 7078, matters that are subject to an administrative
jurisdiction application to the enforcement proceeding without a court ruling is
impossible. In the same line, according to the temporary Article added to the
EBL through the above-mentioned Law, the enforcement officers shall dismiss the
enforcement proceedings without a court rule on the matters that are subject to
administrative jurisdiction that were commenced prior to the date of entry into
force of the related article, as per the request, and this decision shall be
notified ex officio to the creditor. Under the related regulation, the creditor
may apply the complaint procedure within seven days as of the notification date
of the decision of dismissal, and may file a lawsuit before the administrative
courts within thirty days as of the finalization of the decision. Proceedings
cannot continue until the finalization of the decision on the dismissal of the
request or approval of the complaint. Law numbered 7078 regulates that the
actions of annulment of objection, or removal of objection on the proceedings
without a court ruling, shall be dismissed upon request upon the reason of having
no basis to render a decision on the matter. Accordingly, proceedings and litigation
costs, in addition to the counsel’s fee, shall be paid by the parties, and the
file of proceeding shall be returned to the execution office. Upon the
finalization of this decision, the proceedings regulated under subparagraph 1 of
the related Article shall be followed.

Conclusion

In order to improve the investment environment, significant amendments have
been made through EBL numbered 2004. The most vital alterations made within
this context are the abrogation of the institution of the suspension of
bankruptcy, reorganization of the institution of concordat in a more effective
manner, definition of the temporary concordat term, regulation of the duties
and authorities of the concordat commissar and the board of creditors, enabling
the sale of goods and rights as a whole that constitute an economic entirety, or which appear to yield a higher
income when sold as a whole, shortening of certain periods on the liquidation
of bankruptcy, and the changes on the provisions of the execution proceedings on
the subjects under the scope of administrative jurisdiction.

(First published on the website of Erdem&Erdem Law Office in March 2018: http://www.erdem-erdem.av.tr/publications/newsletter/recent-developments-on-the-enforcement-and-bankruptcy-law-and-concordat/) 

[1] http://www.erdem-erdem.av.tr/publications/newsletter/concordat-as-an-alternative-to-suspension-of-bankruptcy
(Access Date: March 20, 2018).

[2] Preamble
of the Law No. 7101, p. 4.

[3] Preamble
of the Law No. 7101, Article 5.

[4] Preamble
of the Law No. 7101, Article 8.