Restructuring Through Negotiation in Turkish Law

METHODS TO AVOID BANKRUPTCY: RESTRUCTURING THROUGH NEGOTIATION

Financial distress is a challenging situation that businesses may encounter. To assist companies and cooperatives experiencing financial difficulties, the legislator has established the process of restructuring through negotiation as an alternative method. This approach allows organizations to renew their operations by developing a plan aimed at reaching an agreement with creditors.

In our previous article, we discussed that the institution of bankruptcy postponement, designed to protect creditors from the consequences of bankruptcy and save the company from financial collapse, has been removed from our legal system for various reasons. You can access our article, which simplifies the complex processes and outcomes of the first remedial measure, concordat, and evaluates its suitability for your business here.

A capital company or cooperative can take a step to improve its financial situation by presenting a restructuring project if it is unable to pay its due monetary debts, if its existing receivables are insufficient to cover its debts, or if it is at risk of falling into one of these situations.

The process generally includes negotiating the restructuring project of the capital company or cooperative in poor financial condition, voting on the project, and, if a sufficient number is reached, approval by the Commercial Court of First Instance. During the period between application and approval, the court may appoint interim auditors to monitor the debtor company’s activities and protect its assets if requested. Following the approval of the project, a project auditor is appointed to monitor its implementation. The project auditor and interim auditors are selected from certified public accountants with the necessary qualifications. The ultimate goal is to realign the business’s financial processes in accordance with the regulations specified in the law.

CONDITIONS FOR BENEFITING FROM RESTRUCTURING THROUGH NEGOTIATION

To apply for the institution of restructuring through negotiation in our legislation;

– The company’s financial situation must be such that it is unable to pay its due monetary debts.

In determining that the debtor is unable to pay its due monetary debts, it is essential to understand that the debtor cannot pay its debts or that it will not be able to pay its debts when they become due, and that these situations will persist if restructuring is not pursued.

– The company’s financial situation must be such that its existing receivables are insufficient to cover its debts.

In determining that existing receivables are insufficient to cover debts, an interim balance sheet, cash flow table, and other valuation documents prepared by a certified public accountant, taking into account the probable sale values of the debtor’s assets and contingent liabilities, are used as the basis.

– The company is likely to fall into one of the above situations.

The likelihood that the debtor will fall into one of the above situations is determined based on the probability that one of the circumstances mentioned in the second and third paragraphs of this article will occur soon and inevitably.

– Being a capital company or cooperative

Capital companies include joint-stock companies, limited liability companies, and partnerships limited by shares. These companies can apply for restructuring through negotiation. However, some financial institutions, such as banks and insurance companies, are prohibited from benefiting from these provisions by the Enforcement and Bankruptcy Law.

It is stated that the right to operate the process is available if these two elements are present together.

RESTRUCTURING PROJECT

The first step to take after the conditions for restructuring through negotiation are met is to create a restructuring project that has been pre-negotiated and accepted by the necessary majority of affected creditors.

Affected creditors refer to creditors whose receivables, rights, or interests will be restructured by the restructuring project. The required majority is determined by whether the number of creditors affected by the project who participate in the vote exceeds at least half and whether their receivables constitute at least two-thirds of the voting creditors’ receivables.

The debtor is free to determine the creditors with whom it will negotiate the project and seek their votes for approval, provided that it complies with the rule of limiting itself to the group whose rights or interests will be restructured. Creditors invited to the negotiations are considered affected creditors, but the debtor must send lists of all creditors, both affected and unaffected, to the invited creditors. This list should include creditors who are similar in nature to the affected creditors but are not affected by the project.

Although not required, the debtor may classify and list each affected creditor and include those with essentially similar receivables in the same class.

What Does the Project Include?

The project prepared for restructuring the debtor’s debts should include important elements such as the status of creditors, the effects on contracts and assets, possible financing options, applicable methods for restructuring, implementation monitoring, and treatment of dissenting creditors. The project should address all the following points:

1. The conditions to which affected creditors will be subject and how equality will be ensured among creditors with similar receivables.

2. The impact of the project on contracts to which the debtor is a party.

3. The impact of the project on the debtor’s authority over its assets.

4. Whether the debtor will resort to financing sources such as loans if deemed necessary for debt restructuring.

5. Methods that can ensure the feasibility of the project, such as partial or complete transfer of the debtor’s business, merger with another company, changes in capital structure or articles of association, determination of persons involved in the management of the debtor’s business, extension of debt maturities, changes in interest rates, and issuance of securities.

6. Who will monitor the implementation of the project after the approval decision and how it will be monitored.

7. The principle that the claim of a creditor who rejects the project will be treated equally with similar claims unless the creditor explicitly accepts a lesser amount than that provided for its class in the project.

How Will the Project Be Negotiated?

Regarding the invitation to vote on the project, the debtor is obligated to provide the affected creditors with documents containing the necessary information to enable them to decide on the project. The documents to be sent to creditors by registered mail or notary notification include:

1. The project, duly signed and sealed by the debtor, the project terms concerning creditors, and documents proving the debtor’s authority.

2. A summary report prepared by an independent audit firm.

3. A summary of the bankruptcy analysis report.

4. The list of creditors.

5. A chart showing all affected and unaffected creditors.

6. An explanation of the factors and reasons causing the financial distress of the business.

7. A plan demonstrating the strategy to overcome the financial bottleneck through restructuring.

8. Conditions for implementing the project.

9. Expectations and conditions for securing the necessary financing.

10. Tax liabilities.

11. Risks and obstacles, such as economic, political, legal, commercial, and tax risks, that may lead to the project’s failure.

12. Voting invitation.

13. Documents showing the financial situation.

How Will the Project Be Voted On?

a. Voting Invitation

The voting invitation to be sent to creditors includes important information such as the amount of their receivables, how the voting will be conducted (by mail or at a meeting), special voting procedures, and the voting date. Creditors should also be informed about the consequences if they do not attend the meeting or vote within the specified period. The invitation also includes the name and title of the official responsible for the voting and a list of all documents attached to the invitation.

If the debtor foresees a meeting for voting, the date, time, and place of the meeting should be clearly stated in the invitation. If no meeting is planned, the invitation should inform creditors of the date they need to vote and the voting method. The voting invitation should be sent to all affected creditors a reasonable time before the voting date to allow them to review the information and decide.

b. Voting Procedure

If the debtor decides to hold a voting meeting, it should select a day, time, and place convenient for all affected creditors and facilitate their participation. The meeting must be supervised by a voting officer with the necessary qualifications, who can be a notary appointed by the debtor, creditors, or a third party later selected to serve as a project auditor. The voting officer is responsible for managing the voting process, including keeping a record of participants, collecting ballots, recording voting results, and preparing a report summarizing the voting process and results to be submitted to the commercial court of first instance.

APPLICATION FOR RESTRUCTURING THROUGH NEGOTIATION

Three conditions must be met to apply for restructuring through negotiation. Firstly, the business must be a capital company or cooperative. Secondly, there must be a decline in financial stability, meaning it cannot pay its overdue debts, it is unable to pay its existing and future debts, or it is at risk of falling into one of these situations. Lastly, it must present a restructuring project that has been pre-negotiated and accepted by the affected creditors. A business can only apply for restructuring through negotiation if all these requirements are met.

When applying for restructuring, the following documents should be attached to the application:

1. The restructuring project itself.

2. Documents providing a detailed overview of the debtor’s financial situation, including the balance sheet, income statement, and other information.

3. Documents demonstrating that the project will enable the debtor to repay its debts according to the payment plan and improve cash flow.

4. A list of affected and unaffected creditors and their receivables.

5. Statements explaining the pre-application negotiation process, along with proof that sufficient information has been provided to affected creditors.

6. Minutes dated by a not

ary, including statements and signatures of affected creditors approving the project.

7. A document comparing the amount creditors will receive under the project to the amount they would receive if the debtor were liquidated.

8. A table showing that the majority condition in terms of the number and amount of creditors has been met.

9. Financial analysis reports prepared by an independent audit firm demonstrating the debtor’s ability to meet the project terms.

What Measures Will Be Taken After the Application?

First, the court sets a hearing date within 30 days of receiving the application. The court then announces the application, detailing the scope and consequences of the project and the date and time of the hearing where objections will be raised. Upon request by the debtor or creditors, the court may take measures to protect the debtor’s assets until a final decision is made. If there is a need for an interim auditor to manage the debtor’s activities during this period, the court may appoint someone with the necessary qualifications. The court may decide to halt enforcement actions initiated by creditors against the debtor and related lawsuits, including those conducted under the Law on Collection Procedure of Public Receivables No. 6183, to prohibit new enforcement actions against affected creditors, and to suspend the execution of precautionary measures and attachments. During the interim period, the debtor may resort to financing tools such as credit or raw materials if necessary for the continuation of the business or if it is deemed necessary to preserve or increase the value of the assets. If a guarantee is required, it will primarily be provided from the debtor’s movable or immovable properties that have not been previously pledged.

How Will the Court Examine the Application and Make a Final Decision?

At the confirmation hearing, the court hears the interim auditor, debtor company officials, and creditors present at the hearing. If the court finds that the debtor has made the restructuring application in good faith, that the application conditions have been met, and that every creditor who rejects the project will receive an amount equal to the amount they would receive at the end of bankruptcy liquidation, it will approve the application within thirty days. Otherwise, the court will reject the application. The court may appoint one or more project auditors, considering the opinions of the debtor and creditors, with the sole authority to monitor the implementation of the project and report regularly to the creditors.

From the date of notification of the approval or rejection decision, the debtor and creditors who objected during the confirmation hearing may appeal the decision within ten days. The appeal review is conducted urgently, and no request for correction of the decision can be made against the decision to be given.

Consequences of the Confirmation of Restructuring Through Negotiation

After the restructuring application is approved, the project provisions come into effect and replace the contract provisions between the debtor and the affected creditors. If the appeal review results in the approval decision being overturned by the Court of Cassation, the execution of the approval decision is automatically halted, but the actions taken until the annulment decision remains valid.

Even if the debtor is not directly affected by the project, contractual provisions that could result in the modification or termination of the project or default or breach of contract due to the debtor’s restructuring will not apply during the restructuring process. If the court rejects the application for approval, the measures taken by the court will be lifted, and the lawsuits and proceedings will continue.

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