What is Concordatum and its Conditions in Turkish Law?

AN ALTERNATIVE TO BANKRUPTCY POSTPONEMENT: CONCORDATUM

Concordatum is an agreement made between a debtor and creditors to restructure debts and payment plans. The Law No. 7101 on the Amendment of the Enforcement and Bankruptcy Law and Some Other Laws, which replaced previous regulations in 2018, was enacted. This law abolished the institution of bankruptcy postponement, which was previously used to assist capital companies or cooperatives in financial distress but failed to provide the desired benefit due to implementation problems. As a result of the abolition of bankruptcy postponement, companies have increasingly turned to concordatum to resolve their financial difficulties. The concordatum system was restructured under the Law No. 7101 to provide a more effective and efficient process for companies seeking financial assistance.

WHAT IS BANKRUPTCY?

Bankruptcy is the liquidation process undertaken to collect debts owed to creditors by a debtor whose assets are insufficient to cover their liabilities. This process extends to all assets of the debtor that can be used and seized to pay off debts, and the liquidation of the debtor’s assets is carried out for the benefit of all creditors. The primary objective of bankruptcy law is to ensure the protection of capital and the smooth functioning of economic and commercial life before the liquidation of the debtor’s assets. The primary goal of bankruptcy law is to prevent bankruptcy from occurring and, secondarily, to ensure the fair liquidation of assets among creditors. The best solution for liquidation in bankruptcy is to discharge the debtor from all debts while maximizing the repayment to creditors.

The institution of bankruptcy postponement, designed to protect creditors from the consequences of bankruptcy and save the company from financial collapse, is a legal process that allows indebted companies to continue their operations while taking remedial measures to improve their financial situation and overcome bankruptcy. To initiate the process, debtor capital companies and cooperatives must first declare their insolvency to the Commercial Court of First Instance in their jurisdiction. If the company believes it can overcome its debts and protect the interests of creditors, it may file for bankruptcy based on insolvency and request a postponement from the court. To support their request, the company must submit an interim balance sheet, also known as the insolvency balance sheet, and an improvement project to the court. The balance sheet provides a financial snapshot of the company’s current debt situation, while the improvement project outlines the steps the company will take to overcome bankruptcy. The request for postponement of bankruptcy can be made by the company’s authorized representatives, creditors, or liquidators. If the court finds the improvement project reasonable and functional, it will grant the applicant a period to pay the postponement costs, and failure to comply will result in the rejection of the request, with the court deciding on the company’s bankruptcy if legal requirements are met.

DIFFERENCES BETWEEN BANKRUPTCY POSTPONEMENT AND CONCORDATUM

One of the most significant differences between concordatum and bankruptcy postponement, two legal institutions aimed at assisting financially distressed companies, is that concordatum is a voluntary agreement between a company and the majority of its creditors, whereas bankruptcy postponement is a temporary legal protection provided by the court to improve the financial situation of a debtor capital company.

While concordatum requires the approval of a specific majority of creditors, the court directly decides on the approval of the improvement project in bankruptcy postponement. Concordatum also has stricter formal conditions, including a maximum period of five months, and can be requested without apparent bankruptcy. Bankruptcy postponement, on the other hand, can only be requested during a bankruptcy proceeding and before a bankruptcy decision is made.

Furthermore, concordatum is available to all financially distressed companies, while bankruptcy postponement is only applicable to capital companies and cooperatives. Bankruptcy postponement provides longer and more favorable legal protection, up to five years, compared to concordatum.

WHAT IS CONCORDATUM?

Concordatum is a legal mechanism that allows an insolvent debtor to propose a repayment plan to creditors through the court. The plan must be approved by a majority of creditors, typically at least half or two-thirds, and the debtor must demonstrate the ability to pay debts based on the proposed plan. For concordatum to be binding on creditors, it must be approved by the Commercial Court and a certain majority of creditors.

There are three types of concordatum: Ordinary (Non-Bankruptcy) Concordatum, Post-Bankruptcy Concordatum, and Concordatum through the Abandonment of Assets.

1. ORDINARY (NON-BANKRUPTCY) CONCORDATUM

Ordinary concordatum is a contractual agreement made between an insolvent debtor and some or all of its creditors based on the principle of contractual freedom and without requiring the intervention of any state authority. However, it is essential to note that such concordatums bind only the relevant creditors and do not prevent other creditors from pursuing bankruptcy proceedings through seizure and bankruptcy. The process involves submitting a concordatum proposal to the court, obtaining a concordatum period, and appointing concordatum commissioners to call a meeting of creditors and the decision phase. If the proposal is deemed appropriate by creditors and the commercial court, the debtor can settle debts according to the concordatum.

Concordatum Proposal

The concordatum proposal must be made by the debtor, who cannot pay debts on time or is at risk of being unable to pay in the future, or by creditors who can request bankruptcy for the debtor, to the commercial court of first instance in the jurisdiction of the debtor’s center or residence. The applicant must also deposit the concordatum expense advance specified in the tariff issued by the Ministry of Justice.

The debtor must include the following documents with the concordatum request:

– The preliminary concordatum project showing the rate or term of debt payments, the extent to which creditors will waive their claims, whether the debtor will sell existing assets to make payments, and the financial resources needed for the debtor to continue operations and make payments to creditors through capital increase, credit, or other methods.

– Documents showing the debtor’s financial status; if the debtor is required to keep books, the latest balance sheet, income statement, cash flow statement prepared according to the Turkish Commercial Code, interim balance sheets prepared based on both the going concern principle and the probable sales prices of assets, opening and closing certifications of commercial books, e-ledger notification information related to electronically created books, other financial information and documents explaining the debtor’s financial situation, lists containing the book values of tangible and intangible fixed assets, and lists and documents showing all receivables and debts with their due dates.

– A list showing the creditors, the amounts owed to them, and their privileged status.

– A table comparing the expected amount of receivables from creditors according to the proposal in the preliminary concordatum project and the probable amount of receivables if the debtor goes bankrupt.

– An audit report and its basis prepared according to Turkish Auditing Standards by an independent audit firm authorized by the Public Oversight, Accounting and Auditing Standards Authority, providing reasonable assurance of the proposal’s feasibility in the preliminary concordatum project.

The court or commissioner may also request other documents and records from the debtor during the concordatum process. If all the required documents are complete, the court will issue a temporary respite decision and take all necessary measures to protect the debtor’s assets.

If a creditor requests the initiation of concordatum proceedings, a temporary respite decision will be given if the debtor submits the specified documents and records within a reasonable period set by the court and in full. Failure to submit the documents and records within the specified period will result in the rejection of the creditor’s concordatum request.

Issuance of Temporary Respite

The temporary respite will have the effects of the definitive respite explained below, and during this temporary period, the court will take necessary measures to protect the debtor’s assets. When the court issues a temporary respite decision, it will appoint a temporary concordatum commissioner to assess the likelihood of a successful concordatum. The temporary respite decision will be announced in the trade registry gazette, the Press Announcement Agency, and other relevant official announcement portals specified in the law. The announcement will inform creditors that they have seven days to object to the concordatum request and request the court to reject the application if there is no need for a concordatum period. The temporary respite will last for three months, but if the debtor or the temporary commissioner requests an extension, this period can be extended for a maximum of two months. It is essential to note that the total duration of the temporary respite cannot exceed five months.

Issuance of Definitive Respite

The court will summon both the debtor and the creditors who requested the concordatum to a hearing to decide on the definitive respite. Before the hearing, the temporary commissioner will submit a written report and may be called to testify if necessary. The court will consider the objections in the creditors’ petitions during its assessment. If the court determines that the concordatum is likely to succeed, it will grant the debtor a definitive respite of up to one year. Additionally, the court will decide whether the temporary commissioner or commissioners will continue their duties or if new appointments are necessary and will present the case to the commissioner.

To ensure fair representation of creditors, the court will establish a creditors’ committee that meets the legal requirements. The committee will meet at least once a month and make decisions by majority vote. In some cases, the court may extend the period for up to six months based on a justified report from the commissioner, even before the definitive period expires. The debtor may also request an extension before the end of the period.

In summary, before issuing a definitive respite decision, the court will evaluate the commissioner’s report, creditors’ objections, and any extension requests. The court will also establish a creditors’ committee for fair representation and

may extend the final period in exceptional cases.

The effects of the definitive respite are as follows:

– During the respite, creditors secured by collateral may initiate foreclosure proceedings or continue ongoing proceedings, but no preservation measures can be taken, and the collateral cannot be sold.

– Contracts in which the debtor is a party and are essential for the continuation of the business must continue, regardless of whether the counterparty is affected by the concordatum project.

– The debtor may continue operations under the supervision of the commissioner. After the respite decision, the debtor cannot establish collateral, act as a guarantor, or make gratuitous dispositions without the court’s permission. The debtor cannot transfer or encumber immovable properties and movable properties essential for the continuation of business activities. Otherwise, such transactions are invalid.

Creditors’ Meeting

Creditors will be invited by the commissioner to report their claims within fifteen days from the date of the announcement, and the debtor will be invited to explain the alleged claims. The commissioner will examine the debtor’s books and records to determine the existence of the claim and inform the result. After preparing the concordatum project and confirming the claims, the commissioner will invite creditors to a meeting to discuss the project. The commissioner will chair the meeting and report on the debtor’s situation. Only affected creditors can vote, and the concordatum project will be accepted if signed by a majority exceeding half of the registered creditors and claims or a quarter of the registered creditors and two-thirds of the claims. Attachments will be accepted within seven days following the end of the meeting. The commissioner will submit all relevant documents and a justified report on the acceptance of the concordatum project to the court within seven days.

Court Review and Approval of Concordatum

When a concordatum request is made, the court will initiate proceedings to decide on the concordatum after receiving the commissioner’s justified report and the case file. The court must hear the commissioner and decide within a short period, within the definitive respite. The hearing date will be announced, stating that those who objected in writing at least three days before the hearing can attend. If the court believes it cannot decide within the allotted time for the concordatum case, it may extend the effects of the respite until a decision is made based on a justified report from the commissioner. However, this period cannot exceed six months.

a- Approval

The concordatum project will be approved by confirming that the legal requirements are met and based on the votes cast during the meeting and attachment period. When the concordatum is approved by the court, the approval decision will specify the extent to which creditors waived their claims and the debtor’s debt repayment schedule. A trustee may also be appointed to oversee the implementation of the concordatum and ensure its proper execution. The trustee must report to the court every two months on the debtor’s business status and debt repayment capability. Once the concordatum is approved, the court will announce the decision and publish it in the relevant official gazettes.

b- Rejection

If the court does not accept the concordatum request, it will reject the application and announce the situation, notifying the relevant authorities. If the debtor is subject to bankruptcy and one of the direct causes of bankruptcy continues, the court will decide on the debtor’s bankruptcy alone.

c- Appeal Against Decision

Any party involved in the process, including the debtor or creditor, can appeal against the concordatum decision within ten days of its notification. Similarly, other creditors who object can appeal against the approval decision within ten days of its announcement. The decision of the regional court of appeal can also be appealed within ten days.

2. POST-BANKRUPTCY CONCORDATUM

If the debtor has been declared bankrupt, either the debtor or one of the creditors may request concordatum. The bankruptcy administration is responsible for overseeing the concordatum process and protecting the interests of all relevant parties, similar to the commissioner. When the concordatum request is accepted by the creditors, the liquidation of the debtor’s assets will be suspended until the court approves the concordatum, which cannot exceed six months. Once the approval decision is finalized, the bankruptcy administration will request the annulment of bankruptcy from the bankruptcy court. The court that decided on the bankruptcy may annul the bankruptcy after the concordatum is approved. It is important to note that only one concordatum request can be made during the liquidation process of bankruptcy, and a concordatum requested and approved post-bankruptcy cannot be requested again during the liquidation process.

3. CONCORDATUM THROUGH THE ABANDONMENT OF ASSETS

Under this type of concordatum, creditors have the authority to dispose of or transfer the debtor’s assets to a third party. These rights are exercised through the concordatum trustee and creditors’ committee selected by the creditors who approved the concordatum request. The concordatum trustee can only assume duties after the approval of the commercial court of first instance. It is worth noting that the concordatum commissioner can also act as the liquidation trustee.

When creditors decide to liquidate the debtor’s assets or transfer them to a third party through concordatum, certain contents must be included in the concordatum by law.

When the decision to approve concordatum through the abandonment of assets becomes final, the debtor is no longer allowed to dispose of assets, and the authority to sign related to asset disposition is revoked. The concordatum trustees will prepare a list of creditors based on commercial books and credit records to determine who will participate in the distribution of the liquidation shares and their ranks. This list will be kept ready for examination without the need for a new invitation to creditors. The assets forming the concordatum table will be disposed of through collection of claims, sale of claim rights, or sale of other assets by negotiation or auction, depending on the situation.

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