Newsletters Regarding 'Concordat Mechanism', 'Movable Pledge' and 'Turkish Commercial Code' Amendments
1. Introduction
As is known, the State of Emergency Decree numbered 669 and published in the Official Gazette on July 31, 2016, had prohibited, for the duration of the State of Emergency regime, the postponement of bankruptcy - a procedure frequently and sometimes abusively used by companies in financial difficulty to avoid bankruptcy based on a court approval.
Against this background, on March 15, 2018, the Omnibus Law no. 7071 Amending the Code of Execution and Bankruptcy and Various Laws (“Omnibus Law”) has been published in the Official Gazette now completely abolishing the postponement of bankruptcy institution the Code of Execution and Bankruptcy (“Law”) and the Turkish Commercial Code. On the other hand, the Omnibus Law has introduced amendments to the concordat proceedings provided under the Law, aiming to functionalize this pre-existing but rarely-used restructuring mechanism.
In very brief terms, a concordat is a restructuring agreement between a debtor in financial difficulty and its creditors, which is made binding upon court’s approval and aims at avoiding the bankruptcy of the debtor. Under the Law, there exists three different concordat proceedings: a) ordinary concordat, b) concordat after bankruptcy and c) concordat via abandonment of assets. The below explanation is based on the new “ordinary concordat” regime, but mostly applies to other two since the proceedings for concordat after bankruptcy and concordat via abandonment of assets, in principle, follow the former. Since the new ordinary concordat provisions introduce comprehensive amendments to the existing concordat mechanics, the below explanations focus only on the new regime rather than taking a comparative approach.
It must also be underlined that the Omnibus Law provide other amendments (not directly related to the amendments on concordat regime) under the Law that aim at strengthening creditors’ positions and smoother and faster collectability of claims in case of bankruptcy such as:
providing priority to creditors receivables of whom are secured with pledge over public receivables arising the pledged assets (and their sale) in debtor’s bankruptcy,
introduction of possibility to sell assets and rights attached thereto as a whole if either such are economically and commercially coherent (Ticari ve ekonomik bütünlük), or higher income is foreseen in such liquidation,
introduction of new provisions to shorten time periods during which bankruptcy offices shall take specific decisions or actions.
The following section briefly examines the amended concordat provisions.
2. The New Ordinary Concordat Regime under the Law
a. The Concordat Request
A concordat refers to a restructuring agreement sought by debtor (or creditor) before competent courts, which would provide such debtor, the debt of whom is overdue or likely to be overdue, with additional term or reduction on the debt amount so that the payment of such debt becomes feasible and bankruptcy can be avoided. A concordat request shall be accompanied by a concordat pre-project, which shall include information on the conditions of the restructured debt (e.g. new terms, reduction amounts, etc.), debtor’s financial situation, other creditors and privileges/priorities thereof, whether debtor and creditors would be worse-off in case of the debtor’s bankruptcy, etc.
b. The Provisionary Period and Appointment of the Concordat Commissioner
Having received the concordat request, the court shall decide whether a provisionary period (of maximum five months) shall be granted to the debtor along with the provisionary appointment of a commissioner (or three, depending on the number of creditors) who shall assess the feasibility of the concordat project. If the court decides that the provisionary period is granted, such decision shall be published in Trade Registry Gazette and notified to various parties and institutions including respective land registries, tax offices, the Banks Association of Turkey, and the Capital Markets Board. Creditors have seven days as of the publication to object to the granted provisionary period and to request the rejection of the concordat. The grant of the provisionary period shall have the same consequences as the grant of the definitive period (please see part d below).
c. The Definitive Period, Duties of Concordat Commissioner During such Period and Creditors Committee
If granted, the court shall then convert the provisionary period to a definitive period of one year (half a year of extension being possible under exceptional circumstances) provided that the projected concordat is expected to attain its objectives on the basis of the commissioner’s report and the input of debtor and creditor(s) during a special hearing. In principle, the same commissioner shall also be responsible for the supervision of the concordat project and the debtor himself, submitting interim reports to the court, and inform creditors regularly on developments related to the concordat project and the financial standing of the debtor, during the definitive period. The court may also establish a committee of (maximum) seven creditors which shall convene at least once a month, supervise and advice the commissioner, submit opinions to the court, and request ( the court) the change of commissioner subject to the presence of just grounds.
d. Consequences of the Grant of Definitive Period
The court’s decision on the grant of the definitive period shall be published in trade registry gazette and notified to various parties and institutions including respective land registries, tax offices, the Banks Association of Turkey, and the Capital Markets Board.
The grant of the definitive period to the debtor has important consequences for (i) creditors (not secured with a pledge), (ii) creditors receivables of whom are secured with pledge, (iii) contracts to which the debtor is party, and (iv) the debtor, as follows:
i. No debt enforcement proceeding can be initiated or continued and no enforcement measure can be obtained against the debtor (except for labor claims and family maintenance payments). Unless otherwise agreed under the concordat project, the accrual of interests shall freeze for claims not secured with a pledge. If, before the grant of the definitive period, an agreement for the assignment of future receivables is executed between the debtor and a third-party, but (assigned) receivables have arisen thereafter, the assignment agreement shall be void.
ii. Creditors receivables of whom are secured with pledge may initiate or continue debt enforcement proceedings but cannot obtain any protection measure against the debtor or realize the sale of the pledged assets.
iii. Contractual provisions under contracts (entered into between the debtor and a third-party) which set forth that a concordat request is deemed as a violation or triggers sums becoming due and enforceable or termination thereunder shall not be enforceable if such contract is substantial for the continuity of debtor’s activities. Further, the debtor may terminate continuous contractual relationship (sürekli borç ilişkileri) that impedes the concordat project upon the assent of the commissioner and the approval of the court.
iv. The debtor is not allowed to pledge its assets, be guarantor, dispose of any part of its immovable assets which are essential to his activities, or make gratuitous dispositions unless the court’s approval is obtained. The debtor may continue its regular activities under the supervision of the commissioner. However, the court may require the commissioner’s assent to be obtained by the debtor for specific transactions or put the commissioner directly in charge of the management of the debtor’s commercial activities.
e. Creditors’ Involvement in the Concordat Negotiations
Creditors shall notify and register their claims within 15 days as of the publication of the provisionary period in order to be involved in concordat negotiations. The concordat project is deemed to be approved by creditors if signed by a majority that surpasses at least; (a) half of registered creditors and half of receivables or (b) one quarter of registered creditors and two third of receivables. Only creditors who are affected by the concordat project can participate in the vote. Creditors receivables of whom are secured with pledge can participate for the part of their claims that are not secured with the pledge. Please note that there exists a special procedure applying the restructuring negotiations with creditors receivables of whom are secured with pledge (Art.308/H of the Law) in respect of the claims secured with pledges.
f. Court’s Approval
The concordat project so approved shall then be reviewed by the court which shall approve (or reject) it during the definitive period. The approval of the court is subject to stringent conditions including an affirmative assessment that creditors would be better-off compared to the bankruptcy of the debtor in terms of collectability of their claims. As another condition, the amount of repayments undertaken by the debtor under the concordat project shall be proportional with his resources. The approval decision rendered by the court shall demonstrate the extent to which creditors have waived their claims as well as the repayment plan. Upon the debtor’s request and subject to the satisfaction of various conditions, the court may also decide to postpone the sale of pledged assets by pledgees and the return of leasing assets (that the debtor holds through a leasing agreement) to the lessor under certain circumstances and subject to stringent conditions, for maximum one year as of the approval decision. If the concordat project is rejected, the court shall decide on the bankruptcy of the debtor provided that the bankruptcy conditions under the Law are present.
g. Binding Effect of the Concordat Project Approved by the Court
Upon the court’s approval decision, the concordat project shall be binding for all claims and receivables that have arisen prior to the concordat request or during the provisionary or definitive periods but without the assent of the commissioner. In other words, ongoing debt enforcement proceedings (e.g. attachment or seizures) against the debtor are ceased. Some privileged claims (e.g. family maintenance, labor claims, state claims, etc.) and claims secured with a pledge (up to the amount covered by the pledge) are exempt such effect. Similarly, loans extended by credit institutions (e.g. banks) to the debtor in the period by obtaining the commissioner’s assent are also not effected by the binding effect of the terms of the concordat project. There exists tax exemptions for transactions concluded between parties to the concordat in the context of the approved concordat project as well as sums and collections recovered by creditors, such as stamp tax not being applicable. As such, loans extended to the debtor in the context of the concordat project are exempted the Resource Utilization Support Fund (Kaynak Kullanımı Destekleme Fonu).
h. Legal Remedies Against the Court’s Decisions Concerning Concordat
The court’s decision of granting provisionary and definitive periods to the debtor or rejecting the request for cancellation of the definitive period are not appealable. On the other hand, the court’s decision rejecting the grant of definitive period or approving the concordat project can be appealed before competent courts.
3. Conclusion
To sum up, the pre-existing concordat mechanism has been extensively revised under the Law following the abolition of the postponement of bankruptcy. While the effectiveness of the amended concordat mechanism is to be seen, it can be predicted that these provisions and protections will be extensively consulted by the companies in financial distress in the very future.
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This newsletter has been prepared only for information purposes. Please do not hesitate to contact us if you need assistance or more detailed information.
Yours faithfully,
YAZICILEGAL
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Law on the Amendment of Certain Laws to Improve the Investment Climate numbered 7099, published in the Official Gazette dated 10 March 2018,
(“Law No. 7099”) introduces significant amendments to the Law on Movable Property Pledge in Commercial Transactions numbered 6750 (“Law No. 6750”).
In their essence, the amendments are aimed at increasing the efficiency and feasibility of the Turkish investment environment by introducing provisions mitigating transaction costs and revising certain matters whose implementation was deemed redundant and problematic in practice.
In general terms, novelties introduced by the Law No. 7099 as to the Law No.7099 are as follows:
Pursuant to the former version of Article 4/6 of the Law No. 6750, incorporation of certain matters in relation to the subject matter of pledge such as the serial number, brand and chassis number indicating its distinguishing characteristics was mandatory. With the amendment introduced by the Law No. 7099, assets that do not have any distinctive elements by nature are excluded such requirement.
With the addition of a catch-all wording to Article 5, the scope of application of the Law No. 6750 has been extended to pledges established on movable assets that are similar to the ones explicitly referred to under such article with the inclusion of a catch-all wording.
Article 7 of the Law No. 6750, setting forth the establishment of rights of pledge on comingled and mixed movable assets is completely revoked. The earlier version of Article 7 raised problems in determining the priority rights, in the event that two or more pledged movable assets become comingled or mixed (e.g. raw materials). The new version of Article 7 entitled “Scope of the Pledge” does not refer to comingled and mixed movable assets anymore and introduces a more concrete mechanism. Article 7/1 states that future legal proceeds/benefits, such as interest, insurance and natural products and substitutes of the products of the movable asset shall directly fall within the scope of pledge together with the movable asset. Furthermore, if a production process is pledged together with the movable assets used in such production process, the pledge shall be deemed to have been established automatically in the same degree and order on the product/receivable that is to be produced/ generated during and as a result of such production process. Article 7 states further that the procedures and principles related thereto will be determined by a regulation.
In addition, Article 7 introduces a radical change by stating that a third party’s acquisition of any right in the pledged movable assets will be protected, provided that such third party is acting in good faith, i.e. does not know or is not obliged to know that a movable asset is already pledged. In other words, the good faith of the third party is now upheld to the detriment of the creditor’s registered pledge interests.
Article 14 of the Law No. 6750, providing for remedies that the creditor may opt for in the event of default of the debtor is amended. The former version of Article 14 stated that the pledgee might initiate execution proceedings according to the general provisions as set forth under Enforcement and Bankruptcy Law numbered 2004, if such pledgee was unable to collect its receivables through the other remedies set out under the respective article and this was creating ambiguities among scholars and practitioners. The new version of Article 14 does not anymore refer to initiation of execution proceedings according to the general provisions as a last resort alternative. It is important to note, however, that if the pledgee opts to initiate execution proceedings according to the general provisions of Turkish execution and bankruptcy laws, such pledgee would be required to initiate a special execution proceeding first, i.e. enforcement by foreclosure of the pledge. If the pledge is not enough to cover the obligations of the debtor, then the pledgee may pursue ordinary or bankruptcy execution proceedings against the debtor.
Article 15 of the Law No. 6750 now stipulates different periods for the application to be made by the pledgee for the removal of pledge in the event that the debtor’s all obligations are fulfilled. In this respect, a pledgee subject to foreign law (e.g. established abroad) shall apply to the pledged movables registry within 30 days, whereas a pledgee subject to Turkish law shall apply to the said registry within 15 days for the removal of the pledge starting the date on which the obligations of the debtor secured by the pledge are fulfilled.
Lastly, Article 18 of the Law No. 6750 used to state that, in cases where no specific provision is provided under Law No. 6750 in relation to a certain matter, the provisions regarding the movable asset pledges of the Turkish Civil Code numbered 4721 shall apply.
With the amendment made by Law No. 7099, the article now provides that the provisions regarding the immovable property pledges will be applicable in such cases.
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This newsletter has been prepared only for information purposes. Please do not hesitate to contact us if you need assistance or more detailed information.
Yours faithfully,
YAZICILEGAL
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Law on the Amendment of Certain Laws to Improve the Investment Climate numbered 7099 (“Law No. 7099”) was published in the Official Gazette dated 10 March 2018.
In their essence, the amendments are aimed at increasing the efficiency and feasibility of the Turkish investment environment by introducing provisions mitigating transaction costs and revising certain matters whose implementation was deemed redundant and problematic in practice.
The most significant amendments made to the Turkish Commercial Code are as follows:
Legal entity and natural person merchants shall submit their signature declarations by way of written statements made directly before trade registries within the scope of their company’s registration with the respective trade registry. Trade registries had been authorized for this procedure as an alternative to notaries public pursuant to law numbered 6728 published on August 9, 2016. With the amendment introduced by Law No. 7099, the TCC requires that the certification of signature declarations is made by trade registry officials in company establishment procedures.
The company books of joint stock and limited liability companies will now be certified before the trade registries at the time of such companies’ registration with the respective trade registry. Before the amendment, such certification used to be conducted by notaries public. However, after their incorporation, the subsequent certifications of the company books of such companies will continue to be made by notaries public.
Articles 428, 430 and 431 of the TCC governing procedures regarding the appointment of corporate body representatives (organ temsilcisi), independent representatives and institutional representatives for general assembly meetings of joint stock companies have been abolished. This is due to the fact that such representation mechanisms introduced by the TCC,
initially aimed at achieving full representation of shareholders, yielded poor response in the Turkish corporate practice. Thus, no alternative or replacement to such mechanisms is provided in the recent amendments.
In order to uniform the remaining articles of the TCC with the above mentioned amendments on the certification of signatures, certain provisions, including Article 575, applying to the incorporation procedures of limited liability companies have been amended. With the amendment of Article 575, founders of limited liability companies shall sign their articles of incorporation directly before trade registries as part of the incorporation procedure.
Finally, shareholders of a limited liability company are no longer obliged to pay at least 25% of the subscribed share capital, before limited liability companies’ registration with the trade registry for incorporation. However, the subscribed share capital shall be paid in full within two years following the company’s registration. It is important to note that such requirement remains in force for joint-stock companies.
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This newsletter has been prepared only for information purposes. Please do not hesitate to contact us if you need assistance or more detailed information.
Yours faithfully,
YAZICILEGAL