A new Law numbered 7101 in Turkey revised the composition procedure (similar to postponement of insolvency proceedings) and reactivated it after many years. The new Law is intended to remedy the consequences of market disruptions caused by the fact that companies were no longer able to reorganise themselves by suspending bankruptcy.

Introduction

Article 4 of Decree-Law No. 669, published in the Official Gazette (Resmi Gazete) of 31.7.2016 in the context of the state of emergency, prohibits companies from applying for temporary postponement of bankruptcy proceedings. Furthermore, the courts are prohibited from taking a decision on such applications. Since then, it has no longer been possible to postpone bankruptcy proceedings which gave the bankrupt company the opportunity to restructure. This ban has made another way of remedying a company’s economic difficulties, namely through a composition agreement (Konkordato), the focus of interest again after many years. Law No. 7101 of 28.2.2018 finally repealed the provisions on postponement of bankruptcy and introduced relevant amendments to the Enforcement and Bankruptcy Law numbered 2004.

What is the composition?

Composition procedure in Turkey is regulated by Articles 285-309 of the Bankruptcy and Enforcement Law (Act No. 2004). In simplified terms, composition procedure is an overall settlement between a debtor who is unable to pay his debts either in time or in full and his creditors. In order to initiate this composition procedure, a petition for composition must be filed with the competent commercial court.

Who can file a petition for composition?

Any debtor who is unable to pay his debts as they become due (insolvency), or who runs the risk of not being able to pay when they become due (imminent insolvency), can file for composition according to Art. 285 of the Enforcement and Bankruptcy Law numbered 2004. The Law no. 2004 allows the filing of an application for composition with the Commercial Court. At the same time, any creditor who is entitled to initiate bankruptcy proceedings against one of his debtors under the legal requirements may also file a petition for composition procedure against that debtor.
Composition proceedings may also be conducted if a private individual is unable to pay his debts.

Composition procedure

The competent commercial court immediately grants a three-month temporary time period that can be extended for two additional months, after the filing of the petition for composition and then, if necessary, debt enforcement proceedings may not be continued or commenced. .The court takes official measures necessary to preserve the debtor’s assets (a kind of protective shield procedure). When the composition is filed, the Commercial Court appoints one or more composition commissioners to supervise the debtor’s actions, draw up a list of his assets with the debtor’s cooperation, convene and chair the meeting of creditors and perform other tasks specified by law.

Within the framework of a composition plan, creditors waive part of their claims (debt cut), while the debtor undertakes to pay the outstanding balance.
Even if individual creditors do not participate in the composition proceedings or do not agree to the composition, the composition agreement is binding on them. To be legally effective, a composition requires the consent of half of the creditors whose claims exceed two thirds of the total debt (head majority and qualified majority).

Comment

The composition procedure, which is regulated in detail in the Act, has long been forgotten due to the earlier possibility of postponement of bankruptcy. Since the postponement of bankruptcy was prohibited in a state of emergency, the “revised” composition procedure has once again become the focus of interest after many years.
The new composition procedure is intended to remedy the consequences of market disruptions caused by the fact that the companies were no longer able to restructure by postponement of bankruptcy. In legal practice, however, a kind of domino effect can be observed in the meantime: as soon as larger companies initiate composition proceedings, this often has considerable negative effects on smaller suppliers and subcontractors, who in turn could then be forced to file for composition.
Due to the current high wave of composition applications in Turkey, the effectiveness and expediency of the current regulatory framework cannot yet be conclusively assessed.

Dr Gökce Uzar Schüller, Attorney
Frankfurt am Main and Istanbul

Çiğdem İleri, Trainee
Frankfurt am Main