Restructuring and insolvency law in Turkiye

1. What is the primary legislation governing restructuring proceedings in your jurisdiction?

Restructuring proceedings are mainly governed by the Turkish Enforcement and Bankruptcy Law Numbered 2004 (“EBL”) and the Turkish Commercial Law Numbered 6102 (“TCC”).

2. How are restructuring proceedings initiated?

Restructuring proceedings are initiated as follows:

a. Composition (concordat)

A debtor who cannot pay or is at risk of not being able to pay its debts on time may file a petition for composition (concordat) to free itself from possible insolvency by submitting to the commercial court of first instance, at the time of the petition, certain documents to prove its situation threatened with insolvency and the prospects of success of the composition project.

Further, any creditor entitled to request insolvency may request concordat proceedings against the debtor with a reasoned petition.

b. Settlement

Restructuring by settlement may be initiated by an application by the distressed trader to a competent commercial court of first instance together with a pre-negotiated restructuring project which should have been approved beforehand by a simple majority of the number of creditors concerned by the project and whose claims represent at least two thirds of the debts of the company concerned by the restructuring.

3. Which different types of restructuring proceedings exist and what are their characteristics?

a. Composition (concordat)

A restructuring method for any debtor who is unable or unlikely to be able to pay its debts when due. In this respect, the concordat procedure offers this debtor the possibility to pay its debts or avoid possible insolvency by extending the deadline or waiving it under Article 285 of the EBL. The EBL also regulates the possibility of post-insolvency concordat and concordat by way of abandonment of assets.

b. Settlement

A restructuring method for stock companies and cooperatives that are unable to pay their debts when due or whose claims are insufficient to cover their debts, or where there are indications that the company concerned is subject to one of the conditions set out in Article 309/m of the EBL.

4. Are there different types of creditors and what is the significance of the differences between them?

The different types of creditors mirror the order of paying off claims in insolvency proceedings. This is applicable to composition. The debtor shall attach the list of creditors, the amount of their claims and their ranking to its filing for composition. The ranking is as follows, unless loans are secured by a pledge:

a. First stage:

Employee severance and redundancy payments were due 1 (one) year before the opening of the insolvency proceedings.

Demands of institutions established to set up pension funds (and the like) for the benefit of employees.

Maintenance payments were due 1 (one) year before the opening of the insolvency proceedings.

b. Second stage:

Claims originated from a trust relationship.

c. Third stage:

Claims that are designated by law as privileged.

d. Fourth stage:

Other requirements than those listed above.

5. Is there any obligation to initiate restructuring / insolvency proceedings? For whom does this obligation exist and under what conditions? What are the consequences if this obligation is violated?

No. However, Article 376 of the TCC provides an obligation to the Board of Directors once certain conditions are met which are as follows:

• If half of the total capital of the company and the statutory reserved capital as shown in the latest annual balance sheet are unfunded, the Board of Directors shall immediately convene a General Meeting and propose reform measures to cover the losses and ensure the sustainability of the company; and
• If there are indications that the company is indebted, the Board of Directors prepares an interim balance sheet. If it shows that the assets are insufficient to cover creditors` claims, the Board of Directors will have to file for insolvency. 

If the directors fail to fulfil these obligations, not only civil but also their criminal liability may be invoked. Under Article 345/a of the EBL, directors may, at the request of one of the company’s creditors, serve a prison sentence of 10 (ten) days to 3 (three) months if they do not fulfil their obligation under the TCC as to apply for insolvency of the company even though the above mentioned conditions are met.

6. What are the main duties of the representative bodies in connection with restructuring proceedings?

The Board of Directors is obliged to take the necessary measures to ensure the continuity of the company and its activities within the framework of the ‘duty of care’ and ‘loyalty’. Accordingly, the directors should exercise all due diligence to safeguard the financial position of the company. Directors are expected to develop reformatory solutions in accordance with the principle of ‘good faith’.

7. What are the main duties of shareholders in connection with restructuring proceedings?

A shareholder has no direct obligation. However, the principle of limited liability can be disregarded in certain situations where the principle is abused (‘piercing the corporate veil’).

2. What is the primary legislation governing insolvency proceedings in your jurisdiction?

Insolvency proceedings are mainly governed by the Turkish Enforcement and Bankruptcy Law Numbered 2004 (“EBL”) and the Turkish Commercial Law Numbered 6102 (“TCC”).

3. How are insolvency proceedings initiated?

Insolvency proceedings are initiated by the filing of a petition for insolvency by the debtor or a creditor with a competent commercial court of first instance. A creditor may file an insolvency petition before an insolvency office following a failed debt recovery procedure relating to the insolvency, or certain conditions laid down in Article 177 of the EBL are met.

4. What are the legal reasons for insolvency in your country?

In principle, a debtor can be subject to insolvency proceedings for non-performance of its monetary debts (either ordinary or linked to negotiable securities) in the context of insolvency proceedings initiated by a creditor. However, there are also specific conditions which are set out below:

• When a stock company has more liabilities than assets;
• If half of a debtor’s assets have been seized, the remaining assets are not sufficient to cover other debts; and
• When a debtor applies for insolvency by informing the court of its inability to pay its debts.

5. Which different types of insolvency proceedings exist and what are their characteristics?

There are the following types:

a. Nonfraudulent insolvency

The creditor starts the proceedings with an insolvency request at the enforcement office. An insolvency payment order is sent to the debtor and if the debtor pays the debt within seven days, the proceedings shall be terminated; if not, the creditor could file an insolvency case at the commercial court of first instance within one year and request the debtor to be declared insolvent. If the debtor objects within 7 (seven) days following the notification of the payment order, the proceedings will be terminated. In this case, the creditor must request the removal of the objection together with the decision on the debtor’s insolvency at the commercial court of first instance.

b. Insolvency of bills of exchange

The procedure is similar to the nonfraudulent insolvency. The creditor initiates the proceedings against the debtor by applying to the enforcement office. If the bailiff determines that the bill is a bill of exchange and is due, they send a payment order to the debtor. The objection and complaint period in this proceeding is five days. The debtor is obliged to specify all available reasons in his/her objection within this period. In addition, the debtor may file a complaint against the payment order. The complaint is also to be made to the enforcement office within 5 (five) days. The commercial court of first instance will review the case.

c. Direct insolvency

Direct insolvency proceedings may be initiated under specific conditions. This procedure does not involve any payment notice or order. If the debtor’s domicile is not known, if the debtor engages in fraudulent transactions that violate the creditor’s rights, if the debtor has suspended its payments, creditors may initiate the direct bankruptcy proceedings. A petition is submitted directly to the commercial court of first instance by the creditor for declaring the debtor insolvent. The creditor must prove the existence of one of these conditions.

In addition, companies may also be directly declared insolvent upon the request of the debtor. If insolvency is declared and proved by the board members who are authorized to represent and bind the company that their debts exceed their current and receivables, these companies may be declared insolvent.

6. Are there different types of creditors and what is the significance of the differences between them?

Please refer to question 4 in the restructuring section.

7. Is a solvent liquidation of the company an alternative to regular insolvency proceedings?

Unless it is obligatory to apply for insolvency proceedings as per Article 376 of the TCC (please refer to question 5 in the restructuring section), the general meeting of a company may decide to liquidate the company instead of initiating insolvency proceedings.

1. If a lender wants to monitor its borrower very closely (i.e. more closely than the usual information covenants in the credit agreement require), what options are there?

• The Turkish Trade Registry Gazette shows court and execution/insolvency office announcements of companies.
• In practice, throughout the court proceedings, creditors may request the declaration of property of the debtor from the court.

Further, in order to hide the properties, debtors usually transfer their properties to their close ones in the presence of a risk that their property may be subject to enforcement. In practice, in such cases, a forfeiture lawsuit is filed as the transfer of assets is not based on the real will of such debtors.

2. What issues arise if a creditor extends credit facilities or offers support conditional on additional or extended guarantees to a company in financial difficulties and/or takes asset security?

The members of the board of directors are required to act in compliance with the duty of care and loyalty. The first condition for compliance with this obligation is to prioritize the interests of the company over their own. A member of the board of directors by failing to comply with this obligation is liable to indemnify this damage.

Pursuant to Article 553 of the TCC, if the members of the board of directors, managers and liquidators breach their obligations arising from the law and the articles of association through negligence, they are liable for the damages they cause to the company, shareholders and creditors of the company.

Therefore, if the creditor company suffers a loss in the event of an investment in a company experiencing financial difficulties, the board members may be held liable for the losses incurred pursuant to Article 553 of the TCC.

1. How does a lender sell a loan?

A lender could sell a loan through assignment of receivables. There is no concept of “true sale” in Turkish law. A “true sale” is recognized as an assignment of existing and/or future receivables, provided that such assignment is made by the assignor to the assignee without recourse to the assignor. That is to say, if the assignor makes such an assignment to the assignee on a non-recourse basis by indicating that under the respective documentation of purchase of a receivable, that the intentions of the parties thereto are to assign and to acquire, respectively, the title over such assets and not to create a security interest over such assets, such transaction would be recognized as “true sale”. Furthermore, it should be noted that, if such receivables are not governed by Turkish law and/or not generated in Türkiye, Turkish laws will recognize and give effect to a sale as a true sale, only if such sale is recognized as a true sale under the foreign law governing such receivables and to the extent that it is not against the public policy rules or mandatory provisions of Turkish law.

2. If the underlying credit agreement prohibits transfer or assignment (i.e. a change in the lender of record) how else (if at all) can a lender transfer the economic risk and/or benefit in the loan? For instance, are sub-participation agreements allowed under the law of your jurisdiction?

If the underlying credit agreement prohibits assignment, lender cannot transfer the economic risk or benefit in the loan.

3. Regulatory issues: is any form of licence or prior authorisation from any regulatory authority required for the purchase, sale and/or transfer of loans? Does it fall within the definition of providing banking or financial services in the territory of the assignor or the borrower?

A “true sale” of a loan is not possible and the “assignment of receivables” does not require any authorization.

However, it should be noted that if a company does conduct such purchase/sale/transfer of loans as its core business, it would be deemed as an asset management company (varlık yönetim şirketi). The law on the establishment of asset management companies entered into force in 2003. As per the relevant legislation, under the license obtained from the Banking Regulation and Supervision Agency (“BRSA”, in Turkish Bankacılık Düzenleme ve Denetleme Kurumu) and under the supervision of the BRSA, asset management companies started to operate for the purpose of assigning and restructuring the non-performing receivables of banks and other financial institutions and reintegrating customers into the financial system.

Banks and other financial institutions usually assign their non-performing receivables portfolios, which consist of files that they could not be collected after an average of two to three years, to asset management companies through auctions. Asset management companies purchase the receivables that constitute the non-performing loan portfolios of financial institutions, primarily banks, and collect the receivables they take over from the debtors. The establishment of asset management companies is subject to obtaining permission from the BRSA.