Doing Business in Türkiye: Financial insolvency and restructuring

Financial restructuring (finansal yeniden yapılandırma)

To protect distressed enterprises that create employment and have a positive impact on the economy, the concept of "financial restructuring” was introduced in 2018 by a regulation. According to information published by the Banks Association of Türkiye (Türkiye Bankalar Birliği), as of July 2023, 399 corporate debtors with total outstanding payment obligations of approximately ₺142,001bn have benefitted from financial restructuring.

Parties to a financial restructuring must comply with the terms and conditions of the framework agreements published by the Banks Association of Türkiye and approved by the BDDK. 

There are two different Framework Agreements in place: (i) the large scale framework agreement, which is applicable to debtors with financial debt of ₺25m or more and (ii) the small scale framework agreement, which is applicable to debtors with financial debt of less than ₺25m. Turkish banks and financial institutions, which provide the considerable majority of loans extended in the Turkish market, have signed both the Large Scale and the Small Scale Framework Agreements. All documents signed and transactions entered into within the scope of financial restructurings are exempt from certain taxes and charges, such as stamp tax, KKDF and BSMV.

A variety of institutions, including banks, financial leasing, financing and factoring companies operating in Türkiye, foreign banks and financial institutions which have directly provided loans to Turkish debtors, multilateral agencies and international financial institutions having direct investments in Türkiye, special purpose companies formed by the above-mentioned creditor groups for collection of receivables and investment funds formed for the same purpose, can benefit as creditors from financial restructuring through acceptance of the Large Scale or the Small Scale Framework Agreements.

To benefit from financial restructuring, an application should be made by the debtor to any of its three largest creditors who must also be party to the relevant Framework Agreement. Applications must include necessary supporting documents listed in the Framework Agreements, such as the debtor's balance sheet, profit and loss statements, business plan, asset lists and information on recent asset disposals. Creditors then are given the option of commencing negotiations with the debtor.

Creditor compliance with the terms and conditions of the Framework Agreements and financial restructuring contracts is supervised by an arbitration board formed by the Banks Association of Türkiye.

Concordat (konkordato)

Concordat is a commonly used alternative to avoid bankruptcy. A concordat agreement is a set of terms, which, if and when approved by the competent commercial court, becomes binding on all of the debtor's creditors, regardless of whether they initially consented to the agreement.

Any debtor, whether a real or legal person, may apply for concordat. Creditors who are otherwise eligible to ask that the debtor be declared bankrupt may also apply. In either case, one of two conditions must be met: (i) the debtor must be unable to pay some or all of its debts upon maturity or (ii) the debtor must be in danger of not being able to pay its debts upon maturity.

The concordat application to the competent commercial court must include, among others: (i) a temporary "concordat plan" specifying a proposed date for the debtor to clear all debts, as well as the means for payment (for example, capital injection, sales and transfers), (ii) debtor financial statements accurately reflecting the insolvent financial situation, (iii) a list of all creditors and the debts owed, ranked in order of privilege and (iv) an independent audit report.

In terms of substance, concordat agreements typically take one of three forms: (i) extended maturity dates for some or all debts owed; (ii) a debt reduction (for example, the debtor promises to pay a percentage of the original debt); or (iii) a combination of (i) and (ii).

Concordat plans may be approved by two alternative routes: (i) approval by more than 50 percent of all registered creditors (meaning, creditors that have registered their receivables), who also hold more than 50 percent of the total registered receivables or (ii) approval by more than 25 percent of all registered creditors, holding more than 66 percent of the total registered receivables.

The commercial court will refuse the request if there is a failure to meet these conditions and it may also declare the debtor bankrupt.

Once under the temporary grace period, which usually commences as of the date of the application to the commercial court, the debtor cannot engage in certain important dispositive transactions (for example creating encumbrances over assets) without the court's permission. Moreover, the creditors are prohibited from initiating new enforcement proceedings against the debtor and ongoing enforcement proceedings are halted. A limited set of enforcement proceedings may continue, including those that arise out of employment and family law relationships and foreclosure proceedings concerning pledged assets.

The most immediate consequence of debtor non-compliance is the termination of the plan by the court. If other conditions are satisfied, the court may also declare the non-compliant debtor bankrupt in the same decision.

Bankruptcy (iflas)

Bankruptcy initiated with a proceeding (takipli iflas)

Bankruptcy initiated directly without a proceeding (takipsiz iflas)

Compared with concordat and restructuring through consensus, bankruptcy is the more traditional form of declaring insolvency. Bankruptcy ensures not only that creditors are satisfied to the fullest extent possible, but also that financially distressed debtors are not unduly taken advantage of.

Bankruptcy for both personal and commercial debt is, in the first instance, a concept reserved for those who are legally defined as "merchants" (tacir). The Commercial Code defines "merchant" as any person (real or legal) who operates a commercial enterprise, even if only partially, in its own name.

Bankruptcy, depending on the procedure and its length, takes two main forms: (i) bankruptcy initiated with a proceeding (takipli iflas) and (ii) bankruptcy initiated directly (without a proceeding) (takipsiz iflas).

Bankruptcy initiated with a proceeding (takipli iflas)

Creditors initiate a proceeding through submission of a bankruptcy request to the competent execution office for the debtor, determined based on the debtor's center of operations (typically its headquarters). The competent execution office forwards a payment order based on the request to the debtor in three days after such submission.

The debtor, upon receipt of the payment order, has three main options, which will need to be exercised within seven days:

1. To accept the claim and make payment;
2. To lodge a complaint against the payment order before the execution courts (for example, based on procedural irregularities), to halt the proceedings; or
3. To object to the claim in the payment order.

Objections made before the execution office may, for example, contest the validity or amount of the claim. A creditor may lodge a counter objection (itirazın kaldırılması) before the competent commercial court. The court's acceptance of a counter objection confirms the validity of the claim and the order is deemed to be final and binding.

Claimants have one year, commencing from the date on which a payment order is received by the debtor, in which to initiate bankruptcy proceedings before the courts. The competent court is the commercial court whose jurisdictional area includes the debtor's center of operations.

Bankruptcy initiated directly without a proceeding (takipsiz iflas)

Creditors may resort to this option if: (i) the residence or center of operations of the debtor is unknown, (ii) the debtor has engaged in fraudulent financial transactions, (iii) the debtor is known to have fled to avoid bankruptcy proceedings or (iv) the debtor has stopped making all payments.

Alternatively, a debtor may similarly ask the court to declare itself bankrupt if: (i) the debtor is in a state of insolvency, which refers to the debtor's inability to make payment on maturity, (ii) the debtor is "asset deficient," a state when a debtor's total liabilities exceed the total cash value of its assets or (iii) if at least 50 percent of the debtor's assets are encumbered and the remaining 50 percent is unable to satisfy the outstanding debt.

Upon obtaining a bankruptcy judgment through either of the two abovementioned methods, the bankrupt entity's estate (iflas masası) is formed. This estate comprises all attachable assets belonging to the debtor.

The assets comprising the bankruptcy estate are then liquidated through a method agreed upon by the bankruptcy directorate (for example, public auction or sale through negotiation). Proceeds from the liquidation are used to satisfy the creditors whose names and receivables appear in an order of priority on the table of order. If the liquidation proceeds are insufficient to clear all debt, unpaid creditors, in order of priority ranking, are able to recover debt in the future if, and when, the bankrupt debtor acquires new assets.

Restructuring through consensus (uzlaşma yoluyla yeniden yapılandırma)

Restructuring through consensus is a rarely used debt restructuring method regulated under the EBC. In this process, the financially-troubled company invites creditors to settle under a "restructuring plan", which must be accepted by a simple majority of the creditors, holding at least two-thirds of the receivables. The accepted plan must then be approved by the commercial court.

Turkish joint stock companies, limited companies, certain commandite companies and cooperatives which (i) are unable to fulfill their payment obligations when due, (ii) do not have assets and receivables sufficient to cover outstanding debts or (iii) are likely to encounter one of these situations, can apply to use this method.

The debtor proposes a restructuring plan to the affected creditors who then approve or reject the terms and conditions by voting. If the plan is accepted, the debtor applies to the relevant commercial court for final approval. The commercial court must issue a decision in relation to the restructuring plan within 30 days of hearing the application.

A restructuring plan becomes effective from the moment of the court's decision. The terms and conditions of the plan prevail over the terms and conditions of earlier agreements with the affected creditors. Further, terms and conditions under the debtor's existing agreements, which include the implementation of restructuring through consensus in the event of default or breach of the contract, or terms which may result in the amendment or termination of the restructuring plan, become automatically unenforceable.

In principle, the approval of the restructuring plan does not have an automatic impact on the powers of the company. However, the court may limit these powers if the restructuring plan clearly foresees this.