Breach of Concordat by the Debtor

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A concordat is a reconstruction agreement that is regulated under Articles 285-309 of the Execution and Bankruptcy Law (“EBL”), and aims to protect both the debtors in poor financial standing, as well as their creditors. Concordats had been applied in our country for a considerable time in the past; however, their popularity ceased after suspension of bankruptcy provisions came into effect.

The concordat took center stage and became the only restructuring option for debtors in a poor financial situation who did not want to face bankruptcy, following the amendments that prohibited the debtors from requesting suspension of bankruptcy under Decree numbered 669, within the scope of the state of emergency declared in 2016 in our country.

The concordat is an important and powerful agreement that is executed under certain conditions before the courts. The concordat is also binding upon creditors who are not parties to the agreement, or who do not accept the agreement. The debtor clears his debts by paying the debt in accordance with the agreement stipulated under the concordat. The debtor should comply with the amount of payment, as well as the schedule.

There are three types of concordats, those being “the ordinary concordat”, “the concordat after bankruptcy” and “the concordat through asset abandonment”.

Introduction

A concordat is a reconstruction agreement that is regulated under Articles 285-309 of the Execution and Bankruptcy Law (“EBL”), and aims to protect both the debtors in poor financial standing, as well as their creditors. Concordats had been applied in our country for a considerable time in the past; however, their popularity ceased after suspension of bankruptcy provisions came into effect.

The concordat took center stage and became the only restructuring option for debtors in a poor financial situation who did not want to face bankruptcy, following the amendments that prohibited the debtors from requesting suspension of bankruptcy under Decree numbered 669, within the scope of the state of emergency declared in 2016 in our country.

The concordat is an important and powerful agreement that is executed under certain conditions before the courts. The concordat is also binding upon creditors who are not parties to the agreement, or who do not accept the agreement. The debtor clears his debts by paying the debt in accordance with the agreement stipulated under the concordat. The debtor should comply with the amount of payment, as well as the schedule.

There are three types of concordats, those being “the ordinary concordat”, “the concordat after bankruptcy” and “the concordat through asset abandonment”.

After the Approval of the Concordat

Suppose that the debtor’s request for a concordat proceeded in accordance with the steps stipulated under the law, the concordat project has been prepared, the success of the concordat has been considered possible, the temporary and definitive terms have been exhausted, the concordat project has been approved, accepted as convenient, and approved before the court. Thus, what options do we have if the debtor breaches the provisions of the concordat?

Firstly, the concordat becomes binding following the approval decision. In an ordinary concordat, the execution of the payment is still in the hands of the debtor despite numerous conditions and provisions regarding supervision or control that are binding upon the debtor. The first option if the debtor does not make the payments in accordance with the concordat plan is to file an action for annulment established under Article 308/e of the EBL. In this respect, any creditor who does not receive a payment stipulated under the concordat project may file a lawsuit for termination of the concordat before the court that approved the concordat, and claim his/her new rights arising from the concordat. The decision with respect to the termination request to be granted by the court would be subject to appeal.

The creditor may file this lawsuit, even if the debtor fails to make just one installment payment. In the event that the concordat is terminated at the end of this lawsuit, all receivables (provided that the debtor accepts) that are subject to the concordat may be collected from the debtor as if the concordat has never been concluded. It should be noted that this receivable may be pursued and may only be subjected to execution proceedings based on a verdict. As the precedents suggest, the receivables that are accepted by the debtor have the same status as the receivables that are based on a verdict. This opinion is based on the registry of the debtor’s unconditional acknowledgment of debt by the court upon the concordat approval.[1]

If the court decides on termination at the request of termination of the concordat, the vested rights of the creditor will be protected. The creditor will keep the guarantee granted to him, and if monies were deposited with a bank for the creditor, he will have a priority right over that money.[2] Pledgees will also benefit the same right. In addition, if the pledgee requests termination, and termination of concordat has been decided for that creditor, and if the 2/3 majority condition pursuant to Article 308/h/3 of the EBL is no longer applicable, the pledgees who rejected the offer of the debtor, but are subjected to the payment plan, will no longer be bound by that plan.

On the other hand, in a prior decision of the Court of Cassation, which is traced back to the previous concordat period, it is ruled that even if it were accepted that payments will be made before finalization of the confirmation of the concordat, a request for termination could only be claimed after the concordat has become final. This decision, which may also become the subject of a discussion in the current concordat period, was criticized by Pekcanıtez.[3]

Another method is that the creditor for whom the concordat conditions have not been met may initiate an execution proceeding without requesting termination. In such a case, the previous decisions of the Court of Cassation may be discussed.[4] This is because in the previous concordat period, the Court of Cassation decided that execution proceeding cannot be initiated without filing a lawsuit for termination. However, there is a consensus in the literature stating that execution proceedings may be initiated without filing a lawsuit for termination.[5]

In that case, the amount of the receivable in the execution proceeding to be initiated will be limited by the unpaid amount written in the concordat project. The creditor cannot initiate execution proceedings for the payment of the debt unless the termination of concordat is decided. On the other hand, the creditor may continue previous execution proceedings for the full amount of the receivable, if the concordat is terminated by the court. If the creditor has not previously initiated an execution proceeding, he may initiate enforcement proceedings for the full amount at that stage.  In the concordat, the creditor whose entire receivable is accepted by the debtor, may initiate enforcement proceedings.

Finally, pursuant to Article 308/f of the Execution and Bankruptcy Law, if the concordat is distorted with bad faith, the creditor may request termination of the concordat, in its entirety, from the court that made the decision.

Conclusion

The concordat is an important and powerful agreement that binds the parties who were not a party to that agreement or creditors who rejected that agreement. With a concordat, the debtor clears his debts by paying those debts in accordance with the agreement stipulated under the concordat. The debtor should comply with the amount of payment, as well as the schedule. The debtor still bears the duty to comply with the payment provisions. Therefore, the creditor who does not receive payment in accordance with the concordat project may apply to the court that confirmed the concordat, and request termination of concordat for himself. In such case, the creditor may request the entire receivable via execution proceeding if the receivable was accepted by the debtor. Another method is the initiation of execution proceeding against the debtor for the unpaid part without requesting termination by the creditor to whom the conditions of concordat have not been met. As well, each creditor may demand termination of the concordat, in its entirety, if the concordat is distorted with bad faith, from the court that granted the concordat decision.

(Authored by Alper Uzun and first published by Erdem&Erdem on February 2021)


[1] Altay, Sümer, Eskiocak, Ali: Konkordato ve Yeniden Yapılandırma Hukuku, 5th Edition, 2019, p.401 et seq.

[2] Pekcanıtez, Atalay / Özekes, Özkan; İcra ve İflas Hukuku, 11th Edition, 2013, p. 817.

[3] Pekcanıtez, Erdönmez: 7101 sayılı Kanuna Göre Konkordato, İstanbul, 2018, p. 166-167

[4] Decision of the Court of Cassation 12th CC, 2430 E., 10285 K., 22.10.1990 (www.e-uyar.com).

[5] Muşul,Timuçin: İcra ve İflas Hukuku Esasları, 2017, p.846; Kuru, Baki: İstinaf Sistemine Göre Yazılmış İcra ve İflas Hukuku, 2016, p. 702.

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