This country-specific Q&A provides an overview of Restructuring & Insolvency laws and regulations applicable in Turkey.
What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?
A mortgage canbe created as security for any kind of debt, present, future or contingent, by registering a mortgage over a real property with the records of the relevant Title Deed Register where the real property subject to mortgage is registered.
The perfection of a mortgage requires a mortgage agreement to be entered into between the mortgagor and mortgagee at the Title Deed Register and the registration of the same. The name ortitle of the mortgagee, the amount and degree of the mortgage, whether the mortgagee shall be entitled to benefit from the free degree system must be indicated in the title deed records. Mortgages can be registered in first and continuing degrees with an indication to the secured amount. The free degree system is granting the mortgagees at the subsequent degrees to move automatically to the higher degrees in case of de-registration of the prior degrees.
Mortgages registered in different degrees shall not be treatedpari passuwhich has significant consequences in foreclosure proceedings. The preceding degree mortgage shall have priority over mortgages established at subsequent degrees.
The amount of the mortgage is required to be registered in Turkish Lira. However, in the event the mortgage is to be registered as a security for a foreign currency cash loan to be obtained by a borrower resident in the Republic of Turkiye from a credit institution conducting business within the Republic of Turkiye or abroad, the amount of the mortgage can be registered in foreign currency.
The mortgage securing an existing or future debt, the amount of which is indefinite, can be registered as a maximum amount mortgage.
A mortgage canbe registered in favour of more than one mortgagee as a joint mortgage and each mortgagee shall rankpari passuwith the other mortgagees in the absence of an agreement determining the shares of each mortgagee.
The mortgage shall secure the principal amount of the debt, default interest and enforcement charges, contractual interest; and expenses, including but not limited to the insurance premium payments made by the mortgagee for the protection of the real property.
Pledges in Commercial Transactions
Pledges on movable property can be established on any movable asset listed in article 5 (i.e. financial agreements relating to capital market instruments and derivative instruments, stocks, agricultural products, trade and business names, commercial projects, consumable materials etc.) of the Law Regarding Pledges on Movable Property in Commercial Transactions.
The pledge agreement can be executed by and between credit institutions and traders, craftsmen, farmers, producer organizations and self-employed individuals and legal entities, traders and/or craftsmen. The registration of the pledge agreement to the Pledged Movables Register is a validity requirement.
The pledge agreement can be executed electronically on an electronic platform with secured e-signature or in written form in front of a notary public or an officer of the Pledged Movables Register.
The subject of the debt, its amount, the amount of security if the amount of debt cannot be precisely indicated in the agreement, the currency which the debt shall be paid and the maximum amount of the security granted under such pledge should be indicated in the agreement.
If a pledge is established with a degree system, the ranking and priority shall be determined with degree system instead of the registrationdate of the pledge.
Physical possession of a moveable is required to be transferred to the pledgee in order to perfect the pledge on a movable.In respect to a pledge over a moveable, which is legally required to be registered with a special registry, such pledge is required to be registered with the relevant registry and the transfer of physical possession shall not be required.
For the perfection of the pledge over the trademark, such pledge is registered in the Trademark Registry and published upon the application of either the pledgee or the pledgor.
A pledge over shares can be created by entering into a written pledge agreement and to perfect the pledge,physical possession ofthe pledged shares must be delivered to the pledgee. A board of directors’resolution for the registration of the pledge with the share book of the company may be required as per the terms of the articles of association of the company.
If the company has not issued share certificates, then temporary share certificates may be issued and the physical possession of the same can be transferred to the pledgee.
A pledge over present and future revenues and/or receivables can be created by entering into a written pledge agreement between the pledgor and pledgee. Such agreement is not required to be registered with any register or authority however the debtor(s) of the revenues and/or receivables is required to be notified of the pledge.
Although notification is not required for the perfection of the pledge, pledgor’s debtor(s) cannot raise good faith claim for the payments made directly to the pledgor after the receipt of the said pledge notice. The amount and the receivable secured by the pledge should be indicated in the agreement. In order to establish another pledge over the same receivables the first pledgee should be notified in writing of the same either by the second pledgee or the pledgor.
What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?
In case of any default, the secured creditor shall be required to apply to the authorised Execution Office and initiate foreclosure proceedings in order to cash-in the pledge/mortgage. Lex Commissaria Prohibition prohibits inserting any provision in the pledge/mortgage agreement enabling the creditor to become title owner of the pledged movables and mortgaged immovable in case of default.Therefore, upon the occurrence of an event of default, the secured creditor shall be satisfied from the proceeds of the sale of the security via execution proceedings as set forth in theExecution and Bankruptcy Law (the “EBL”).
In principle, the moveable shall be sold to the highest bidder and the secured creditor will collect its receivables from the sale proceeds. Under certain conditions, the pledge over the shares may be foreclosed by the pledgee privately without a foreclosure proceeding through the Execution Office.
The process shall take 1 to 2 years.
What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?
In the event of a suspicion that a company is in debt, the board of directors must prepare an interim balance sheet and apply to the Commercial Court with a bankruptcy request in the event the liabilities of the company exceed its assets and/or it is understood from the interim balance sheet that the company is deeply in debt.
In case the authorized individuals of a company fail to apply for bankruptcy, they must be punished with imprisonment for up to three months upon complaint. The board of directors shall also be liable for the damages arising from such failure.
What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?
Ordinary bankruptcy involves a creditor bringing bankruptcy proceedings against a debtor. Bankruptcy can only apply to merchants in relation to their unpaid and due debts.
A creditor who holds negotiable instruments can bring special bankruptcy proceedings for negotiable instruments against the debtor.
Direct bankruptcy is possible where the debtor’s liabilities are greater than its current assets. Individuals authorized to manage and represent those companies, co-operatives, or any of the creditors, can apply for the debtor’s bankruptcy.
The activities of the company shall be limited with the liquidation of the assets of the company and paying its debts. The bankrupt shall be represented and managed by the bankruptcy administrators which shall be elected by the majority of the shareholders.The bankrupt’s estate shall be distributed by the bankruptcy administration. The administration shall request the closing of bankruptcy after the distribution and the Commercial Court, which has commenced the bankruptcy, must decide on closing as well.
The length of the process depends on the assets and debts of the bankrupt, whether there is any fraudulent transaction, cancellation lawsuits, etc. The process usually takes 2 to 3 years.
How do creditors and other stakeholders rank on an insolvency of a debtor? Do any stakeholders enjoy particular priority (e.g. employees, pension liabilities)? Could the claims of any class of creditor be subordinated (e.g. equitable subordination)?
Receivables of preferred creditors are firstly taken into consideration by the Bankruptcy Office.
The liabilities of the estate are determined by a schedule of ranking as follows:
First Rank: Receivables of the employees including severance and notice pays arising from the employment relation and accrued for the year before the opening of the bankruptcy together with the severance and notice pays they earn due to the termination of the employment relation due to bankruptcy. The debts of the employers to the foundations and institutions which had been established to form provident funds or other aid institutions for the employees and in order to perpetuate such. All sorts of alimony receivables arising from family law which had accrued for the year before the opening of the bankruptcy.
Second Rank: Receivables of the persons whose properties are entrusted to the debtor because of parentship and appointed guardianship.
Third Rank: Receivables which had been determined as preferential receivables.
Fourth Rank: Unprivileged claims.
All the creditors in a category must be satisfied before creditors in the following category are paid. If the remaining money is not sufficient for the unprivileged receivables, it will be distributed between those creditors in proportion to their receivables.
The expenses of the Bankruptcy Administration have priority over insolvency receivables.
It is legally not possible for the Bankruptcy Administration to subordinate the order of priority.
Can a debtor’s pre-insolvency transactions be challenged? If so, by whom, when and on what grounds? What is the effect of a successful challenge and how are the rights of third parties impacted?
The debtor’s pre-insolvency transactions can be challenged within the hardening periods.
The one-year hardening period applies to (i) security interests if such security interest is created to secure an existing debt and the security collateral provider has not committed to provide security interest at the time of incurring a debt, (ii) payments made via instruments other than cash or ordinary payment instruments, (iii) payments made before their due date, and (iv) certain annotations to the title deed registries. These transactions should have been made within one year prior to the bankruptcy of the debtor or the attachment of its assets in order for these transactions to be annulled.
The two-year hardening period applies to donations or gifts.
The five-year hardening period applies to transactions made by the debtor with one of its creditors with the aim of harming its other creditors provided that the creditor with whom the transactions are made is aware of the insolvency and the aim of the debtor at the time of the transaction.
Upon the decision of the court granted for the cancellation of the transaction, the assets subject to the decision shall again be involved to the debtor’s assets. The rights of the third party who has acquired title for an asset of the debtor in good faith shall be protected and the transaction shall not be cancelled.
What form of stay or moratorium applies in insolvency proceedings against the continuation of legal proceedings or the enforcement of creditors’ claims? Does that stay or moratorium have extraterritorial effect? In what circumstances may creditors benefit from any exceptions to such stay or moratorium?
The decision of the court regarding the opening of bankruptcy provides an “automatic stay” on legal actions taken or to be taken against the debtor, with no extraterritorial effect.
The exceptions to such principle may be exampled as a secured creditor with security in the form of a mortgage/pledge, alimony receivables.
What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play?
The main types of restructuring are concord restructuring and amicable restructuring.
Concord restructuring is proposed by the debtor or a creditor to compromise certain liabilities in accordance with a plan. The key aim is to present a probable success through a concordat plan, with no intention to cause any damage or loss to the creditors. The restructuring can be implemented in three different ways: as the ordinary concordat; the concordat in bankruptcy; and the concordat through asset abandonment. Some restrictions are imposed on creditors enforcing their rights over companies under a temporary period and a precise period of concordat. During the temporary and precise period of concordat, no proceedings may be filed against the company and any proceedings previously initiated are suspended. Prescription periods and statute of limitations shall be suspended.
Amicable restructuring is applicable for capital stock companies and cooperatives. If a company is not able to pay its debts or its receivables are not enough to recover its debts or if the company is under the threat of facing these steps, such company may apply to a Commercial Court for an amicable restructuring.
Concerning the concord restructuring, in case the Court does not approve the concord or cancels the concord period, it will decide on the bankruptcy of the debtor upon the report of the concord commissar. Creditors may apply to the Court for the termination of the concord restructuring if it is found that the debtor acted in bad faith in having the restructuring proposal approved or that the debtor breaches the provisions of the concord.
Concerning the amicable restructuring, if the restructuring project is successful, the debtor will continue to operate. If the company breaches the terms of the restructuring, the company should seek to agree with creditors and to have an amendment approved by the Court to the restructuring proposal. In the absence of an agreement, the Court may decide on bankruptcy.
Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?
A debtor can obtain new financing, if such is approved by the Court in corcordatum or by the Creditors’ Meeting in amicable restructuring. There is no special priority afforded to such financing.
Can a restructuring proceeding release claims against non-debtor parties (e.g. guarantees granted by parent entities, claims against directors of the debtor), and, if so, in what circumstances?
Restructuring proceedings do not have the effect of releasing claims against non-debtor parties.
Is it common for creditor committees to be formed in restructuring proceedings and what powers or responsibilities do they have? Are they permitted to retain advisers and, if so, how are they funded?
In large restructurings, it is common to appoint commissars or form creditor committees.They may retain advisors by considering the needs of the companyand funding the same at the cost of the company.
How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any ability for either party to disclaim the contract?
The debtor will continue its activities and business in restructuring process. The restructuring shall not create a just legal ground for third parties to terminate their agreements with the debtor. Agreements bearing perpetual liabilities may be terminated by the debtor in case such agreements create a risk for the successful completion of the concord/restructuring. There are also certain restrictions to perform a set-off. The Court may decide whether certain transactions are valid only with the permission of the commissar or if the commissar should carry out the operating activity in lieu of the debtor.
Termination, retention of title and set-off provisions in these contracts remain enforceable.
With respect to the amicable restructuring, the restructuring project’s terms will override all agreements executed with creditors affected by the project.
In bankruptcy, if a contract allows either of the parties to terminate the same upon bankruptcy, the termination will take effect. In the absence of such a clause, the bankrupt debtor’s activities shall be limited with the liquidation, and in principle the agreements are not enforceable against the estate.
What conditions apply to the sale of assets / the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted? Are pre-packaged sales possible?
In restructuring process, the debtor is required to obtain the consent from the commissar and the competent court if it wishes to sell its assets or even the entire business during the condordat.
In bankruptcy proceedings, the purchaser would follow strict procedural rules with regard to the realization of assets. Although there may be exceptions, the usual process shall include a value assessment and public auction phases and the property shall be sold to the higher bidder.
Both in restructuring and insolvency proceedings, the purchaser acquires the assets free and clear of any claims and liabilities.
Security cannot be released without creditor consent.
Credit bidding is not regulated by the EBL.
With respect to pre-packaged sales, unless decided otherwise by the general assembly, the liquidator can perform the sale of the active assets of the company by way of negotiation. If the subject of the sale constitutes a wholesale of a significant amount, then a general assembly resolution is required.
What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty? Is there any scope for other parties (e.g. director, partner, shareholder, lender) to incur liability for the debts of an insolvent debtor?
In the event the last annual balance sheet of the company indicates that half of the sum of the paid-in capital and statutory reserves are lost as a result of accumulated losses, the board of directors must immediately invite shareholders to a general assembly meeting in order to submit the remedial measures.
In case the last annual balance sheet indicates that two-thirds of the sum of the capital and statutory reserves are lost as a result of accumulated losses, it is the liability of the board of directors to convene an immediate general assembly meeting for the shareholders to decide whether the capital shall be fully supplemented or the company shall be satisfied with one-third of the capital, as otherwise the company is deemed abolished.
The board of directors are also under the burden to notify court about the bankruptcy request of the company if the assets are not sufficient to cover the receivables of the creditors.
In case the authorized individuals of a company fail to apply for bankruptcy, they will be punished with imprisonment for up to three months upon the complaint filed by one of the company’s creditors. The board of directors will be liable for the damages arising from such failure.
The managers, directors and officers may be kept liable from the damages of the company resulting from their failure to comply with their duties, or from wrongful intent.
Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?
Restructuring or insolvency proceedings have no effect of releasing directors and other stakeholders from liability for previous actions and decisions.
Will a local court recognise concurrent foreign restructuring or insolvency proceedings over a local debtor? What is the process and test for achieving such recognition? Has the UNCITRAL Model Law on Cross Border Insolvency or the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments been adopted or is it under consideration in your country?
Turkish courts do not recognize insolvency judgments of other jurisdictions granted for a Turkish entity. A decision given for a foreign entity may be enforced in Turkey following the enforcement and recognition process.
Turkish courts will only enforce a final judgment of a foreign court if the relevant judgment is not against public policy rules of Turkiye and does not fall into the exclusive jurisdiction of Turkish Courts. The merchant against whom enforcement is sought should not raise any objection before the Turkish courts to the effect that he was not duly summoned to or represented at the foreign court or that the judgment was rendered in his/her absence in violation of the laws of the foreign country.
Under Turkish Law, compulsory execution is accepted to be an absolute authority granted to the state within the boundaries of that country and is construed as a consequence of the state’s exercise of its sovereignty. Accordingly, the authority of the bankruptcy bodiesis an issue of public policy and is within the exclusive jurisdiction of Turkish Courts.
Finally, the UNCITRAL Model Law on Cross Border Insolvency or the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments have not been adopted by Turkey.
Can debtors incorporated elsewhere enter into restructuring or insolvency proceedings in the jurisdiction?
Judicial powers are vested in and exercised by the courts where the registered addresses of the subject entities are in relation to insolvency filings. The competency of the court pertains to the matter of public order and is exclusive.
As a consequence of the principle of territoriality and the above traditional notion of the Turkish Civil Procedural Law, a debtor incorporated elsewhere shall not be subject to an insolvency proceeding in Turkey. The branch office of a foreign entity may be subject to insolvency proceedings in Turkey limited with its assets.
Depending on the type of its presenceand provided that the foreign debtor has assets in Turkey, it may be subject to restructuring proceedings.
How are groups of companies treated on the restructuring or insolvency of one of more members of that group? Is there scope for cooperation between office holders?
Each individual company must meet the requirements by itself. Under certain conditions and in the event of deficiency of equity capital or when the Company does not have a share capital adequate to cover its activities, the group of companies may be treated as a whole as per the corporate veil lifting principle.
Is it a debtor or creditor friendly jurisdiction?
The EBL provides provisions tending to balance the interest of the creditor and the debtor and aiming to prevent the immoderate violation of the debtor’s right of property while protecting the interests of the creditors for a fair distribution of sale proceeds.
Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?
The decisions concerning the insolvency are adopted by a qualified majority of creditors; in this regard, the creditors with major receivables will have influence in decision making process, as the second creditors’ meeting decides as to whether the bankruptcy administration shall continue its work or not, claims of ownerships, whether the suspended lawsuits shall continue or not, and the sale of certain goods by bargaining.
The state does not influence or interfere the affairs of a company in distress.
With respect to amicable restructuring, the company shall submit its restructuring plan previously negotiated and accepted by the creditors who are affected by the terms of the plan. The Court holds a hearing in which opposing creditors can state their case.
For the plan to become effective, it shall be accepted by half of the total number of the creditors and by a two-third majority by value of creditors who participated in the voting of the plan.
Unions may play a more significant rolewhen restructuring requires dismissal of employees.
What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?
The greatest barrier is the duration of insolvency proceedings. New regulations should be introduced enabling cross border insolvency more efficient.