Authors Stephen Baister and Elif Altınsoy
Stephen Baister Chief Bankruptcy Registrar, High Court of Justice, London.ElifStephen Baister Chief Bankruptcy Registrar, High Court of Justice, London.
Elif Altınsoy Lawyer, Altınsoy Law Office (Hukuk Bürosu), Istanbul, Turkey.TheAltınsoy Lawyer, Altınsoy Law Office (Hukuk Bürosu), Istanbul, Turkey.
THE BANKRUPTCY LAW OF THE REPUBLİC OF
Mustafa Kemal Atatürk’s modern Turkish Republic’s looked to the West rather then the East when it wished to codify or reform its cumbersome laws accelerating a process that had been
underway for a century before the founding of the modern republic.
That process continues today: the Turkish Commercial Code (Türk Ticaret Kanunu) is being redrafted according to a Swiss model, and there is an increasing tendency in Turkey to adopt or adapt EC legislation where it is available, unsurprising in the light of the
country’s aspiration to EC membership.
Turkish insolvency or bankruptcy law (the term ‘bankruptcy’ is generally used for the Turkish iflâs although as we shall see it does not apply primarily to individuals) falls squarely. The Enforcement and Bankruptcy Law (İcra ve İflâs Kanunu) of 1932 (Law No 2004 of 9 July 1932) in its original form was based on Swiss federal legislation, large portions of which were simply incorporated as translations of the original text. The recent amendments (which followed the economic crisis of 2000-2001 which saw significant growth in the number of bankruptcies and a devaluation of the Turkish currency) have focussed on rehabilitation and rescue and are said to have been influenced by US corporate rescue provisions (this applies in particular to the bankruptcy postponement procedure described on p 70).
The Enforcement and Bankruptcy Law (‘E&BL’) is supplemented by a number of pieces of secondary legislation notably the Enforcement and Bankruptcy Law Practice Rules (İcra ve İflâs Kanunu Tatbikatına Dair Nizamnamesi) 1932, the Enforcement and Bankruptcy Law
Regulations (İcra ve İflâs Kanunu Yönetmeliği) 2005 and various other rules and regulations governing matters such as advertising, fees and expenses and so forth.
NATURE OF BANKRUPTCY
It is not insignificant that the Turkish legislation on bankruptcy is to be found in a law which also deals with enforcement or execution. In many respects it is more akin to a form of general or collective execution than to more developed insolvency systems. The process does not release the debtor from its obligations which may survive the process. The differences between bankruptcy and enforcement are often explained by reference to the principle of equality of treatment and the element of creditor control in bankruptcy. Another important
difference is that a debtor may apply for his own bankruptcy.
Turkish bankruptcy law differs from execution or enforcement (and from insolvency proceedings in many jurisdictions) in another significant respect: the remedy is available only against traders or merchants (tacirler) (s 20 E&BL; s 43 Turkish Commercial Code). An
individual who holds himself out as being a trader or merchant is thus susceptible to bankruptcy, but generally the remedy is available against businesses rather than individuals. The key to establishing whether a debtor is a trader is generally whether the business is registered in the commercial register (ticaret sicili), although other persons and
entities (for example, ship owners) are deemed to carry on trade or are otherwise deemed susceptible to bankruptcy by specific provisions.
Turkish insolvency law has been amended to focus on the rescue and rehabilitation of insolvent debtors and offers a range of solutions to creditors although enforcement.
Turkish law recognises a wide range of entities but only certain categories may be made bankrupt. It is not possible to bankrupt an association (dernek) or a charitable trust or foundation (vakıf) since neither is permitted to carry on trade. An individual may not be made bankrupt unless he holds himself out as a trader: only execution is available against him. However, a simple partnership (adi şirket) may be bankrupted even though it is formed by contract, has no separate legal personality and is governed by the Law on Obligations (Borclar Kanunu) rather than the Commercial Code. Entities which do require registration and have legal personality are the collective company (kollektif şirket), the limited partnership company (komandit şirket), the joint stock company (anonim şirket) and the limited company (limited şirket). A foreign company trading in Turkey would also be susceptible to bankruptcy if a local branch were registered in the commercial register.
A person who has abandoned his business may be subject to bankruptcy one year after he has ceased trading and given notice under s 44 in the Trade Registry Gazette (Ticaret Sicil Gazetesi). Special provisions also allow bankruptcy proceedings to be brought against the
partners of a collective company or limited partnership and the directors of banks or otherfinancial institutions who have allowed business to be carried on in breach of legislation (s 17 Banking Law No 4389, 1999).
Whilst a Turkish bankruptcy is in theory universal, in practice it is limited to territorial assets with the main problem appearing to be a lack of recognition in foreign countries (an opinion expressed by Judge Mubarra Guldal and Judge Munira Ceylan of the Istanbul High
Commercial Court, 13 June 2008).
A number of state and other bodies are concerned with the administration and supervision of bankruptcy in Turkey.
The enforcement authority or enforcement office (icra dairesi) (s 1) is responsible for issuing and serving a creditor’s demand for payment where the bankruptcy process is begun by serving a demand on the debtor. The demand must generally be satisfied within seven days of
service if the debt is not disputed. A debtor wishing to dispute the demand must do so by notifying the icra dairesi of the dispute (ss 154, 155, 167, 171 and 172). However, that body has no role in determining the dispute. That is the job of the commercial court (ticaret mahkemesi) which is the court which generally exercises bankruptcy jurisdiction.
Apart from hearing the application for a bankruptcy order and dealing with any grounds of dispute (ss 154, 158, 173, 174 and 177), the commercial court also deals with applications made in the bankruptcy after the proceedings have been opened. Although creditors and others may apply to the court, it does not exercise any general control over the bankruptcy which remains largely in the hands of the creditors and the administrators they appoint.
The enforcement authority is subject to control by the enforcement
court (icra mahkemesi) (ss 4 & 16).
The bankruptcy authority or bankruptcy office (iflâs dairesi) (s 2) attached to each court plays a role which is in some respects similar to, albeit more restricted than, that of the Insolvency Service. Its main role is to advertise and give notice of the opening of bankruptcy proceedings
and to summon the first meeting of creditors which is chaired by the bankruptcy director (iflâs müdürlüğü) or one of his assistants. The bankruptcy authority is also responsible for initially securing the bankrupt’s assets and maintaining records relating to the conduct of the bankruptcy, in particular the register of creditors. It is responsible for convening meetings and also has a supervisory role in relation to the bankruptcy administrators. It is accountable to the state prosecutor (cumhuriyet savcısı) and the ministry of justice.
A number of state and other bodies are concerned with the administration and
supervision of bankruptcy in Turkey.
The bankruptcy administration (iflâs idaresi) consists of three administrators (ss 223, 226 and 227) who conduct the liquidation of the bankrupt’s assets and the administration of the bankruptcy. They are nominated at the first meeting of creditors but need not be
creditors themselves (s 223). The administrators become the legal representatives of the bankrupt and the creditors (s 226) and have the power to do all that is necessary for the administration of the estate, including taking or continuing proceedings and entering into
contracts. They must act for the benefit of the creditors to whom they owe a duty of good faith. They are subject to supervision by the bankruptcy authority (s 223).
Turkish bankruptcy proceedings are summary in the extreme. The reforms of 2003 and 2004 introduced tight time limits with a view to speeding up a process which had become regarded as too heavily weighted in favour of debtors. Those reforms were, however, complemented by others introducing new or improving on existing rescue proceedings. A trader may be subject to bankruptcy in respect of almost any kind of debt whether arising out of a money claim (s 20 Turkish Commercial Code) or default in relation to security (teminat) (s 42). However, a creditor may only bring bankruptcy proceedings in respect of a secured debt if he has failed to recover the amount due in proceedings to enforce the security (s 45).
The text books generally distinguish between (a) bankruptcy following service of a demand (takipli iflâs), sometimes called ordinary bankruptcy (adi iflâs), and (b) bankruptcy without demand (takipsiz iflâs), sometimes called direct bankruptcy (doğrudan doğruya iflâs).
Bankruptcy proceedings must generally be brought in the area of the debtor’s principal place of business (s 154). Proceedings may be brought by foreign creditors as well as Turkish creditors. Note, however, that a foreign creditor may be required to deposit security for costs as a condition of bringing proceedings. Any creditor must in any event pay a deposit of TL 4,000 on account of the costs of administering the bankruptcy in the event of an order being made.
The creditor begins this form of proceeding by requesting the enforcement authority to serve on the debtor a demand or order to pay (ödeme emri) the debt said to be due. The demand is supposed to be served within three days and the debtor has only seven days after
service in which to dispute the debt (ödeme emrine itiraz etmek) or pay (s 155). There is no prescribed method of raising the dispute: a letter accompanied by relevant documents may suffice.
If the debtor fails to take one of those courses the creditor may apply to the commercial court for a bankruptcy order at any time up to one year after service of the demand. If the debtor fails to pay or dispute the debt the court will generally make a bankruptcy order (s 156 I).
Hearings in Turkish civil courts are perfunctory. Oral evidence is rarely taken since heavy weight attaches to documentary evidence. Hearings are largely confined to clarifying matters for the benefit of the court before judgment is given (generally by the presiding judge of
a bench of three judges) on the basis of a decision which will generally have been reached before the hearing. If a dispute has been raised the court will hear it at the same time as the application (s 156 III) but the burden is on the creditor to satisfy the court that the dispute is not genuine. The creditor may withdraw its application at any time up to the making of an order but may also renew the application within a month of so doing (s 157).
The court will not generally make a bankruptcy order straightaway. If it resolves the dispute in favour of the creditor it will generally make a provisional order (called a depo kararı) giving the debtor seven days in which to pay the money into court (s 157). If the debtor fails to pay a bankruptcy order (iflâs kararı) will be made (s 158).
An appeal may be made but the time limit for doing so is 15 days (s 158). An appeal in bankruptcy, like any other appeal, lies to the Supreme Court (Yargitay).
If the creditor’s claim is based on a bill of exchange or similar instrument an even speedier procedure (kambiyo senetlerine özgü iflâs) may be invoked (ss 167, 171-176b). This is a sub-species of the ordinary
proceedings, the main difference being that the debtor has only five days in which to dispute the demand.
Direct bankruptcy is available on the application of a creditor (s 177) or the debtor (s 178). No demand or order to pay is served. A creditor may apply for direct bankruptcy where:
. the debtor’s residence cannot be ascertained;
. the debtor has absconded to avoid its creditors;
. the debtor has engaged in or attempted to engage in fraudulent
-transactions which threaten the interests of creditors;
. the debtor has concealed assets to avoid execution;
. the debtor has suspended payments to creditors;
. the debtor has failed to satisfy a final judgment or order served on it by the enforcement office;
. a voluntary arrangement proposal has been rejected by the court
or a moratorium period is cancelled by the court;
. the debtor’s liabilities exceed its assets.
A debtor may apply for its own bankruptcy on the basis of inability to pay its debts as they fall due. When making the application for an order the debtor must submit a list of assets and liabilities together with the names and addresses of creditors. The court will decline to
make an order without this information.
A debtor is obliged to apply to the commercial court for a bankruptcy order if it is subject to execution which reduces its assets by more than 50 per cent in value and the remaining assets are not sufficient to enable the debtor to pay debts falling due within one year.
Failure to do so is a criminal offence and may result in a prison sentence of between one month and two years.
The court has a wide discretion to grant interim relief to protect the interests of creditors pending the making of a bankruptcy order. The court may order:
. an inventory to be taken of the debtor’s assets;
. determination of the extent and value of the debtor’s assets;
. payment of money due to the debtor to be made to the commercial court or the bankruptcy authority;
. an inhibition to be placed on the land registries to prevent the transfer of property.
CONSEQUENCES OF BANKRUPTCY
If the court makes a bankruptcy order it notifies the office of the bankruptcy authority attached to the court which in turn notifies the relevant land registry, the commercial registry, the customs administration, the Turkish Banks Association, the Stock Exchange,
the Capital Markets Board, local chambers of industry and commerce and the post office ofthe making of the order. The order must also be advertised in one of the five national newspapers with the highest circulation figures and in the Commercial Registry Gazette.
On the opening of bankruptcy proceedings by the making of an order the debtor becomes bankrupt (müflis). A bankrupt does not lose any civil rights but does lose control of its assets. Although the bankrupt’s assets form the bankruptcy estate (s 184) they do not vest
in the administrators. Secured property also falls into the estate but subject to the rights of the secured creditor (s 185). After the making of an order only the administrators have the authority to dispose of assets in the estate (s 226). Any disposition of assets by the bankrupt after the opening of the bankruptcy proceedings is void (s 191). Creditors may no longer pursue the bankrupt, and any proceedings must be stayed or discontinued (s 193). No proceedings may be brought against the bankrupt. Interest on claims continues to run (s 196). However, interest will only be paid out of distributions when principal has been paid. The bankrupt is obliged to surrender its assets. Failure to do so may result in imprisonment for a period of one month to two years.
A number of contracts such as leases, leasing agreements and agency contracts (s 133 Turkish Commercial Code) terminate automatically on bankruptcy; bankruptcy also terminates an ordinary partnership (s 535).
CONDUCT OF THE BANKRUPTCY
Pending the first meeting of creditors and the appointment of administrators the insolvency authority is obliged to get in and safeguard the assets of the bankrupt (ss 208 and 210). It must
advertise the bankruptcy within 10 days of the opening of proceedings (s 219) in one of five newspapers with the greatest circulation, a local newspaper and the commercial register Gazette (s 166). Creditors then have 30 days in which to make their claims in the bankruptcy. A register of creditors must be kept by the bankruptcy administration.
If the bankrupt has no assets, the value of the assets is insufficient to cover the costs of the bankruptcy or the creditors are not prepared to put up the costs, the bankruptcy may be suspended on the application of the debtor or the creditors. Where there are sufficient assets the insolvency authority proceeds to conduct an ordinary bankruptcy (adi iflâs).
A first meeting of creditors (ilk alacaklılar toplantısı) is convened (ss 221 and 233-238), the main purpose of which is to appoint bankruptcy administrators (s 221). For that purpose four candidates are nominated by a vote of creditors by value and two are nominated by a vote by
number. In consultation with the insolvency authority the court then selects two from the first group and one from the second to make a total of three administrators. No professional qualification is prescribed, so the administrators may be creditors or agents nominated by them. However, as a general rule they are lawyers or accountants.
The first meeting of creditors may also consider whether it is appropriate to propose an arrangement (konkordato) for dealing with the debtor’s affairs.
To be quorate the first meeting of creditors must be attended (in person or by proxy) by a quarter of creditors in value. If fewer than five creditors are present or represented they must represent at least half of creditors’ claims to constitute a quorum.
Following the first meeting of creditors the administrators establish the extent of the bankrupt’s assets and liabilities and investigate the creditors’ claims. Any claims for damages or of a non-pecuniary nature must be valued and converted into a monetary claim (s 198). If they reject a claim they must give reasons for doing so. A creditor whose claim is rejected may apply to the court within 15 days by way of an application for acceptance of registration of its claim (kayıt kabul davası) (ss 233-235). A creditor whose claim is rejected is precluded from attending the second meeting of creditors.
The second meeting of creditors (ikinci alacaklılar toplantısı) (ss 237240) takes place when the assets and liabilities have been established. The purpose of the second meeting is to consider the timing and manner of the disposal of the bankruptcy estate and to fix the order of
priority for the creditors who have lodged claims. Generally the assets are disposed of by public auction (açık artırma) but open market sale (pazarlık suretiyle satış) may also be permitted.
Distributions are made in accordance with the following priorities (s 206). (The provisions are quite detailed; the following is a summary of the broad principles.)
. Tax and social security contributions, wages and other sums due to employees for the period of one year before the opening of the bankruptcy;
. claims of wards and dependents of the bankrupt;
. other claims specifically provided for by legislation (including
medical claims and those of agents);
. all other claims.
The claims of a higher rank of creditors must be satisfied in full before creditors lower in the order of priorities receive a dividend, but creditors rank equally within each class (s 207). A creditor whose claim remains unsatisfied receives a certificate of insolvency (acız belgesi) (s
251) enabling him to levy execution against any assets the debtor may acquire after the closing of the bankruptcy.
After making distributions the administrators make a final report to the court which then makes an order closing the bankruptcy and providing for that to be advertised (s 254). The bankrupt may apply for the return of any assets not liquidated for the bankruptcy (s 255).
Sections 277-280 provide jurisdiction to set aside antecedent transactions by means of what are called annulment proceedings (iptal davası). The purpose of these is not to annul the bankruptcy but a transaction entered into before the bankruptcy. They enable an application to be made to set aside transactions entered into for inadequate or no consideration or at an undervalue or obligations entered into in contemplation of or knowledge of insolvency.
‘Normal’ gifts (such as wedding and birthday presents and the like) are expressly excluded from attack.
Various time limits apply as to how far back in time the relevant transaction may be: broadly 2-5 years is the general rule, but it would appear that there is no time limit for transactions entered into in fraud of creditors.
Proceedings may be brought by the administrators or by a creditor, but any recovery must go into the bankruptcy estate for the benefit of all the creditors (s 283).
RESCUE AND REHABILITATION
A composition or voluntary arrangement (konkordato) may be proposed either in bankruptcy, where it is sometimes referred to as an ordinary voluntary arrangement (adi konkordato), or outside bankruptcy (iflâs dışı) (ss 285-309).
The proposal is presented to the enforcement court rather than the commercial court if it is made before bankruptcy; it is filed with the insolvency authority if made after bankruptcy. The most common form of proposal is for payment over a period of time. However, a proposal may also take the form of an assignment of all or part of the debtor’s assets in satisfaction of creditors’ claims (malvarlığını terki suretiyle konkordato).
If the proposal is made before bankruptcy and appears to the court to be viable, the court imposes a moratorium (to which creditors may object) and appoints a commissioner (konkordato komiseri) to examine the debtor’s affairs and report to the creditors at a meeting summoned to consider the proposal (s 294). Approval of the proposal requires a majority in value of two thirds of creditors and court approval (s 298).
If the proposal is not approved, fails or the moratorium is lifted a bankruptcy order may be made.
The konkordato is, however, now rarely used (it had a bad success rate according to Judge Seyfettin Tan (interview 13 June 2008)). In practice it has been replaced by the more flexible iflâsin ertelenmesi (literally ‘postponement of bankruptcy’)(s 179 a & b; s 324(2) Turkish
Commercial Code). The procedure is based on the US Chapter 11. The debtor presents a rehabilitation plan (literally ‘improvement plan’, iyileştirme projesi) to the court.
If the court decides it is viable it may grant a moratorium for a period of up to one year and appoint a caretaker (kayım) to give effect to the plan. The court may extend the moratorium for further one year periods up to a maximum period of four years. If the plan fails
the court may make a bankruptcy order. (Judge Seyfettin Tan of the Istanbul High Commercial Court expressed the view that in reality the procedure was no better than the konkordato, indeed was often abused simply to dispose of assets to the detriment of creditors.)
The E&BL also provides for the restructuring of companies or collectives by a process called sermaye şirketleri ve kooperatiflerin uzlaşma yoluyla yeniden yapılandırılması (a scheme of reconstruction).
This allows a company in financial difficulty to apply to the court for sanction of a scheme with the approval of half of its creditors in number and two thirds in value.
It will be seen that the Turkish bankruptcy system is dated and rudimentary. It is unsurprising, therefore, that it is used much less than in many other legal systems. The preferred method of seeking to secure payment of a debt is haciz (attachment). Although this
appears to be a form of execution it is in fact a summary procedure
for debt collection which is effective and efficient. A demand for payment is served on the debtor, and if it fails to object or dispute the debt the creditor may seek execution. It is akin to obtaining a default judgment.
Corporate Rescue and Insolvency April 2009 Vol.2.2