Turkish bankruptcy laws do not include provisions on "informal" corporate work-outs. However, such work-outs would still be enforceable under Turkish contracts law by the creditors who are parties to them. Informal work-outs must not be used to defraud non-party creditors by hiding assets from them.
Applicable Turkish rules provide for two main types of scheme of arrangement: (i) composition with creditors (konkordato) and (ii) amicable restructuring (uzlaşma yoluyla yeniden yapılandırma). The major differences between the two is that composition applies to all creditors whereas the amicable restructuring can be executed with a group of creditors. In addition, while the composition targets the restructuring of the debt obligations (changing the maturity date, reducing the amount of the debt etc.) the amicable restructuring aims at transforming the business and operations. It may therefore include remedies such as asset transfer, merger with another company or change of management, in addition to the restructuring of the debt. In that sense, the amicable restructuring is more similar to a Chapter 11 procedure under the US law.
Composition with creditors. Insolvent debtors or their eligible creditors (secured or unsecured) may request a composition with creditors from the Turkish commercial courts. After the abolishment of postponement of bankruptcy procedure, it is expected that the composition with creditors will be used more frequently.
The aim of requesting a composition with creditors is to reach an agreement to determine new maturity dates for the debt and/or reduce the amount of debt based on a remedial plan.
If the court decides that the remedial plan is viable, then it grants a period of one year during which the composition process needs to be completed. This one-year composition period may be extended up to only six months in exceptional cases. During this period, the creditors cannot initiate new legal proceedings against the debtor. Additionally, it is not possible to get preliminary injunctions or initiate attachment proceedings against the debtor.
Furthermore, during the composition period, no interest would accrue on unsecured claims. Secured creditors are entitled to initiate or continue with the foreclosure of their pledges; however, no protective measures can be taken or the pledged assets cannot be sold during the composition period.
Amicable restructuring. This scheme of arrangement applies only to corporates (limited companies, joint stock companies or co-operatives save for banks or insurance companies). The amicable restructuring may be initiated by companies which are not able to or may not be reasonably expected to pay their debts. Unlike the composition with creditors explained above, initiating an amicable restructuring is within the discretion of the debtor, who starts negotiations with its creditors to discuss a restructuring project. It is also within the debtor's discretion to decide which debts will be part of the restructuring project and which creditors will be affected by it (i.e. will be part of the restructuring).
If the restructuring project is accepted by the requisite majority of the creditors (being affected by the project), the company applies to the court for its approval. The court hears the debtor company's representatives, creditors present at the hearing, and the auditor (if available). The court should approve a viable project, prepared and submitted in good faith and which complies with the applicable rules. Creditors who have objected to the project are also bound by its terms. However, the amount they are entitled to under the project should be equal to or exceed the amount which they would have received in case of the liquidation of the company upon bankruptcy.
The court may take appropriate measures to protect the debtor's assets during the term of the project, including suspension of legal proceedings initiated against the debtor by affected creditors or prohibiting the affected creditors from getting preliminary injunctions or initiating attachment proceedings against the debtor. However, unlike the composition with creditors the suspension of execution proceedings is not automatic or by virtue of law, but is within the discretion of the relevant court.
Our Istanbul office
Our Istanbul office draws on the firm’s established Turkey practice to counsel clients in corporate, M&A and securities, private equity, privatization, capital markets, corporate finance and project finance. The Istanbul team has significant experience in a variety of sectors, including banking and finance, financial services, telecommunications, energy, real estate, consumer markets, renewables and construction and engineering. Our Istanbul-based professionals are all natives of Turkey and are fluent in Turkish and English. Through our professional affiliation with our local law firm, we provide clients with Turkish legal advice.