- Concordat as an Alternative to Suspension of Bankruptcy
- February 16, 2017
- Law Firm: Erdem Erdem Law Office - Istanbul Office
As per the state of emergency declared in the Republic of Turkey on July 20th, 2016, and under Article 4 of Decree Law numbered 669 and dated 31.07.2016, corporations are prohibited from requesting, and the courts are prohibited to rule upon, suspension of bankruptcy. Through this prohibition, yet another opportunity, namely, the concordat, has again come into effect. The meaning of the word ‘concordat’, is a restructuring option for debtors in a poor financial situation, but one that has been rarely applied due to the advantages of suspension of bankruptcy.
A concordat is regulated under Articles 285-309 of the Enforcement and Bankruptcy Code, and aims to protect both the debtors in poor financial standing, as well as their creditors. In the event that a debtor and a creditor agree on a concordat, the debtor clears his/her debts by paying the debt in line with the agreement stipulated under the concordat. Therefore, a concordat may be defined as a reconstruction agreement between the debtor and his/her creditors.
Even if some creditors do not take a part or agree to the concordat, it will be binding upon them. Therefore, in order to have a concordat, two different quora of creditors, and the amount of debt must be agreed upon. Within this scope, the validity of a concordat is subject to approval of one-half of the creditors whose receivables exceed two-thirds of the total debt of the debtor.
Types of the Concordat
The official (judicial) concordat can be made in three different ways: the ordinary concordat; the concordat after bankruptcy (in bankruptcy); and the concordat through asset abandonment. An ordinary concordat can be made in two ways: As per the first option, the creditors may waive some portion of their receivables, and debtor clears his/her debt entirely by paying the agreed amount. As per the second option, the amount remains the same, but the payment is withheld, subject to payment terms. In such case, the payment of the debt can be postponed or split into installments. It is also possible for both types of concordat to be utilized in one case.
Apart from the official concordat, the debtor and the creditors may agree upon, and reconstruct, the debts together. In such a case, the government agencies would not get involved in the agreement amongst the parties. This concordat, which is viewed as the private or special concordat, is subject to the terms of the law of obligations.
The Ordinary Concordat
This concordat is applicable for both debtors who are subject to, or not subject to, the provisions of bankruptcy. The request for concordat can be made by either the debtor or the creditor. If the debtor is a person (real person or legal entity) who is subject to bankruptcy, the provisions of concordat may save itself from becoming bankrupt. Therefore, the ordinary concordat may be used in order to prevent probable risks of bankruptcy.
The debtor wishing to apply a concordat, or any creditor who can request the bankruptcy of the debtor, is entitled to file a concordat proposal through a petition to the Execution Court. If the conditions are met, the Execution Court can grant a term for concordat up to three months in favor of the debtor, and will appoint one or several concordat commissars. The appointed commissars invite the creditors to discuss the concordat proposal. In these meetings, the creditors will decide either to approve or to reject the proposal of concordat. Upon approval of the creditors, the concordat is submitted to the Commercial Court for approval. The Commercial Court who examines the conditions of the concordat either approves or rejects the concordat. Following the approval of concordat by the Commercial Court, the debtor pays its debts in line with the concordat, and will be free from the remaining part of its debts.
The requirement for a term of concordat is to have a probable success through a concordat, with no intention to cause any damage or loss to the creditors. The requirements for the approval of concordat are a ratio between the proposed payment amount and the current of the debtor, an approval of one-half of the creditors whose receivable exceed two-thirds of the total debt, providing necessary security, and depositing litigation expenses and fees.
Even if the concordat is approved, the creditors remain entitled to request the cancellation of the concordat if they realize that the debtor had sought approval of the concordat in bad faith. The cancellation of the concordat may be requested with regard to one creditor, or in whole.
The concordat is binding also upon the creditors who are not parties to the agreement. However, for the pledgee-creditors, the creditors holding a right in rem arising from the state receivables, as well as all other preferential creditors, are not bound by the concordat. Therefore, these creditors have the right to collect their receivables, in their entireties. Those creditors who are bound by the concordat may only collect their receivables from the co-debtors, guarantors or sureties in line with the terms of the concordat. With few exceptions, execution proceedings may not be initiated against the debtor, and execution proceedings that were previously initiated will be suspended. The foreclosure executions will resume, but the assets of the debtors cannot be attached or sold. During the term of the concordat, the provisionary attachments are not implemented, and the lapse of time will not resume. Unless otherwise stipulated in the concordat, interest on the debts that are unsecured with a pledge right will not accrue. Despite such protections in favor of the debtor, to file or resume an action against the debtor remains to be an option.
During the term of the concordat, the debtor’s authority on his/her assets is under the control of the concordat commissar. However, some transactions require the permission of the Court of Execution.
The Concordat after the Bankruptcy (The Concordat in the Bankruptcy)
The concordat after the bankruptcy (the concordat in the bankruptcy) is regulated for those debtors who are already bankrupt. If the concordat is approved, the bankruptcy for the debtor is cancelled with all its effects and outcomes. The debtor submits the request for concordat to the administrator of bankruptcy. The administrator of bankruptcy then informs the creditors of its own opinion concerning this request during the next creditors meeting, or at a later time. In this option, there is no term for the concordat, and neither is a commissar appointed. The provisions of the concordat enter into force not after the concordat’s approval decision, but after the cancellation of the bankruptcy. The bankruptcy concordat is subject to the provisions regulating ordinary concordat terms, as much as they are in conformity thereof.
The Concordat through Asset Abandonment
If the parties agree on this type of concordat, the debtor transfers to the creditors his/her rights to dispose of, or to transfer, the asset, entirely, or in part, to third persons. Through this means, the creditors collect their receivables by disposing of the assets of the debtors that have been transferred to them. The creditors may appoint liquidators; however, the right to dispose of the assets is transferred to the creditors and the liquidators, after the approval of the liquidator by the Court of Execution. The liquidators will dispose of the assets of the debtor in manner that is similar to liquidation in bankruptcy, and will distribute the amount received from the sale to the creditors. Unless they are contradictory, the provisions regulating ordinary concordats are applied to the concordats through asset abandonment. The concordats, through asset abandonment, protect the debtor against the risk of underpriced sales of its assets during the bankruptcy period, and the creditors are protected against the risk of enduring a long bankruptcy period during which they are unable to collect on their debts.
Concordats, which are regulated in detail in the code, have been forgotten for a long while, due to the implementation of suspension of bankruptcy in recent years. However, as the suspension of bankruptcy is prohibited during the state of emergency, concordats will be used more often in the upcoming days.