Insolvency Law at Turkey
Insolvency law in Turkey is primarily governed by the Turkish Commercial Code (TCC) and the Execution and Bankruptcy Law (No. 2004). These legal frameworks outline the procedures for bankruptcy, restructuring, and liquidation of businesses and individuals who are unable to meet their debt obligations.
Here is a general overview of how insolvency law works in Turkey:
1. Types of Insolvency Procedures in Turkey
Restructuring (Reorganization or Restructuring Plan - İflas Ertelemesi): This procedure is designed to help businesses facing financial difficulties but still considered viable. It allows the business to restructure its debts and operations to continue functioning. This process is aimed at avoiding liquidation, giving the debtor an opportunity to recover.
A debtor company can apply for debt restructuring, where the court can grant a suspension of debt payments for up to 3 years, during which time a plan for reorganizing the company’s operations is developed and creditors are involved in the negotiations.
This restructuring process is applicable primarily to corporate entities, not individuals.
Bankruptcy (İflas): This is the liquidation procedure, which is initiated when a debtor is unable to pay its debts and no viable restructuring plan is possible. The court appoints a trustee to liquidate the debtor’s assets and distribute the proceeds to creditors.
If a company’s debts exceed its assets, the court can declare bankruptcy, and the company will be liquidated.
If the company is found to have engaged in fraudulent activities to avoid paying creditors, the bankruptcy process may be delayed or the debtor may face legal penalties.
Individual Bankruptcy: Unlike some jurisdictions that have specific personal bankruptcy laws, individual bankruptcy in Turkey is usually addressed under the bankruptcy procedure in the Execution and Bankruptcy Law. However, individuals are not often subjected to bankruptcy unless they have large debts associated with business activities or personal guarantees given for corporate debts.
2. Insolvency Filing and Initiation
The debtor or creditors can initiate insolvency proceedings in Turkey.
The debtor can file for restructuring or bankruptcy if they are unable to pay debts.
Creditors may request the initiation of bankruptcy proceedings if they believe the debtor will not meet obligations.
Once the court accepts the application for insolvency, the debtor’s assets are temporarily frozen, and no further actions can be taken against the debtor’s assets without the court's approval.
3. The Role of the Court and Court-appointed Trustee
In bankruptcy proceedings, the court appoints a trustee who is responsible for managing the debtor’s assets and selling them to satisfy the claims of creditors.
In restructuring proceedings, a temporary administrator (often appointed by the court) supervises the process of the debtor's business recovery, manages negotiations with creditors, and ensures compliance with the court-approved plan.
4. Debt Restructuring Procedure
During a restructuring process, the debtor, with the assistance of the court-appointed administrator, submits a restructuring plan that details how the business intends to reorganize its debts.
The plan must be approved by the creditors, typically representing at least two-thirds of the total claims.
Debt rescheduling: The debtor may be allowed to extend the time frame for paying debts, reduce the total amount of debts, or convert some debt into equity, depending on the negotiations with creditors.
The aim is to avoid the liquidation of the debtor’s business by facilitating a new repayment plan that creditors accept.
5. Creditors' Rights in Insolvency Proceedings
Creditors' meetings are held during the restructuring process to discuss the proposed plans. The creditors are ranked according to priority for receiving payment from the debtor’s liquidated assets, with secured creditors having the highest priority.
In the liquidation process, the creditors are paid in order of priority. Secured creditors (those with collateral) are paid first, followed by unsecured creditors.
6. Role of the Trustee or Administrator
A trustee or administrator plays a key role in managing the assets of the insolvent debtor, assessing the financial condition of the debtor, and distributing payments to creditors.
In restructuring, the administrator helps to develop the restructuring plan, coordinates negotiations, and implements the court-approved plan.
In bankruptcy, the trustee liquidates assets and follows legal protocols to ensure fair distribution of proceeds to creditors.
7. Post-Insolvency Consequences
If the company is liquidated, it ceases to exist after its assets are sold and proceeds are distributed to creditors. The directors of the company may also face legal consequences if they are found to have mismanaged the company or engaged in fraudulent activity.
For individuals, after the completion of the insolvency procedure, they may still face restrictions on certain financial activities, depending on the nature of the debts and bankruptcy.
8. Corporate Debt Restructuring (Law No. 7253)
Law No. 7253, enacted in 2020, introduced a new framework for restructuring companies with significant debts but which are still considered economically viable.
The law encourages out-of-court negotiations between businesses and creditors before the official insolvency procedure begins, providing more flexibility for businesses to avoid formal bankruptcy procedures.
The law also establishes pre-packaged insolvency plans, which allow for faster, more efficient debt restructuring.
9. Recent Reforms and Trends
Turkey has been modernizing its insolvency framework, particularly with respect to corporate restructuring and rehabilitation procedures. The Law on Restructuring of Debts (7253) offers greater flexibility for businesses in financial distress and is part of efforts to improve Turkey's legal environment for distressed businesses.
The aim of the recent reforms is to allow businesses to avoid liquidation when possible and offer a more structured approach to debt restructuring.
10. International Insolvency Issues
Turkey is also a signatory to various international treaties that may influence cross-border insolvency proceedings. This includes the UNCITRAL Model Law on Cross-Border Insolvency, which provides guidelines for the recognition and cooperation between countries on insolvency matters involving international debtors.
This summary provides a broad understanding of the insolvency law system in Turkey. The specific procedures and outcomes can depend on the nature of the case, such as the type of business, the amount of debt, and the available assets for distribution to creditors. For complex cases, legal advice and representation by a lawyer specialized in Turkish insolvency law is recommended.
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