INTRODUCTION
A concordat is a legal mechanism that enables a debtor who is unable to pay its debts as they fall due, or is at risk of becoming unable to do so, to repay its debts on extended terms and/or at a reduced amount and to restructure its financial position.
The concordat procedure, governed by Articles 285 et seq. of the Enforcement and Bankruptcy Law No. 2004 (the “EBL“), is intended to improve the debtor’s financial condition, while also materially affecting the conditions under which creditors may recover their claims. In particular, the granting of provisional and definitive moratorium periods during concordat proceedings generally stays ongoing enforcement proceedings against the debtor and prevents new proceedings from being commenced. Therefore, it is important for creditors to file their claims, assess the concordat proposal and exercise the rights afforded to them by law within the applicable time limits.
Accordingly, the commencement of concordat proceedings in respect of a company does not mean that creditors lose the ability to recover or otherwise legally protect their claims. However, because concordat proceedings involve significant deadlines and procedural steps for creditors, the process must be monitored closely and the necessary legal action must be taken in a timely manner having regard to the nature of each claim.
This article first explains the stages of concordat proceedings and then addresses the effect of the concordat moratorium on enforcement proceedings and litigation, the filing of claims and the consequences of failing to file them, the treatment of disputed claims, the negotiation and voting process in respect of the concordat proposal, and the legal remedies available to creditors against the proposal and the decision confirming the concordat.
CONCORDAT PROCEEDINGS AND THEIR STAGES
Concordat proceedings commence upon an application to the court by the debtor or by a creditor entitled to petition for the debtor’s bankruptcy. If all required documents are duly submitted, the court grants a three-month provisional moratorium and appoints a concordat commissioner. The provisional moratorium may be extended by up to two months. If the court considers that the concordat is capable of succeeding, it grants a one-year definitive moratorium, which may be extended by up to six months in exceptional circumstances.
During the definitive moratorium, claims are filed and the concordat proposal is negotiated and voted on by the creditors. After the commissioner submits the commissioner’s report, the court assesses the conditions set out in Article 305 of the EBL and decides whether to confirm or reject the concordat. Once confirmed, the concordat becomes binding on creditors to the extent prescribed by law.
EFFECT OF THE CONCORDAT MORATORIUM ON ENFORCEMENT PROCEEDINGS AND LITIGATION
Pursuant to Article 294 of the EBL, during the definitive moratorium no new enforcement proceedings may be commenced against the debtor, including proceedings under Law No. 6183 on the Procedure for the Collection of Public Receivables, and any enforcement proceedings previously commenced are stayed. As the provisional moratorium produces the same legal effects as the definitive moratorium, the stay on enforcement takes effect upon the granting of the provisional moratorium.
Accordingly, as a general rule, during the concordat moratorium:
- no new enforcement or bankruptcy proceedings may be commenced against the debtor;
- no further enforcement measures may be taken in proceedings commenced before the moratorium;
- interim injunctions and provisional attachment orders may not be enforced; and
- limitation periods and statutory time bars capable of being interrupted by an enforcement act do not run.
The stay of proceedings commenced before the moratorium does not extinguish those proceedings; it merely prevents them from progressing during the moratorium. By contrast, as a general rule, the stay on enforcement does not prevent the commencement of legal proceedings or the continuation of pending litigation.
A. Status of Claims Arising Before the Concordat and During the Moratorium
The date on which a claim arises is relevant in determining whether that claim is subject to a confirmed concordat. Pursuant to Article 308/c of the EBL, unless the concordat proposal provides otherwise, claims arising before the application for concordat and claims arising during the moratorium without the commissioner’s approval are subject to the confirmed concordat.
By contrast, obligations incurred during the moratorium with the commissioner’s approval are not subject to the binding provisions of the confirmed concordat. Pursuant to Article 308/c of the EBL, in an ordinary concordat such claims are paid without being subject to the terms of the concordat and, if the debtor subsequently becomes bankrupt, are treated as debts of the bankruptcy estate. However, the fact that such claims are not subject to the concordat does not mean that they may automatically be pursued through enforcement proceedings while the moratorium remains in effect. Whether enforcement may be pursued during the moratorium must be assessed separately in light of the stay on enforcement and the exceptions thereto set out in Article 294 et seq. of the EBL.
B. Exceptions to the Stay on Enforcement
The stay on enforcement during the concordat moratorium is not absolute. Pursuant to Article 294 of the EBL, enforcement by way of attachment may continue during the moratorium in respect of the following claims ranking in the first category under Article 206 of the EBL:
- employees’ claims arising from the employment relationship and accrued within the period specified by law, including notice and severance pay;
- amounts owed by employers to employee benefit funds or other employee welfare organizations established for employees; and
- maintenance claims arising under family law and accrued within the period specified by law.
Accordingly, enforcement by way of attachment may be pursued in respect of these claims notwithstanding the concordat moratorium.
C. Enforcement in Respect of Secured Claims
Article 295 of the EBL contains a specific regime for claims secured by a pledge. During the concordat moratorium, enforcement proceedings for the realization of pledged assets may be commenced and proceedings already commenced may continue. As a general rule, however, measures to take the pledge into custody may not be implemented and the pledge may not be sold.
However, if the collateral is not intended to be used by the business under the concordat proposal, or if it is likely to depreciate or be costly to preserve, the court may, at the request of the secured creditor and after obtaining the opinion of the concordat commissioner, authorize the collateral to be taken into custody and sold. Accordingly, although enforcement proceedings in respect of secured claims may be commenced, custody and sale measures may be carried out only where the exceptional conditions set out in Article 295 of the EBL are satisfied.
D. Effect of the Concordat Moratorium on Litigation
As a general rule, legal proceedings may be commenced against the debtor during the concordat moratorium and proceedings commenced before the moratorium may continue. The prohibition under Article 294 of the EBL concerns compulsory enforcement proceedings, and there is no general statutory provision preventing proceedings from being brought against the debtor.
Accordingly, during the moratorium a creditor may bring proceedings to establish the existence or amount of its claim, and proceedings commenced before the moratorium will, as a general rule, continue to be heard. However, a judgment in favor of the creditor does not mean that the resulting judgment may be enforced through compulsory enforcement during the moratorium. The stay on enforcement and the exceptions thereto under Article 294 of the EBL continue to apply to enforcement of the judgment.
Thus, as a general rule, the concordat moratorium does not prevent a claim from being asserted through judicial proceedings; rather, it restricts recovery of the claim through compulsory enforcement.
ASSERTION AND RECOVERY OF CLAIMS DURING CONCORDAT PROCEEDINGS
Because individual enforcement as a means of recovery is generally restricted during the concordat moratorium, it is important for a creditor to file its claim in due form and participate in the negotiation and voting process relating to the concordat proposal in order to protect and recover its claim.
A. Filing of Claims
Pursuant to Article 299 of the EBL, the concordat commissioner invites creditors, by an announcement published in the Turkish Trade Registry Gazette and on the official announcements portal of the Press Advertisement Agency, to file their claims within fifteen days, and sends a copy of the announcement by post to creditors whose addresses are known.
When filing a claim, it is important to state the amount and legal basis of the claim and to submit the agreement, invoice, negotiable instrument, court decision or other documents evidencing the claim. Following the filing, pursuant to Article 300 of the EBL, the commissioner invites the debtor to comment on the claims filed and examines the debtor’s books and records to determine whether the claims exist.
B. Consequences of Failure to File a Claim
Failure to file a claim within the prescribed period does not, as a matter of substantive law, automatically extinguish the claim; however, it may affect the creditor’s participation in the concordat proceedings.
Indeed, pursuant to Article 299 of the EBL, creditors that fail to file their claims within the fifteen-day period are not admitted to the negotiations on the concordat proposal unless their claims are recorded in the debtor’s balance sheet. It is therefore particularly important for claims not recorded in the debtor’s balance sheet to be filed with the commissioner within the prescribed period.
C. Disputed Claims
The debtor’s refusal to accept a claim that has been filed does not extinguish the claim, but may result in the claim being treated as a disputed claim for purposes of the concordat proceedings.
Pursuant to Article 302 of the EBL, the court determines whether disputed claims or claims subject to a condition precedent are to be included in the calculation of the concordat majority and, if so, to what extent. The court’s decision for this purpose does not have res judicata effect as to the existence or amount of the claim under substantive law; it serves only to determine the concordat majority. Where necessary, the existence and amount of the claim are determined in separate proceedings brought under the generally applicable provisions of law.
D. Negotiation and Voting on the Concordat Proposal
The concordat proposal is negotiated at the creditors’ meeting convened by the commissioner and is voted on in accordance with the majorities prescribed by Article 302 of the EBL. Creditors may review the documents relating to the concordat proposal during the seven days preceding the meeting and may express their views on the proposal at the meeting.
For the concordat proposal to be deemed accepted, it must be signed by a majority exceeding either (i) one-half of the recorded creditors and one-half of the aggregate amount of recorded claims, or (ii) one-quarter of the recorded creditors and two-thirds of the aggregate amount of recorded claims.
Only creditors affected by the concordat proposal may vote. In the case of secured claims, only the unsecured portion is taken into account. The debtor’s spouse and children, as well as the parents and siblings of both the debtor and the debtor’s spouse – even if the marriage has ended – are excluded from the calculation of both the majority in number of creditors and the majority by amount of claims.
In addition to votes cast at the creditors’ meeting, votes cast during the seven-day accession period following the meeting are also taken into account in calculating the relevant majority. Creditors should therefore assess the reduction, maturity and payment terms contemplated by the proposal and participate in the negotiation and voting process, as this will affect the terms on which their claims may be recovered under the concordat.
CONFIRMATION OF THE CONCORDAT, CREDITORS’ RIGHT TO OBJECT AND APPELLATE REMEDIES
Acceptance of the concordat proposal by the statutory majority of creditors is not, in itself, sufficient for the proposal to produce legal effect. For the concordat to become binding, it must be confirmed by the court. Creditors may raise objections in the confirmation proceedings and, subject to the conditions prescribed by law, may pursue appellate remedies against the confirmation decision.
A. Confirmation of the Concordat and Creditors’ Right to Object
Following completion of the creditors’ meeting and the accession period, the commissioner submits to the court the documents relating to the concordat together with a reasoned report stating whether the concordat proposal has been accepted. In the confirmation proceedings, the court examines whether the conditions set out in Article 305 of the EBL have been satisfied.
Pursuant to Article 304 of the EBL, the date of the confirmation hearing is announced. The announcement states that objecting parties may attend the hearing provided that they submit their grounds of objection in writing at least three days before the hearing. Accordingly, it is important that creditors wishing to raise objections to confirmation of the concordat at the hearing should submit their grounds of objection to the court in writing within the prescribed period.
In particular, when considering whether to confirm the concordat, the court assesses:
- whether, in an ordinary concordat, the amount offered exceeds the amount that creditors would likely recover if the debtor were declared bankrupt;
- whether the amount offered is proportionate to the debtor’s resources;
- whether the proposal has been accepted by the majority prescribed by law;
- whether full payment of the privileged claims prescribed by law and performance of obligations incurred during the moratorium with the commissioner’s approval have been adequately secured, unless the relevant creditor has expressly waived such security; and
- whether the required costs of the proceedings and the fee payable depending on the nature of the confirmation decision have been deposited.
Creditors who consider that these conditions have not been satisfied may raise their objections in the confirmation proceedings.
B. Effects of a Confirmed Concordat on Creditors
As a general rule, a confirmed concordat is binding in respect of claims arising before the application for concordat and claims arising during the moratorium without the commissioner’s approval. Creditors whose claims are subject to the concordat may seek payment in accordance with the percentage, maturity and other payment terms set out in the confirmed proposal.
However, pursuant to Article 308/c of the EBL, privileged claims ranking in the first category under Article 206 of the EBL, the portion of secured claims covered by the value of the collateral, and public receivables falling within the scope of Law No. 6183 are not subject to the binding provisions of the concordat.
C. Appellate Remedies Against the Confirmation Decision
Pursuant to Article 308/a of the EBL, appellate remedies are available against a decision concerning the concordat. Accordingly, the debtor or creditor that applied for the concordat may file an appeal within two weeks of service of the decision, while other creditors that objected may file an appeal within two weeks of publication of the confirmation decision. A cassation appeal against the decision of the Regional Court of Appeal may also be filed within two weeks. The appeal and cassation proceedings are conducted in accordance with the Code of Civil Procedure.
For creditors other than the parties applying for concordat, the status of an “objecting creditor” under Article 308/a of the EBL is significant for purposes of the right to pursue appellate remedies. Accordingly, creditors opposing the concordat proposal should place their objections on record during the concordat proceedings and, following publication of the confirmation decision, observe the applicable appeal period in order to avoid any loss of rights.
CONCLUSION
Concordat proceedings are intended to restructure the debtor’s financial position, but they also materially affect creditors’ ability to pursue and recover their claims. Given the restrictions on enforcement during the concordat moratorium, the requirement to file claims within specified time limits and the binding effect of a confirmed proposal on creditors whose claims are subject to the concordat, creditors should actively monitor the proceedings.
In this context, in order to protect their rights, creditors should determine the nature of their claims and whether those claims are subject to the concordat, file their claims within the prescribed period, participate in the negotiation and voting process relating to the concordat proposal and, where necessary, exercise their rights to object and pursue appellate remedies in the confirmation proceedings.
In conclusion, protecting creditors’ rights in concordat proceedings is not limited to filing their claims. Depending on the nature of the claim, creditors should also consider relying on applicable exceptions to the stay on enforcement, pursuing the necessary legal remedies in respect of disputed claims, participating effectively in the negotiation and voting process relating to the concordat proposal, and raising the necessary objections at the confirmation stage.
FREQUENTLY ASKED QUESTIONS
Does the commencement of concordat proceedings mean that the debtor’s debts are extinguished?
No. The commencement of concordat proceedings does not automatically extinguish the debtor’s debts. The percentage and maturity at which claims subject to the concordat will be paid are determined by the confirmed concordat proposal.
Can enforcement proceedings be commenced against a company subject to concordat proceedings?
As a general rule, during the concordat moratorium no new enforcement or bankruptcy proceedings may be commenced against the debtor, and proceedings commenced before the moratorium are stayed. However, the EBL provides for exceptions to the stay on enforcement, including in particular for privileged and secured claims.
Can legal proceedings be brought during the concordat moratorium?
Yes. As a general rule, the concordat moratorium does not prevent legal proceedings from being brought against the debtor or pending proceedings from continuing. However, the stay on enforcement during the concordat moratorium must be taken into account when seeking to enforce any judgment obtained in such proceedings.
What is the time limit for filing a claim in concordat proceedings?
Pursuant to Article 299 of the EBL, creditors are invited to file their claims within fifteen days of the concordat commissioner’s announcement.
Is a claim extinguished if it is not filed in concordat proceedings?
No. Failure to file a claim within the prescribed period does not automatically extinguish the claim. However, a creditor that neither files its claim nor has its claim recorded in the debtor’s balance sheet will not be admitted to the negotiations on the concordat proposal.
What happens if the debtor does not accept a claim that has been filed?
The debtor’s refusal to accept the claim does not extinguish it. The court may determine whether the disputed claim is to be included in the calculation of the concordat majority and, if so, to what extent. Where necessary, the existence and amount of the claim may be determined in separate proceedings under the generally applicable provisions of law.
Can a creditor object to confirmation of the concordat?
Yes. Pursuant to Article 304 of the EBL, objecting creditors may attend the confirmation hearing and raise their objections, provided that they submit their grounds of objection in writing at least three days before the hearing.
Are appellate remedies available against a decision confirming the concordat?
Yes. Pursuant to Article 308/a of the EBL, the debtor or creditor that applied for the concordat may file an appeal within two weeks of service of the decision, while other creditors that objected may file an appeal within two weeks of publication of the confirmation decision. A cassation appeal against the decision of the Regional Court of Appeal may also be filed within two weeks.
