Leaving its Mark on 2018 and
Likely to Linger in 2019 albeit with a Slow Down
Concordato has recently become a popular headline in economy pages with the increasing number of companies pursuing this path owing to the economic slowdown in Turkey. Following the enactment of No. 7101 on Amendment of the Code of Execution and Bankruptcy and Certain Laws (“Law No. 7101”), on 15 March 2018, introducing the re-regulated concordato procedure and abolishing the postponement of bankruptcy, Turkey saw 1549 concordato applications in the year 2018, as a rather surprisingly vast number.
Why has concordato again become so popular?
The recent state of economy in Turkey has given a hard time to companies in terms of meeting their (re)payment obligations. Debtors in financial difficulty hope to improve their positions through the concordato process giving them the chance to propose a project to restructure the debts and the time to make preparations to realize such project. Prior to March 2018, companies in technical bankruptcy more frequently chose to pursue the route of postponement of bankruptcy, however, with the abolishment of this route, concordato has become a more routine practice (other restructuring options which are not subject of this article being reserved). The amendments brought by Law No 7101 had also provided for some more favorable rules for the process. For example, before Law No 7101, timelines for concordato were not helpful for debtors to be able to reach a restructuring with the creditors, as the court could approve a concordato period of up to three months, which could be extended for another 2 months, during which the restructuring plan was required to be approved. With the amendments by Law No. 7101, the concordato period has been divided into: (1) temporary period and (2) definite period. Once all the documents and information are submitted completely and in full to the court with a concordato request, the court (i) rules on a temporary period of three months, which can be extended for a maximum additional period of two months, (ii) takes necessary precautions for protection of the assets of the debtor, and (iii) appoints a commissaire to evaluate whether or not concordato will be successful. If the court reaches the conclusion that the concordato project would be approved and be successful, then it grants the debtor a definite period of one year, which can be extended for a maximum additional period of six months. Therefore, the total concordato period for the approval of concordato project has been elongated to potentially twenty-three months giving the debtor more time to conduct negotiations, finalize a deal with creditors and financially stabilize as well.
Highlights on Process and Effects
A company applying for concordato is required to submit to the competent court the following documents and information together with its concordato request in order to obtain a decision on temporary period: (i) concordato preliminary project, (ii) documents indicating the status of the assets of the debtor, (iii) a list indicating the creditors, receivable amounts and privileges of creditors, (iv) a comparison table evaluating amounts to be received by the creditors according to the concordato preliminary project and potential amounts to be received by creditors in case of bankruptcy, (v) an independent audit report reasonably assuring that the proposal under the concordato preliminary project is most likely to be realized and its justification.
The commissaire that is appointed with the decision of temporary period will be authorized to either merely overview the transactions of the debtor or take over the administration as a whole. In case of need, due to amount of the receivables and number of creditors, the court is allowed to appoint three commissaires and according to recent amendments, one should be an authorized independent auditor.
During the concordato period no execution proceedings can be started against the debtor and all execution proceedings that have already commenced stop. Regarding secured debts, it is possible to commence execution proceedings, however, injunctions cannot be taken or secured asset cannot be sold. Upon the approval of the concordato, the court could, at the request of the debtor, postpone the sale of secured assets, for a maximum period of one year. In order for the court to take this decision, the interest payment regarding the secured receivables accrued until the date of concordato request should be totally paid. During the concordato period no interest accrues for debts except for secured debts.
With its decision on definite period for concordato, the court may also form a board of creditors (not to exceed seven creditors and to always be an odd number). Board supervises the commissaire and expresses its opinion to the court at instances determined under the legislation. The board also has the authority to request replacement of the commissaire. The board convenes at least once a month and takes decisions with the majority of the present votes, and the commissaire attends such board meetings.
All the creditors that will be affected by the concordato project will convene for approval of the concordato project and the convention will be presided by the commissaire. The quorum for convention to approve the concordato project is either (i) half of the registered creditors and receivables, or (ii) one fourth (1/4) of the registered creditors and two thirds (2/3) of the receivables.
Restructuring of the secured receivables by way of concordato is made subject to specialized rules. Accordingly, the commissaire invites all secured creditors in order to negotiate the proposals of the debtor for reductions in principal amount or interests, extension of due dates and other payment proposals. Agreement with secured creditors representing more than two-thirds (2/3) of the secured debts has to be made during the negotiations and the following seven days after the negotiations. In such case, the dissenting secured creditors will be subject to a payment plan corresponding to the longest-term agreement made with the other secured creditors, where the interest agreed upon by the parties before default applies. Upon entering into force of these agreements, if the debtor does not comply with their terms, each secured creditor has the right to terminate its agreement. Due to these terminations, if the quorum of more than two-thirds (2/3) of secured receivables will no longer be met, the pledgees previously representing the remaining part less than one-third (1/3) of the secured receivables will no longer be bound with the payment plan imposed on them.
The debtor may request concordato together with bankruptcy, or concordato may be requested during the judicial proceedings for bankruptcy. However, note that there is still the risk for the court to rule on bankruptcy ex officio if the creditors do not accept or the court rejects the concordato request/plan. If, among others, it is understood that bankruptcy must be initiated to protect the assets of the debtor or the concordato will not be successful, upon the report of the commissaire, the court ex officio rules on lifting of the definite period, rejection of concordato request and the bankruptcy of the debtor. If the commissaire reports to the court that the amelioration aimed by the concordato request has been achieved before the end of the definite period, then definite period for concordato is lifted and concordato request is rejected.
Expectations for 2019
The vast number of concordato applications, critisims that the process is being abused by the debtors, the fear that it may have a negative domino effect on also companies dealing with the concordato applicants, and the heavy workload for the courts created by the number of applications have alarmed the Government who brought some more stringent rules for the process through a law enacted on 19 December 2018. The documentation required to be submitted as part of the corcordato application now requires not a mere financial analysis report, but a qualified independent audit institution’s audit report reasonably assuring that the proposal under the concordato preliminary project is most likely to be realized and its justification. Further, the process is intended to be monitored more strictly with the requirement to have an authorized independent auditor as one of the commissaires. It has also been provided that if the company is considered to be acting with the aim of harming its creditors, concordato may be rejected and the company’s bankruptcy may be adjudicated.
For companies subject to pressing economic conditions, in the absence of the postponement of bankruptcy process, it is certain that concordato will continue to be a process to be considered in 2019, however, maybe with a relatively decreasing pace following the new amendments.