"Landmark Turkish Court of Appeal Decision Strengthens Creditor Power in Turkish Concordat Battles"
October 14, 2024 | NEWS
By Gokhan Bozkurt, Mustafa Bozkurt
In recent years, concordat proceedings initiated in Turkey to restructure financially distressed companies have posed several uncertainties and risks for creditors. While the concordat is a crucial legal mechanism aimed at restructuring the financial situation of companies facing bankruptcy or the threat of insolvency, it can create significant issues if creditors' rights are not adequately protected. In this context, a recent reversal decision by the 6th Civil Chamber of the Turkish Court of Appeal (“Appeal Court”) serves as a critical precedent [1] for how concordat proceedings should be conducted in favor of creditors. The Appeal Court’s ruling, which rejected the debtor's proposed concordat plan due to its unfavorable terms for creditors and the debtor’s inadequate financial capacity to fulfill its obligations, represents a significant step toward better-safeguarding creditors’ rights and restoring financial stability. This decision contains important implications, particularly for foreign banks, credit holders, and other financial institutions with commercial interests in the Turkish market.
Background
In a case heard before Gaziantep 1st Commercial Court (“Commercial Court”), a debtor company applied for a concordat to restructure its debts, submitting a concordat plan to the court [2]. Under the plan, the debtor committed to making payments to its creditors according to a specific schedule and percentage. According to Article 305 of the Turkish Enforcement and Bankruptcy Law, for a concordat plan to be ratified, the debtor’s financial situation must be sufficient to support the plan, the interests of the creditors must be preserved, and the concordat must provide a solution that will prevent the debtor from going bankrupt.
After reviewing the case, the court accepted that these statutory conditions were met and ratified the concordat plan. However, a group of creditors, primarily banks, appealed the court’s decision to the 11th Civil Chamber of the Gaziantep Regional Court of Appeals (“Regional Court”), arguing that the debtor’s financial resources were insufficient and that the proposed payment plan was disadvantageous and harmful to creditors.
Upon review, the Regional Court ruled that the legal conditions for ratifying a concordat, as set forth in Articles 302 and 308/h of the Turkish Enforcement and Bankruptcy Law, were present for both ordinary and secured creditors and dismissed the appeal on the merits [3]. The court found the creditors' objections unfounded and upheld the lower court’s ratification of the concordat.
Dissatisfied with this decision, the creditors appealed to the Appeal Court, and the case was referred to the 6th Civil Chamber of the Appeal Court.
Decision
Upon reviewing the appeal, the Appeal Court referred to Article 285 and subsequent articles of the Turkish Enforcement and Bankruptcy Law and found that the proposed concordat plan did not accurately reflect the debtor’s financial condition. The court also ruled that the payment plan was not fully aligned with the creditors' interests and overturned the Regional Court’s decision. In its decision, the Appeal Court emphasized that the debtor’s financial resources were insufficient to support the concordat plan and that creditors were exposed to a higher risk of non-recovery of their claims. The case will now return to the local court, which will conduct a new hearing in light of the Appeal Court's findings.
Takeaways
The Appeal Court’s decision to overturn the ratification of the concordat plan marks a crucial turning point for creditors. In Turkish law, the concordat process is designed to create a framework for negotiation between creditors and the debtor to restructure the debtor’s financial situation. However, in this case, creditors raised objections to the concordat plan, citing its unfavorable terms and the debtor's inability to meet the plan’s obligations.
The Appeal Court’s ruling is significant because it supports the creditors' justifiable concerns and objections. This decision enhances the protection of creditors’ rights during the concordat process by signaling that the debtor’s financial capacity and the feasibility of the payment plan must be rigorously scrutinized. According to the Appeal Court, this scrutiny is necessary to ensure a higher probability of creditors recovering their claims.
Furthermore, the Appeal Court’s reversal helps prevent the ratification of a payment plan that could be detrimental to creditors and requires the local court to conduct a deeper examination of the debtor’s financial structure to create a more realistic plan. This increases the likelihood that creditors will be able to recover their claims while better protecting their rights.
Based on this ruling, the following key points should be considered in any future concordat proceedings before Turkish courts:
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Project Content: The details of the concordat plan submitted by the debtor should be carefully examined to ensure the protection of creditors' interests.
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Payment Capacity Analysis: A realistic assessment of the debtor’s ability to fulfill the obligations outlined in the concordat plan should be conducted.
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Objection Procedures: Creditors should file objections against the proposed plan to protect their rights.
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Review of Financial Condition: The debtor’s financial condition and past performance should be meticulously evaluated.