Things to know about composition with creditors (“Konkordato")

Lately, there have been significant amendments in Enforcement and Bankruptcy Law with the law numbered 7101, which relates to mainly ways for indebted companies or persons to restructure their debt relations.

Following March 15, 2018, the effective date of these amendments, there has been an immense increase in requests for “composition with creditors” by troubled companies unable to pay their debts. This became a way out for them after the abolishment of the scheme of “postponement of bankruptcy” which had been followed by indebted companies pretty frequently in the past decades in Turkey.

The list of companies requesting composition with creditors even includes big companies of various sectors such as food, shoes, textile, fuel, jewelry, and car rental. Composition with creditors is now a charming option for financially depressed debtors as it allows the debtors to sustain their business activity while spreading their re-payments to their lenders into long terms.

There is no doubt that we will hear more of composition in the forthcoming time. According to some Turkish newspapers, the number of requests for composition with creditor is expected to be 7,000 by the end of 2018.

Is it mandatory to be subject to bankruptcy to request composition with creditor?

It is not mandatory to be subject to bankruptcy in order to be able to request composition, however, some relevant news seem to be misleading. Natural persons that are deemed merchants as per the Turkish Commercial Law, commercial companies and public entities are subject to bankruptcy. Nevertheless, all legal entities and natural persons have the right to request composition, irrespective of whether or not they are merchants.

What is the difference between bankruptcy and composition with creditors?

Some news is also misleading regarding the relationship between bankruptcy and composition. For instance, it is observed that postponement of bankruptcy is confused with composition, being bankrupt is said to be necessary in order to request composition or that the composition request is reflected as an “announcement of composition” and that with this request composition is effective immediately.

However, that is not the case.

In case the court rejects the composition request within the definitive term because is it understood that the composition shall not be successful or because the debtor is not following the trustee’s directions, the court declares the debtor a bankrupt. Similarly, if the composition is not granted due to failure to meet the conditions of Article 305 of the Enforcement and Bankruptcy Law and the debtor is subject to bankruptcy and a direct cause of bankruptcy exists (e.g. the debtor is insolvent), then the court shall declare the debtor a bankrupt. 

What are the effects of composition on existing contracts?

One of the main questions today is: What will happen to the contracts to which the debtor (that is requesting a composition) is a party?

Article 296/I of the Enforcement and Bankruptcy Law regulates that any clause annulling the contract or giving the opposite party a right to terminate with just cause or rendering the debt due and payable in case of a request for composition by such non-terminating party shall be void. The lawmaker has indeed intended to provide continuance of the contracts as per the preamble of law numbered 7101 and has regulated that contracts continue to be valid with the terms executed before the composition. Therefore, in case merchants and lawyers come across contract clauses giving the opposite party a cause for automatic and immediate termination in case of a request for composition, these parts of the contracts shall be partially void.

Who can be a composition trustee? What are their duties?

Debtors having difficulty paying their debts or that are under the risk of failure to meet the due date can request composition submitting a preliminary project to the court and upon acceptance of this project, the court grants them an interim term. Upon this decision, the court also appoints a composition trustee. It is also possible to appoint three trustees, where the amount of receivable and number of creditors so require. The composition trustee is a government officer that is responsible for the operations of the debtor within the statutory procedure and rules.

The duties of the composition trustee are as follows:

  • Inspecting activities of the debtor,
  • Keeping and evaluating the asset books and informing the creditors accordingly and
  • Preparing the relevant report for the court and negotiate the project with creditors, if necessary.

Hence, considering the scope and nature of their duties, it is of great importance that the trustees are competent of their jobs and they have knowledge about the sector the debtor carries its business in so that they can manage this process well.

As per the Regulation on Composition Trustee’s Qualifications and Mandatory Creation of Creditors’ Committee (the “Regulation”) that is published and entered into force on June 2, 2018trustees must have an undergraduate education degree from at least a four-year university or from an equivalent foreign or local institution (as per the Board of Higher Education) and a minimum 5 years of professional experience. On the other hand, it is regulated under the Regulation that a trustee can be appointed for a maximum of five cases simultaneously. Accordingly, as the range of composition application widens, it is undoubted that there will be more need for expert persons in this field, that are responsible for submitting a report to the court by inspecting the debtor company’s activities. Our attention is also drawn by some higher education institutions, which, keeping up with the current developments and foreseeing the future necessities, are providing certificate programs regarding composition trusteeship.

As per the Regulation on Composition Advance Expense Payments published on the same date that is applicable to composition requests after March 15, 2018; the debtor requesting a composition shall pay all costs of notice, postage, expert, announcement, and trustee. Accordingly, on condition that the full amount declared by the court shall be completed later, a five-month trustee fee to be calculated over a minimum of TRY 1,000 shall be paid in advance.