Composition Of Debts In Turkish Legal System

Composition Of Debts In Turkish Legal System

• 14.02.2023

Composition of debts is a special way that allows the debtor to agree with the creditors under the supervision of the court and to get rid of the debt by paying a certain percentage of the debt or with certain maturities. It is not a 'proceeding path' like enforcement or bankruptcy.

The composition of debts is divided into 3 according to the way it is made: percentage composition of debts, maturity composition of debts, mixed composition of debts. In the percentage composition of debts, creditors waive a certain percentage of the debt, in the maturity composition of debts, the maturity is rearranged and postponed to a later date. Mixed composition of debts is in question when the creditors both give up a part of the receivable and arrange a new maturity or connect the debt to installments.

Composition of debts is divided into 2 according to its purpose: composition of debts for liquidation of debts and composition of debts for liquidation of asset. The only type of composition of debts for the liquidation of the asset is the composition of debts by abandoning the asset.

The composition of debts is regulated under Articles 285-309 of the Code of Execution and Bankruptcy No. 2004 (“the Code”). The Code examined the composition of debts according to the time of it was made, first the in-bankruptcy and out of-bankruptcy composition of debts was regulated.

I.  ORDINARY (OUT OF BANKRUPTCY) COMPOSITION OF DEBTS

1.Ordinary Composition of Debts in Generally

Article of 285 of EBL was clearly regulated who can apply to the Composition of debts in which cases: ” Any debtor who does not pay his debts when they are due or is in danger of not being able to pay on due date may request a composition of debts in order to avoid a possible bankruptcy by giving a term or making a discount. Every creditor who may request bankruptcy may request the initiation of composition of debts proceedings against the debtor with a reasoned petition.” As can be seen, the EBL did not impose a limitation on the applicant for composition of debts. ”Any debtor", natural or legal persons, regardless of whether they are merchants or not, can request a composition of debts.

Ordinary composition of debts is a way that can be applied for before the bankruptcy of the debtor is decided. The ordinary composition of debts application takes place when the composition of debts project is submitted to the commercial courts of first instance  with a petition. In this project, it is written how much of the borrower's debts he plans to pay in what term. If the documents to be submitted to the court are complete, the debtor is granted a temporary respite period of 3 months. If requested, the temporary respite can be extended for another 2 months. Within this period, the court decides whether to give the debtor a final respite. If the court sees that the composition of debts is likely to be successful, the one-year deadline begins. The debtor or the composition of debts trustee may request an extension of the final respite for another 6 months. After the definite respite is given, the temporary composition of debts trustee may continue his duty or a new composition of debts trustee may be appointed

In the EBL, among the conditions for applying for a composition of debts, “inability to pay when due or being in danger of not being able to pay when due” is decimated. A debtor who is short of cash can apply for a composition of debts, he does not necessarily have to be incapacitated, a temporary state of deprivation is sufficient for a composition of debts application.

2. Temporary Respite

If the documents are complete in the composition of debts application, the court directly gives a temporary respite decision. In case of missing documents, it rejects the request, but unlike the regulation in the Swiss Code of Execution and Bankruptcy, where the Code is quoted, it cannot decide for bankruptcy ex officio. The court only examines the form at this stage. The expediency and content inspection is carried out by the temporary trustee during the temporary respite period. If the temporary trustee considers that the composition of debts has no chance of success, the temporary respite decision is lifted and in case the person is subject to bankruptcy, a bankruptcy decision is made. Decisions on granting a temporary respite and extending the temporary respite are certain, no legal action can be taken against these decisions. An objection can be made only within 7 days from the announcement of the temporary respite decision that there is no room for a composition of debts deadline.

In accordance with the 1st paragraph of Article 288 of the Code, the temporary respite results are same with the final respite. With the temporary respite decision, the proceedings initiated by the creditors against the debtor stop and new proceedings cannot be started. The started proceedings will continue from where they left off at the end of the respite period. However, if there is proceeding for the employee and alimony receivables, the prohibition of proceeding is not applied. The prohibition of prosecuting through bankruptcy is absolute, no exceptions have been regulated.

3.Final Respite

The final respite decision is announced in the procedures specified for the announcement of the temporary respite decision. The cessation of the opened proceedings and the ban on new proceedings shall continue within the final respite period. The statute of limitations and right-lowering periods do not apply.

4.Consequences of Final Respite

No precautionary lien is applied to the debtor's properties within the composition of debts period. Unless there is a provision in the composition of debts expressly that interest will be charged on the receivables, interest processing for receivables, excluding pledged receivables, will cease within the period of time.

If a contract is made for the transfer of a future receivable before the composition of debts deadline is given, and the receivable arises after the deadline is given, the transfer is invalid.

The respite decision has no effect on the cases in which the debtor is a party. The lawsuits against the debtor can be continued and new lawsuits can be filed within the deadline.

During the respite period, the debtor's power of seizure is also limited. The debtor performs its transactions under the supervision of the trustee. In some cases, the court may bind the validity of the transactions to the trustee or transfer the power of seizure to the trustee. The debtor must obtain permission from the commercial court of first instance in order to establish pledges and mortgages, to sell real estate, to transfer the continuous installation of the enterprise even partially, to be a guarantor and to make gratuitous dispositions. Otherwise, their contracts are void. If the debtor engages in prohibited transactions and does not comply with the trustee's instructions, the court may revoke the debtor's power of seizure or a definitive respite decision.

Contracts to which the debtor is a party continue after the composition of debts deadline. As it is clearly regulated in Article 296 of the EBL, “even if the contract does not contain a provision in this regard, the contract cannot be terminated on the grounds that the debtor has applied for composition of debts.”

In permanent debt relations where the debtor is a party, if the contract prevents the composition of debts from reaching its purpose, the debtor may terminate the contract by obtaining the opinion of the trustee and the approval of the court.

5.Removal of Final Respite

There are two ways to remove the final respite in the EBL: The improvement of the debtor's financial situation within the deadline of the composition of debts and the existence of one of the situations listed in Article 292 of the EBL.

There are four cases which the final respite will be lifted and the bankruptcy decision will be given in Article 292:

i) When bankruptcy is required to protect the debtor's assets

ii) When it became clear that the composition of debts would not succeed

iii) If the debtor acts in violation of Article 297 or does not comply with the instructions of  the trustee, or when it is understood that the debtor acts with the aim of harming the  creditors

iv)  When a capital company or cooperative, which is understood to be in debt, waives its composition of debts request.

With the removal of the final respite decision, the consequences of the decision disappear. The activities of the trustee and the board of creditor shall be terminated. A legal remedy may be applied against the cancellation of the respite decision.

6.Composition of debts Trustee

The commercial court of first instance appoints one or more of the Turkish citizens who have the necessary knowledge and experience as the composition of debts trustee with the respite decision. The trustee must be a natural person. It is essential that the trustee is impartial and does not have an economic relationship with the debtor or creditors. The EBL did not regulate the responsibility of the state for the responsibility of the trustee, but accepted individual responsibility. In terms of criminal liability, the trustee is considered a public official.

The composition of debts trustee is in charge of participating in the savings of the debtor, keeping the book of the debtor's assets, inviting the creditors by announcement, examining the receivables notified to him, and issuing interim reports.

7.Board of Creditors

The commercial court of first instance, which examines the composition of debts request, may establish the board of creditors with the final decision. In ordinary composition of debts, the establishment of the creditors' board is at the discretion of the court. However, if there are at least three classes of creditors, if the number of creditors exceeds two hundred and fifty or the amount of receivables exceeds one hundred million Turkish liras, it is obligatory to form a creditors' board.

The court elects the members of the Board, provided that they do not exceed seven members and are in odd numbers.  The board of creditors supervises the activities of the trustee and makes recommendations to the trustee. The Board also has the authority to request the Court to change the trustee.

The board of creditors accepts the composition of debts project at the creditors' meeting with a majority exceeding half of the registered creditors and their receivables, or a quarter of the registered creditors and two-thirds of their receivables.

8. Examination and Approval of the Composition of Debts

The composition of debts trustee gives his reasoned report on the composition of debts project to the court. The trial begins with the court's receipt of the report.

At the end of the trial, it should be understood that the amount offered for the approval of the composition of debts will be more than the possible amount that may fall into the hands of creditors in the event of the debtor's bankruptcy. This calculation is left to the trustee of composition of debts, the court may appoint an expert witness for the calculation if the trustee does not fall within the field of expertise. In addition, the amount offered in the project should be commensurate with the borrower's resources. These resources represent the borrower's financial income. In addition to these conditions, sufficient collateral must be shown for the creditors and expenses and fees must be stored.

At the end of the examination, the commercial court decides on the approval of the composition of debts if it is a concrete event, the existence of the conditions listed above, and the composition of debts has a chance of success. After the approval of the composition of debts, the debtor now has the authority to seizure of his assets.

The debtor or the creditor requesting a composition of debts against the decision made about the composition of debts, from the notification of the decision objecting creditors can apply to appeal within ten days from the announcement of the approval decision. It is possible to appeal the appeal decisions regarding the approval of the regional court of appeal.

9. Terms and Consequences

The Composition of debts becomes binding with the approval decision without the need for finalization. The composition of debts is valid for everyone, including those who have voted against or who have not registered their receivables.

10.Termination of Composition of Debts

After the approval of the composition of debts, each creditor may pursue proceedings against the debtor as well as request the termination of the composition of debts in case his receivables are not paid within the framework of the composition of debts terms. The court in charge for the annulment case is the commercial court of first instance, which has decided to approve the composition of debts.

If it is understood that the debtor has provided the approval of the composition of debts by acts contrary to the rule of good faith, each of the creditors may request the annulment of the composition of debts. In this case, the composition of debts will be completely terminated and all creditors can claim their receivables in full and proceeding as if the composition of debts has never been made.

II.COMPOSITION OF DEBTS AFTER THE BANKRUPTCY

A person whose bankruptcy has been decided may offer a composition of debts to get rid of this decided bankruptcy. The bankrupt starts the process by giving the composition of debts project to the bankruptcy office. Creditors who may request bankruptcy may also request the initiation of composition of debts proceedings.

After bankruptcy, the composition of debts must be requested no later than the distribution of the funds. This path cannot be applied after the money has been distributed definitively.

In after-bankruptcy composition of debts, unlike ordinary composition of debts, there is no composition of debts deadline and composition of debts trustee does not take charge. The duties of the composition of debts trustee are assumed by the bankruptcy administration.

If a composition of debts is offered while the bankruptcy is in progress, this proposal is voted on at the second meeting of creditors. The required majority for acceptance is like the majority in the ordinary composition of debts. If a decision is made to accept the composition of debts in the second meeting of creditors, the decision is submitted by the bankruptcy administration together with the file to the commercial court of first instance, which has made the bankruptcy decision. The commercial court approves the composition

of debts if its conditions are met. If the composition of debts is approved, the bankruptcy is lifted.

III.COMPOSITION OF DEBTS BY ABONDONING THE ASSET

Composition of debts with the abandonment of assets is a unique way for the debtor to get rid of the debt by transferring the assets in his assets to the creditor wholly or partially. It is separated from the composition of debts because it does not include a payment commitment, it is similar to the liquidation of bankruptcy. For this way, an application is made to the commercial court of first instance with a project.

REFERENCES

1.Pekcanıtez/Atalay/Özkan/Özekes, Execution and Bankruptcy Law, Vedat Publishing, 5.Edition, İstanbul 2018.

2. Murat Atalı, Execution and Bankruptcy Law, Yetkin Publishing , 5.Edition, İstanbul 2020.