Concordat Law

In periods of economic volatility and commercial uncertainty, maintaining financial balance is vital for both companies and individuals. In the Turkish legal system, the Concordat is one of the most effective legal protection mechanisms for debtors with a deteriorated financial status but a sustainable business model.

A Concordat is not just a shield protecting the debtor from bankruptcy; it is also a platform for reconciliation that safeguards the rights of creditors.

What is a Concordat?

Konkordato; mali durumu bozulmuş olan borçluların, alacaklılarıyla mahkeme huzurunda yaptığı ve alacaklıların belirli bir çoğunluğu tarafından kabul edildikten sonra mahkemece tasdik edilerek hüküm ifade eden bir **”borç yapılandırma anlaşması”**dır.

· Objective: To prevent the bankruptcy of an honest debtor and ensure the continuity of the business.
· Mechanism: Restructuring involves either extending the maturity of debts (tenhil) or reducing the total debt amount (tenzilat).

The Concordat Process

The process begins with an application to the authorized Commercial Court of First Instance and consists of several critical stages:

1. Application and Preliminary Review: Submission of the “Concordat Preliminary Project” and mandatory financial documents.
2. Temporary Respite (Geçici Mühlet): If conditions are met, the court grants a 3-month protection period and appoints a Temporary Commissioner.
3. Definitive Respite (Kesin Mühlet): If the project shows potential for success, the court grants a 1-year definitive protection period.
4. Creditors’ Meeting: Creditors vote on the proposed restructuring project.
5. Court Ratification: If accepted by the required majority, the court approves the project, making it legally binding.

Throughout this process, the debtor is under the supervision of the court and the bankruptcy commissioner.

Types of Concordat

The types of concordat differ according to their stipulations and the timing of their application in the Enforcement and Bankruptcy Law.

1. Ordinary Concordat (Adi Konkordato):

The most common type, aimed at preventing bankruptcy before it occurs.

2. Concordat within Bankruptcy (İflas İçi Konkordato):

Proposed by a debtor who has already been declared bankrupt, seeking to lift the bankruptcy restrictions through a payment plan.

3. Non-Bankruptcy Composition Agreement

While this term is often used synonymously with “Ordinary Composition Agreement,” it technically refers to an agreement made before entering bankruptcy proceedings. The most strategic timing for a debtor to continue their business operations uninterrupted is to resort to this path when the first signs of financial distress are detected, before the conditions for bankruptcy are fully met.

4. Concordat through Asset Assignment (Malvarlığının Terki Suretiyle Konkordato):

The debtor transfers all or part of their assets to creditors to be sold for debt recovery; often used as a faster alternative to liquidation.

How to File for Bankruptcy Protection?

A request for a composition with creditors is made by submitting a petition to the Commercial Court of First Instance located where the debtor’s main business is situated. Any creditor who is entitled to file for bankruptcy may also request the initiation of composition proceedings against the debtor by submitting a reasoned petition.

All required documents (Preliminary Composition with Creditors draft, financial statements, income statement, cash flow statement, etc.) must be prepared completely and accurately during the application process. This stage is the most critical point in the process, as the court will make its decision based on the seriousness and credibility of the draft.

Temporary and Definitive Stay Periods

The protective shield that a concordat provides to the debtor begins with “morning hold” decisions.

• Temporary Stay: If the court finds the application appropriate, it immediately grants the debtor a temporary stay of 3 months. This period can be extended by another 2 months if necessary (a total of 5 months). During the temporary stay, enforcement proceedings against the debtor are suspended, no new proceedings can be initiated, and precautionary attachment orders cannot be enforced. At this stage, the court appoints a temporary concordat commissioner.
• Definitive Grace Period: If it is determined that the debtor’s financial situation can improve during the temporary grace period, the court will grant a definitive grace period of one year. This period may be extended by another six months in difficult circumstances. During the definitive grace period, the debtor continues their business under the supervision of a commissioner, and preparations are made for the creditors’ meeting.

The Role of Creditors and Creditors’ Meetings

Konkordato, tek taraflı bir irade beyanı değil, bir “uzlaşma”dır. Bu nedenle alacaklıların tutumu belirleyicidir. Süreç içerisinde alacaklılar alacaklarını bildirir ve komiser tarafından bu alacaklar kaydedilir.

At the end of the process, a Creditors’ Meeting is held. For the concordat project to be approved, one of the following two majorities is required:

1. A majority exceeding half of the registered creditors and claims.
2. A majority exceeding one-quarter of the registered creditors and two-thirds of the claims.

At this meeting, creditors say “yes” or “no” to the payment plan presented by the debtor.

The Duties and Importance of the Concordat Commissioner

The concordat commissioner acts as the “eyes and ears” of the court. They do not take over the management of the company but oversee the actions of the management bodies.

Main Tasks:

• To contribute to the completion of the concordat project.
• To oversee the debtor’s activities.
• To provide the court with interim reports to inform it about the progress of the process.
• To call creditors to a meeting and to preside over the meeting.
• Examining the existence of receivables.

The commissioner’s reports play a vital role in the court’s confirmation decision.

How to Prepare a Concordat Project?

A concordat project is not a wish list, but a business plan based on mathematical and financial realities. The following points should be clearly stated in the project:

• What is the percentage or the payment term for the debts?
• How the borrower will provide working capital.
• What will be the source of the payments (sales proceeds, capital increase, asset sale, etc.)?
• Apart from a composition with creditors, whether the debtor’s assets are sufficient to pay off the debts.

The project must be supported by independent audit reports and must be “credible”.

Common Mistakes During the Bankruptcy Proceedings

The following mistakes often underlie bankruptcy proceedings:

1. Late Application: Submitting the application after the company’s resources have been completely exhausted.
2. Unrealistic Projects: Making commitments that cannot be fulfilled.
3. Lack of Communication with Creditors: Failing to involve and persuade creditors in the process.
4. Lack of Legal Support: The request is rejected due to procedural errors in the process.
5. Lack of Transparency: Engaging in transactions that raise suspicions of asset concealment.

Strategic Approaches to a Successful Bankruptcy Proceedings

A successful bankruptcy process requires sound legal and financial engineering.

• Early Diagnosis: Professional help should be sought as soon as cash flow begins to deteriorate.
• Transparency: Full transparency between the commissioner and creditors builds trust.
• Negotiation Skills: Professional language should be used in negotiations with banks and suppliers.
• Flexible Planning: A project should be prepared that can be revised according to market conditions.

What happens if a request for a concordat is rejected?

If the court does not approve the project submitted by the debtor, or if it becomes clear within the moratorium period that the composition agreement will not succeed, the court will reject the composition agreement application. According to the Bankruptcy Law, if the debtor is found to be insolvent, the court will, along with the rejection decision, directly declare the debtor bankrupt. This means the liquidation process of the company will begin. Therefore, a composition agreement application is a risky “make or break” decision and must be managed with expertise.

Why is a Bankruptcy Lawyer Necessary?

A concordat is not simply a matter of filing a petition; it is a complex process that combines knowledge of Enforcement and Bankruptcy Law, Commercial Law, Contract Law, and financial analysis.

A concordat lawyer:

• By analyzing the company’s financial situation, it determines the most opportune time to apply.
• It ensures that the preliminary project is prepared in accordance with the law.
• He/She manages relations with the court and the commissioner.
• They represent the debtor at creditors’ meetings and conduct negotiations.
• It provides a legal defense against possible objections.

Since a flawed filing can lead directly to a company’s bankruptcy, working with an experienced lawyer during this process is not a luxury, but a necessity.

Frequently Asked Questions About Concordat