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What is Concordat?

Concordat: It is the restructuring of debts by a well-intentioned debtor within a plan that will be accepted by creditors. This restructuring process is approved by the court, allowing the debtor to avoid bankruptcy by reducing the debt amount or rescheduling the debts.

Concordat is regulated in Article 285/1 of the Enforcement and Bankruptcy Law. Debtors who cannot pay their due debts or are in danger of being unable to pay them may resort to this method to avoid a possible bankruptcy. Concordat can be done in two ways:

1. Concordat by reduction

2. Concordat by extension of term

What Are The Types Of Concordat?

1. Reduction Concordat

This is an agreement where the debtor requests a reduction in the amount of debt, and the creditors approve this request, agreeing to waive a portion of their claims. If the creditors accept this proposal with the majority of the debt amount and the number of creditors, the agreement is approved by the court.

2. Extension Concordat

In this type of concordat, the debtor prepares a payment plan that schedules all debts. If the creditors accept this payment plan with the majority of the debt amount and the number of creditors, the agreement is approved by the court. Thus, the debtor restructures the debt by extending the payment terms.

Who Can Request Concordat?

According to Article 285 of the Enforcement and Bankruptcy Law, the debtor themselves or the creditors can request concordat.

In What Cases Can Concordat Be Applied For?

All debtors who cannot pay their due or upcoming debts can apply for concordat. Therefore, companies facing payment difficulties and experiencing cash flow disruptions can apply for concordat. The applicant must approximately prove to the court that they cannot pay their debts. The debtor can request concordat by presenting accounting data showing their financial situation to the court.

Both individuals and legal entities can request concordat before falling into a state of insolvency.

Which Court Is Authorized And Responsible İn The Concordat Process?

Commercial courts of first instance handle concordat requests. Whether the applicant is an individual or a company, they must submit their request to the commercial court of first instance. The authorized court is the one in the debtor’s place of residence. If there is no commercial court of first instance in the debtor’s place of residence, the civil court of first instance will accept this request.

What Documents Must Be Attached To The Concordat Request?

A debtor requesting concordat must attach the following documents to their application petition for it to be accepted:

A. Preliminary concordat project

B. Documents showing the debtor’s financial situation and assets

C. List showing the amounts of debts and privileged debts

D. Comparative table showing the amount creditors will receive through the concordat process and the amount they would receive in case of bankruptcy

E. Audit report prepared by an independent audit firm

A. Preliminary Concordat Project

The debtor requesting concordat must submit a preliminary project to the court. This project should show the rate and schedule of debt payments, the extent of creditors’ waivers, whether the debtor will sell assets to pay debts, and how the necessary financial resources will be secured for the debtor to continue their commercial life and pay their debts.

 B. Documents Showing the Debtor’s Financial Situation and Assets

A debtor requesting concordat, if required to keep books (i.e., if a merchant), must attach the following documents to the application:

– Latest balance sheet and income statement

– Cash flow statement

– Interim balance sheets

– Opening and closing certifications of commercial books

– Lists showing the book values of fixed and current assets

– Lists showing all receivables and debts with their due dates

The submitted balance sheets should be prepared no more than 45 days before the application date, meaning the debtor’s current situation should be demonstrated with recent documents.

If the debtor is not a merchant, they must document their assets and debts with letters obtained from official institutions (mortgage letters from banks, copies of checks and promissory notes, agreements with creditors, invoices, waybills, letters from enforcement offices).

C. List Showing the Amounts of Debts and Privileged Debts

The debtor requesting concordat must submit a table to the court showing the total amount of debt and the status of creditors’ claims (an article on what a privileged claim is will be written). In this table, the debtor should indicate the order and amount of payments to each creditor.

D. Comparative Table

The debtor requesting concordat must present a comparative table showing the amount that creditors would receive in case of bankruptcy and the amount they can receive through the concordat process. The court will decide whether the bankruptcy route or the concordat route is more advantageous based on this table.

E. Audit Report Prepared by an Independent Audit Firm

According to Article 286/e of the Enforcement and Bankruptcy Law: “Another document that must be attached to the debtor’s concordat request is the financial analysis report prepared by independent audit firms showing that the proposal made in the preliminary project is highly likely to be realized, along with its grounds.” Therefore, debtors requesting concordat must prepare for concordat by applying to independent audit firms before the application. The debtor company must submit its financial data from previous years to the independent audit firms. In this context, a report should be prepared on whether the company can pay its debts if it continues its commercial activities, considering its revenue, movable and immovable assets from previous years. The independent audit firm should provide reasonable assurance that the payment proposal presented in the preliminary concordat project will be realized and present the accounting grounds for this assurance to the court.

What Happens After Submitting The Required Documents?

1. Decision on Temporary Respite

After submitting the aforementioned documents and the petition requesting concordat to the commercial court of first instance, the court immediately issues a decision on temporary respite. Along with the decision on temporary respite, the court takes all necessary measures to preserve the debtor’s assets. A letter is sent to the land registry office, banks, trade registry office, and other relevant institutions announcing the temporary respite decision.

The temporary respite is granted for a period of 3 months, but this period can be extended by 2 months upon the request of the debtor or the concordat commissioner.

2. Appointment of a Commissioner

Seeing that the documents are complete, the commercial court of first instance appoints a commissioner to oversee the concordat process along with the decision on temporary respite. Depending on the amount of debt and the number of creditors, a one-person or a three-person commissioner panel can be appointed. One of the commissioners appointed by the court is a legal expert, one is a financial audit expert, and one is a technical expert in the debtor’s field of activity.

The main function of the commissioner is to evaluate the concordat plan proposed by the debtor and assess its likelihood of success. The commissioner is also responsible for taking measures to protect the debtor’s assets during the temporary respite period. This includes monitoring the debtor’s commercial activities and transactions that affect the debtor’s assets, ensuring that the debtor does not engage in transactions that would deplete the assets, thus protecting the rights of the creditors. The commissioner should identify the debtor’s assets and present a list to the court as soon as they take office.

If the commissioner sees that the debtor’s proposed payment plan is unlikely to succeed within the 3-month period, they can prepare a report and request the termination of the respite period before it ends. In practice, commercial courts of first instance often rule that the debtor must obtain the commissioner panel’s approval for any cash outflows, sales, and assignment transactions.

3. Announcement of the Temporary Respite Decision

The temporary respite decision issued by the commercial court of first instance is announced to the land registry office, trade registry office, tax office, the Banks Association of Turkey, the Participation Banks Association of Turkey, chambers of commerce, industry chambers, the Capital Markets Board, and stock exchanges. The announcement informs creditors that they can request the rejection of the concordat within a 7-day period by claiming that there is no reason for granting concordat.

The request for rejection of concordat is subject to a 7-day period from the announcement of the temporary respite decision.

4. Effects of the Temporary Respite

The temporary respite has the same effects as the final respite.

With the issuance of the temporary respite decision, ongoing enforcement proceedings against the debtor are halted, and no new enforcement proceedings can be initiated against the debtor. Precautionary measures or precautionary attachment cannot be applied to the debtor’s assets. The exception to the inability to conduct enforcement proceedings against the debtor is the proceedings initiated by secured creditors through the foreclosure of the collateral and the privileged claims listed in Article 206 of the Enforcement and Bankruptcy Law.

What İs Final Respite?

The court must make a decision on whether the concordat will be successful within the period of the temporary respite. The court applies the principle of ex officio investigation in this decision. Accordingly, the court is not bound solely by the evidence presented by the parties and can conduct its own investigation to form a judgment.

The court calls the relevant parties to a hearing to decide on the final respite. Before this hearing, the temporary commissioner must submit a report on whether the concordat will be successful.

The temporary commissioner must prepare a report within the temporary respite period to determine whether the conditions for granting the final respite are met. If it is clear that the creditors will not accept the proposal and that the necessary majority for the acceptance of the concordat plan will not be achieved, the court should not grant the final respite. The temporary commissioner must determine whether the well-intentioned debtor will be able to improve their financial situation within the given period and assist the court in forming an opinion on this matter.

If there is a likelihood that the well-intentioned debtor’s proposed concordat will be successful, a one-year final respite is granted to the debtor. The duration of the final respite is one year.

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