This is the English version of a Turkish article. The original, with further detail and linked petition templates, is at Konkordato ve İflas: İşletmeler İçin Yol Haritası.
The company's debts have outgrown its ability to pay. At that point there are two routes: composition with creditors and bankruptcy.
This article covers the composition procedure, the documents required, the stages of the moratorium, and how it differs from bankruptcy. Note at the outset: postponement of bankruptcy was abolished in 2018.
What Composition Is
Article 285 of the Enforcement and Bankruptcy Act: any debtor who cannot pay debts that have fallen due, or who is in danger of being unable to pay them when they do, may apply for composition in order to pay by extension of time or by reduction of the debts, or to escape a likely bankruptcy.
Any creditor entitled to petition for bankruptcy may also apply, by reasoned application, for composition proceedings to be started against the debtor.
The competent court is the commercial court of first instance where the debtor's centre of operations is for a debtor subject to bankruptcy, and the commercial court at the debtor's residence for one who is not.
Composition is not confined to companies; natural persons not subject to bankruptcy may also apply. But the process is heavy, and in practice it is mostly used by businesses.
The Documents Required
Article 286 lists what must accompany the application, and that list decides its fate:
- the draft composition proposal, showing in what proportion and over what periods the debts will be paid, to what extent the creditors will give up their claims, whether the debtor will sell existing assets to make the payments, and how the finance needed to continue trading will be found
- documents showing the state of the debtor's assets: the balance sheet, profit and loss account and cash flow statement, interim balance sheets, and a table drawn up at book values showing current market values
- a list of creditors, the amounts owed and any preferences
- a comparative table setting the amount creditors would receive under the proposal against what they would probably receive on the debtor's bankruptcy
- financial analysis reports prepared by an independent audit firm with their supporting material (not required for small enterprises below the statutory thresholds)
Missing documents mean the application is refused. An unprepared application costs money and reputation.
Provisional and Definitive Moratorium
Provisional moratorium (Art. 287): on an application, once the court establishes that the documents are complete it immediately grants a provisional moratorium and takes every measure it thinks necessary to preserve the debtor's assets.
The provisional moratorium is three months. Before it expires the court may, on the application of the debtor or the provisional commissioner, extend it by up to two months.
The court also appoints a provisional composition commissioner.
Definitive moratorium (Art. 289): where it appears that the composition may succeed, the court grants the debtor a one-year definitive moratorium.
In particularly difficult cases it may be extended by up to six months on the commissioner's reasoned report and request.
The most important consequence (Art. 294): during the moratorium no enforcement may be taken against the debtor and existing enforcement is stayed. Interim injunctions and precautionary attachments are not executed. Limitation periods and forfeiture periods that an act of enforcement would interrupt do not run.
Acceptance by Creditors and Approval
The proposal takes effect only if the creditors accept it.
Article 302: the proposal is treated as accepted where it is signed by a majority exceeding either
- half of the registered creditors and half of the registered claims, or
- a quarter of the registered creditors and two thirds of the claims
One of those two must be achieved. In practice the second matters most for proposals backed by the large creditors.
Conditions of approval (Art. 305): that the amount offered will exceed what creditors would probably receive on bankruptcy, that it is proportionate to the debtor's resources, that the proposal has been accepted, and that the debtor is released from the debts to the extent that the creditors have given them up.
An approved composition binds all creditors (Art. 308/c) — including those who did not join it.
Bankruptcy, and the Abolished Postponement
Postponement of bankruptcy was abolished in 2018 by Act no. 7101. It can no longer be applied for; the route provided for capital companies is composition.
That matters, because many sources online still refer to postponement of bankruptcy.
Bankruptcy is the liquidation of the debtor's assets and their distribution to creditors. Unlike composition, its object is not to keep the business trading but to wind it up.
It may be sought by a creditor, or in the cases of direct bankruptcy. In capital companies the board is also under a duty to notify the court of over-indebtedness (Article 376 of the Commercial Code).
Failing to give that notice makes the board members personally liable.
Where the composition fails — the moratorium lifted, the proposal not approved — the debtor may be adjudged bankrupt if the conditions are met.
What a Creditor Should Do
- Register your claim. Notify the commissioner within the period stated in the announcement; a creditor who does not register is not admitted to the negotiations on the proposal.
- Put in your documents: invoices, contracts, notes, current account statements.
- State any preference. Secured and preferential claims are treated differently.
- Attend the creditors' meeting. Acceptance turns on majorities; staying away makes acceptance easier.
- Challenge the approval. An appeal lies against approval of the proposal.
Special rules apply to secured creditors during the moratorium: enforcement to realise the security may be started, but no preservation measures may be taken and the secured asset cannot be sold.
Finally, suspicious transfers made before the application should be considered separately, with a view to setting the disposition aside.
It was abolished in 2018, and the route for capital companies is composition. Do not rely on older sources online. A composition application requires extensive documents, including an independent audit report; an unprepared application is refused.
Frequently Asked Questions
Can I still apply to postpone bankruptcy?
No. Postponement of bankruptcy was abolished in 2018; the route for capital companies is composition with creditors.
What does a moratorium stop?
During it no enforcement may be taken and existing enforcement is stayed; interim injunctions and precautionary attachments are not executed, and periods interrupted by enforcement do not run.
How long does the moratorium last?
Three months provisionally, extendable by two, then a definitive moratorium of one year, extendable by up to six months in difficult cases.
What majority is needed?
Either more than half of the registered creditors and half of the claims, or a quarter of the creditors and two thirds of the claims.
My debtor has applied — what should I do?
Register your claim with the commissioner within the announced period, put in your documents, state any preference, attend the creditors' meeting, and consider challenging the approval.