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Legal Alerts

Bankruptcy protection provides an “easy way out” in Turkey

Legal Alerts
Banking & Finance

Recent development

In response to the 2001 Turkish banking crisis, Turkey introduced an insolvency procedure known as “bankruptcy postponement” in 2003. Although Turkish law also provides for a more traditional, court-supervised reorganization, the reorganization procedure requires the approval of a majority of creditors, making bankruptcy reorganization more difficult, time-consuming and, from a debtor’s perspective, often less effective. As bankruptcy postponement does not require creditor approval, the procedure proved immediately popular, with its use increasing from 484 cases in 2012 to more than 1,000 in 2015, prompted by the contraction of available credit, foreign exchange fluctuations, and a rapid increase of loan debt. In contrast, companies in financial distress rarely used the reorganization procedure.

Companies across sectors – including construction, textiles, food and industrial machinery manufacturing – continue to file for bankruptcy postponement, sounding the alarm for banks and other creditors. As of March 2016, there are 240 pending bankruptcy postponement filings.

Although the majority of cases are due to macroeconomic factors and cash-flow issues, there is a concern that some companies have created fictitious debt to apply for bankruptcy postponement, while others have moved their headquarters to benefit from more bankruptcy-friendly courts.

What the law says

The Execution and Bankruptcy Law provides that, where the liabilities of a company exceed its assets, the board of directors or any of the company’s creditors may seek bankruptcy postponement.

•    Upon receipt of a petition for bankruptcy postponement, the court appoints a trustee to replace the board of directors and prepare an inventory of assets and liabilities, or to simply affirm the resolutions of the present board of directors, which are then published in the Turkish Trade Registry Gazette to inform creditors and other parties of the proceedings.

•    During the initial stage, the court is authorized to order an interim injunction, typically imposing a stay where all execution proceedings are also suspended and no new execution proceedings can be initiated. The court may also set out exceptions to the interim injunction, such as execution proceedings for debts to employees and debts secured by a pledge or mortgage.

•    Next, the court appoints an expert to evaluate whether the company was entitled to bankruptcy postponement by examining the ratio of assets to liabilities. If the applicant is found to be entitled to bankruptcy postponement protection, the expert evaluates the proposed recovery plan. If the court finds the recovery plan is not found feasible, the court directly rules on the bankruptcy of the company followed by liquidation and distribution of the liquidation proceeds to the creditors. If the recovery plan is found to be feasible, the court grants the postponement. The maximum period of postponement is one year. An extension of up to four years in total may be granted if the court finds the trustee’s interim reports to be sufficiently promising.

•    An average bankruptcy postponement proceeding generally takes one-and-a-half years to finalize; some cases, however, take up to four years or more.

•    After the court rules for bankruptcy postponement, it may also take measures to protect the company’s assets; the trustee must regularly submit activity and financial reports.

•    If, at the end of the postponement period or at any time during the proceedings, the court determines that the company’s financial situation cannot be improved, bankruptcy is declared and the company is liquidated.


Bankruptcy postponement proceedings have significant implications for all creditors, including banks, due to the courts’ discretion to impose a stay of execution, without the same protections for creditors as found in reorganization proceedings, permitting unscrupulous debtors to avoid payment of their debts for substantial periods without the pressure of obtaining creditor consent. Turkish companies are aggressively filing for bankruptcy postponement in an effort to use the mechanism for corporate reorganization purposes, while some companies are rumored to be acting fraudulently to benefit from stay of execution. Currently, this risk can only be mitigated where creditors have secured their debts with collateral. Postponement proceedings as currently used pose a risk to the financial stability of other companies engaged in business with postponement debtors, which could potentially have a domino effect in certain market segments.