We discussed the Draft Law on the Restructuring of Debts Owed to the Financial Sector (the “Draft Law”) prepared by the Banking Regulatory and Supervisory Authority (the “BRSA”) in our Client Alert dated September 14, 2018. The BRSA recently made amendments to the Draft Law and the Banks Association of Turkey (the “BAT”) distributed the amendments to its members for their comments.
What Do the Amendments Say?
- The most controversial provision of the Draft Law wherein third party creditors (including government entities) cannot take any enforcement action against the debtor and ongoing enforcement procedures must cease upon execution of restructuring agreement was removed. Therefore, only creditors that are parties to the framework agreement on financial restructuring drafted by the BAT (the “Framework Agreement“) will be unable to enforce their claims and the ongoing enforcement procedures initiated by those creditors will cease. Creditors that are not parties to the Framework Agreement will be able to take enforcement actions against the debtor.
- A provision referring to the Regulation on Restructuring of Debts Owed to the Financial Sector (the “Regulation”) is included in the Draft Law. Accordingly, all creditor institutions¹ that are parties to the Framework Agreement will be obliged to agree to restructuring at the same terms and conditions, if the creditor institutions that own at least two thirds of the claims covered under the Framework Agreement enter into a restructuring agreement with the debtor.
- Foreign financial institutions’ ability to participate in the financial restructuring process provided by the Regulation is now in the Draft Law. However, different from the Regulation, the Draft Law sets forth that only foreign financial institutions that have directly extended loans to Turkish debtors or mad direct investments in Turkey are able to participate in financial restructuring process as creditors.
- The Draft Law includes the Regulation’s definition of “debtor”. Accordingly, Turkish banks, financial leasing companies, finance companies, factoring companies, capital markets institutions, insurance and reinsurance companies, payment services and e-money institutions and system operators will be unable to apply for financial restructuring as debtors.
- The amendments clarified that in order for the debtors to benefit from financial restructuring, debtors are expected to be able to repay their debts within a reasonable period. The independent auditing firms or institutions referred to under the framework agreements will review debtors’ financial status.
- The amendments also provide a number of tax exemptions for the transactions and documents to be entered into within the scope of financial restructurings. These include exemption from, including but not limited to, stamp tax, the resource utilization support fund, banking and insurance transaction tax, income tax and other levies and charges. However, if the debts of a debtor which has gone through financial restructuring become subject to financial restructuring again within two years, these tax exemptions will not apply.
- Furthermore, the Draft Law provides the following amendments to the Banking Law No. 5411:
- Banks will have to adapt policies regarding writing-down and restructuring loans and establish the necessary structures to apply these policies.
- In addition to banks’ term extension, renewal, provision of additional financing, installment or collateralization; write-offs of the principal amount and other receivables and similar transactions to restructure loans will not constitute criminal actions, i.e., embezzlement.
- Loans written-down due to the inability to collect will be considered “bad debt” under the Tax Procedural Code No. 213, on the condition that a special reserve is set aside for such loans.
The amendments are simplifying and incentivizing the restructuring of Turkish financial institutions’ receivables.