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11/09/2021 https://www.esin.av.tr/wp-content/themes/esin/images/esin.jpg

Significant Amendments to the Enforcement and Bankruptcy Law

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Dispute Resolution
General

Recent development

The Law Amending the Enforcement and Bankruptcy Law and Certain Laws No. 7327 (“Law“) was published in the Turkish Official Gazette on June 19, 2021. Significant amendments have been made to the Enforcement and Bankruptcy Law (“EBL”) by the Law, which especially includes regulations on composition process.

What’s new?

The Law’s most important amendments to the EBL are as follows:

  • Businesses that have a commercial and economic integrity or that, if sold as a whole, are understood to generate higher income, will be sold as a whole.

With the amendment to Article 241/3 of the EBL, “Liquidation of Assets,” it is regulated that, in cases falling within the scope of the Article, the businesses will be sold as a whole and the provisions regarding the liquidation of immovable property will be applied to the sale transaction. In addition, if the sale cannot take place as a whole, rights and assets will be sold separately.

  • The pledged asset’s sale will be permitted if it is not envisaged to be used pursuant to the composition project, or its value will decrease or its preservation will be costly.

With the amendment to Article 295 of the EBL, “Consequences of the Definitive Term for Pledged Creditors”, certain exceptions have been made to the rule that the pledged asset can be subject to enforcement proceedings but cannot be sold during the definitive and temporary terms of composition process. As per this amendment, the pledged asset can also be sold during the definitive and temporary terms if it is not envisaged to be used pursuant to the composition project, or its value will decrease or its preservation will be costly. As a result of the sale, a payment will be made to the pledged creditor from the sales revenue in the amount of the pledged amount.

  • It is clearly regulated that the parties to the agreements will continue to perform their obligations arising from agreements during the temporary and definitive terms.

With the amendment to Article 296 of the EBL, “Consequences of the Definitive Term for Agreements”, it has been regulated that the contractual obligations arising from the agreements that continue during the temporary and definitive terms will be mutually performed by the parties. As per this amendment, it has been adopted that the agreements to which the debtor is a party and that are important for the continuation of the debtor’s business will continue to be performed. Furthermore, unlike the previous version of the article, as per the amendment, the debtor can terminate the agreements with the commissar’s approval and the court’s permission if the execution of the agreement is “extremely burdensome”. Therefore the scope of agreements that can be terminated is narrowed.

  • The transfer of the movable property that is important for the continuation of the business is included among the transactions which cannot be made by the debtor as of the decision on the temporary term.

With the amendment to Article 297/2 of the EBL, “Consequences of the Definitive Term for Debtors”, it has been regulated that as of the court’s decision on the temporary term, without the court’s permission, the debtor cannot transfer or restrict its rights on movable property that is important for the continuation of the business. Before the amendment, this restriction was applied only to the immovable properties and the continued installation of the business. In addition, it has been regulated with the amendment that the court is required to obtain the creditors board’s permission instead of their opinion and, therefore, the execution of the transactions is no longer dependent solely on the court’s discretion.

  • Debts concluded after the decision on the temporary term with the commissar’s permission can be subject to enforcement proceedings even during the composition process if the default conditions are met and these debts will be paid with priority.

With the amendment to the fourth paragraph of Article 308/c of the EBL, “Provisions of Composition”, debts concluded after the decision on the temporary term with the commissar’s permission, including loans provided by credit institutions, will not be subject to the provisions of composition in ordinary composition. These debts may be subject to enforcement proceedings even during the definitive or temporary terms if the default conditions are met and will be immediately paid after the payment of pledged receivables and before the other receivables. Since there was no clear regulation on this subject in the previous version of the Article, there were different applications in the practice. With this amendment, this issue has been clearly regulated.

Conclusion

The Law made significant changes to the EBL’s provisions on the composition process. In our opinion, with these changes, uncertain practices regarding the composition process have been clarified and important steps have been taken to protect the interests of both the creditors and the debtors applying to the composition.