Revisions in Bankruptcy and Composition Law

1. Introduction

In recent years, economic fluctuations, high inflation, and financial fragility in Turkey have severely impacted businesses. Many companies have faced difficulties in repaying their debts , disrupting the balance between production and employment. In this environment, amendments to the Enforcement and Bankruptcy Law (EBL) have introduced significant revisions, particularly aimed at accelerating the processes of concordat and bankruptcy proceedings

The reforms accelerate the restructuring while simultaneously preventing unnecessary delays in the bankruptcy process.
However, the implications of these changes for both debtor protectionand the balance of creditor interests are debatable.

This article will provide a critical legal assessment of the transformation of the concordat institution, the tightening of the bankruptcy process, corporate restructuring mechanisms, and new legal regulations .

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2. The Legal Basis of the Institution of Composition with Creditors

A concordat is a legal restructuring agreement aimed at preventing bankruptcy and satisfying creditors when a debtor's financial situation deteriorates . Its legal basis lies in Articles 285–309 of the Enforcement and Bankruptcy Law .

The purpose of a concordat:

• To support the debtor's good faith efforts,

• To protect the common interest of creditors,

• The goal is to ensure the continuation of economic activity.

However, recent practices have raised criticisms that debtors may abuse the concordat process

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3. Main Revisions Introduced by the New Regulations

3.1. Tightening the Moratorium Period for Concordat Proceedings

Previously, a temporary moratorium of 3 months could be followed by an additional 1 year + 6 months.
With the 2023 and 2024 regulations, the court's power to extend the moratorium has been limited, and the total moratorium period is now capped at a maximum 18 months .

Objective: delays in and to deter malicious bankruptcy filings.

3.2. Debtor's Transparency Obligation

With the new revision, during the debtor company's application for concordat;

• The actual debt-credit statement,

• Financial analysis reports,

• It has been made mandatory to submit a business plan and recovery strategy.

This necessity was also emphasized in the Supreme Court's 19th Civil Chamber decision numbered 2023/1285 E., 2023/2144 K .:

"If the debtor does not submit honest and auditable financial statements along with their request for a composition with creditors, the request will be rejected."

3.3. Strengthening Commissioner Oversight

The powers of concordat commissioners have been increased, and they are now required to submit monthly reports to the court .
This is a positive development in terms of preventing abuse.

3.4. Creditor Voting and Quorum

The acceptance threshold has been increased from more than half of the total amount owed to two-thirds . This change is not in favor of the debtor; it is aimed at the common interest of the creditors .

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4. Accelerating and tightening bankruptcy proceedings

With the new regulations, bankruptcy proceedings and liquidation processes have been accelerated.

• After a bankruptcy ruling is issued, liquidators are appointed directly.

• The courts' authority has been expanded, and the appeal period has been shortened.

• The institution of bankruptcy postponement has been completely abolished, replaced by a restructuring model limited to concordat .

This change is specifically aimed at preventing "abuse of the system through bankruptcy postponement." However, there are serious criticisms that it restricts the restructuring opportunities for well-intentioned companies during periods of economic crisis

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5. Company Restructuring: The New System

A concordat means not only the postponement of debts, but also the financial rehabilitation of the company

The new system envisages the following three basic stages:

1. Financial structure analysis: The debtor's sustainability is examined.

2. Creditor agreement: An agreement is reached to reduce or reschedule debts.

3. Court approval: The plan is approved by the commercial court and becomes binding.

This model the American “Chapter 11” system. However, the creditor-debtor settlement process in the US system is much more flexible; in the Turkish system, judicial control is more prominent.

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6. The Supreme Court's Practice of Concordat and Revision

In recent years, the Supreme Court has shifted its approach to bankruptcy proceedings stricter oversight .

Supreme Court 19th Civil Chamber, Case No. 2022/6548, Decision No. 2023/1256.:

"A composition agreement cannot be a tool for abusing bankruptcy; the debtor's genuine ability to pay and good faith must be investigated."

Supreme Court 23rd Civil Chamber, Case No. 2023/2148.:

"If a concordat plan does not provide reasonable satisfaction to the creditors, it will be rejected by the court."

These decisions demonstrate that the "debtor protection" objective of concordat is now balanced with creditor security

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7. The Difference Between Financial Restructuring and Bankruptcy Proceedings

In recent years, the Financial Restructuring (FRR) model has been preferred over bankruptcy proceedings, especially in large companies. However, this model suffers from a lack of transparency due to limited judicial oversight .

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8. Economic Impact of the New Regulations

8.1. Positive Effects

• The number of malicious bankruptcy filings has decreased.

• The courts' workload has decreased.

• Creditor confidence has increased.

• The role of concordat commissioner has been institutionalized.

8.2. Negative Effects

• SMEs that are truly in a difficult situation have less chance of filing for bankruptcy protection.

• Time constraints have made debt restructuring more difficult.

• Some companies prefer "silent bankruptcy" instead of filing for a debt restructuring agreement.

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9. Critical Evaluation

9.1. Criticism of Excessive Tightening

Increasing the duration and quorum requirements of concordat proceedings has weakened the "company rescue" function.
Concordat is now that protects creditors rather than debtors .

9.2. Problem of Alignment with Economic Realities

In an economy with high inflation, interest rate, and exchange rate risks, the likelihood of recovery in 18 months is low.
Improving cash flow within this timeframe is impossible for most businesses.

9.3. Legal Uncertainties

Issues such as whether interest accrual will cease upon the commencement of the moratorium period for concordat proceedings , the scope of surety liability , and the fate of collateral are still under debate. There are conflicting decisions from different chambers of the Supreme Court.

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10. Balance Between Fairness and Public Interest

A concordat is a tool to protect not only the debtor's health but also the health of the economic system .
The collapse of a large company affects the supply chain and thousands of jobs.
Therefore, "balance of interests" principle must be maintained during the concordat process.

Supreme Court 23rd Civil Chamber, Case No. 2022/3441:

"A concordat aims to ensure the stability of the economic order; the debtor's malicious behavior will not be protected."

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11. Reform Proposals

1. A concordat preliminary review committee should be established; unnecessary applications should be filtered out beforehand.

2. An "accelerated bankruptcy" model should be introduced for SMEs .

3. The appointment of commissioners independent auditing firms .

4. A coordination committee should be established between financial restructuring and bankruptcy proceedings .

5. The adjustments should be integrated with supplementary legislative support measures such as interest rate freezes and tax amnesties .

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12. Conclusion and Evaluation

The new revisions in concordat and bankruptcy law represent a significant transformation in the Turkish legal system regarding the restructuring of companies . The aim is to ensure economic stability, maintain the balance between debtors and creditors, and expedite the judicial process.

However, these reforms some problems of justice and fairness in practice .
Shortening the concordat period and tightening the conditions are reducing the chances of "breathing" for small and medium-sized enterprises in particular.

In conclusion:

• A concordat is no longer an easy means of protection; it is a process requiring serious financial and legal preparation.

• The bankruptcy process has accelerated, but debtors' chances of restructuring have narrowed.

• The Supreme Court follows a balanced policy that protects honest debtors but does not tolerate abuse.

• The aim of the legislation is to protect debtors acting in good faith and to weed out those acting in bad faith from the system.

The effectiveness of the concordat system should be measured not only by the text of the law, but also by court practice, the quality of financial supervision , and the integrity of economic policies .