What is concordat? A step-by-step guide to the process

Concordat (konkordato) is a court-supervised procedure under Turkish law that allows a debtor who cannot pay its debts as they fall due, or who is at risk of being unable to do so, to restructure those debts by reaching an agreement with its creditors. Its purpose is to keep the business running and to give creditors more than they would receive in a bankruptcy liquidation. Concordat is governed by Articles 285 et seq. of the Enforcement and Bankruptcy Law No. 2004.

Concordat is not debt forgiveness. The debtor must present a realistic payment plan, have it accepted by the majority of creditors required by law and obtain the court's approval. Throughout the process, the business continues to operate under the supervision of a commissioner appointed by the court.

Types of concordat

• Ordinary concordat: The most common type in practice. The debtor offers its creditors a reduction of the debt, a rescheduling over time, or both.
• Concordat after bankruptcy: A bankrupt debtor offers a concordat to its creditors while the bankruptcy liquidation is ongoing; if approved, the bankruptcy is lifted.
• Concordat with secured creditors: Allows the interest and maturities of claims secured by a mortgage over real property to be restructured under certain conditions.
• Restructuring of capital companies and cooperatives by agreement: A route close to concordat, in which a restructuring agreement negotiated by the debtor with its creditors is approved by the court.

Who can apply?

A debtor who cannot pay its debts as they fall due, or who is at risk of being unable to do so, may request concordat. Both merchants and companies subject to bankruptcy and debtors not subject to bankruptcy can use this route. A creditor who would be entitled to request the debtor's bankruptcy may also request concordat in respect of the debtor.

The competent court is the commercial court of first instance at the place where the debtor's centre of business is located.

Documents required for the application

A concordat request requires careful preparation. The debtor must attach the documents listed in the law to the application. The main ones are:

• A preliminary concordat project showing the debtor's ability to pay and how the project will be financed,
• Up-to-date financial statements showing assets, liabilities, income and expenses, and other documents demonstrating the financial position,
• A list of creditors and the amounts owed, showing any security or priority,
• A reasonable assurance report from an independent audit firm on the likelihood that the concordat will succeed,
• An advance on costs set by the court.

Missing or inconsistent documents may lead to the request being rejected at the outset. The consistency of the financial records is examined closely by the court and the commissioner throughout the process.

Temporary moratorium

If the court finds the documents complete, it immediately grants the debtor a temporary moratorium of three months and appoints a temporary commissioner. Where necessary, the temporary moratorium may be extended by two more months, so that it does not exceed five months in total. The decision is published, and creditors are invited to file their claims.

During this period, the commissioner examines the debtor's business and financial position and submits a report to the court assessing the likelihood that the concordat will succeed.

Definitive moratorium and creditors' committee

If, following the review during the temporary moratorium, the concordat appears likely to succeed, the court grants a definitive moratorium of one year. Depending on the circumstances, the definitive moratorium may be extended by six more months. If success does not appear likely, the request is rejected; for debtors subject to bankruptcy, bankruptcy may be ordered if the conditions are met.

If it considers it necessary, the court may also set up a creditors' committee representing the main groups of creditors. The committee advises the commissioner, monitors the process and helps ensure that creditors' voices are heard.

Effects of the moratorium on the debtor and creditors

The most important effect of concordat is that individual enforcement against the debtor is suspended during the moratorium. The main consequences are:

• No new enforcement proceedings, including for public receivables, may be brought against the debtor during the moratorium, and pending proceedings are suspended. First-rank priority claims, such as employee receivables and maintenance, are an exception to this ban.
• Interim attachment and interim injunction orders cannot be enforced.
• Secured creditors may start or continue enforcement proceedings; however, during the moratorium no protective measures may be taken and, as a rule, the secured asset cannot be sold.
• Unless the project provides otherwise, interest stops running on claims that are not secured.
• Limitation periods and time limits that can be interrupted by enforcement steps do not run during the moratorium.
• The debtor continues its business; however, significant transactions such as selling real property, granting security or acting as guarantor require the court's permission.
• Contracts to which the debtor is a party and which are important for the success of the project cannot be terminated by the other party solely because concordat has been requested.

While the moratorium gives the debtor breathing space, it also keeps creditors waiting until the process ends. Creditors should therefore follow the moratorium decision closely as well.

The commissioner's role

The commissioner conducts the process on behalf of the court and supervises the debtor's activities. The commissioner oversees the business, examines the claims, gives an opinion on the claims filed by creditors, runs the voting process and submits a detailed report to the court on whether the concordat project should be approved. The commissioner's reports are among the most important factors in the court's decision on approval.

Filing claims and voting

Creditors must file their claims with the commissioner within the period stated in the announcement. The commissioner compares the claims filed with the debtor's records and obtains the debtor's statement on each claim.

The concordat project is put to the creditors' vote. The law requires one of two thresholds to be met for the project to be accepted:

• Acceptance by a majority of more than half of the registered creditors, both by number and by amount of claims, or
• Acceptance by a majority of more than one quarter of the registered creditors by number and more than two thirds by amount of claims.

First-rank priority claims, such as employee receivables and maintenance, are not taken into account in calculating the majority, because the concordat must provide for their payment in full. Secured creditors, as a rule, are counted with the ordinary creditors only for the portion of their claim not covered by the security.

Approval: what does the court look for?

After the vote, the court assesses the commissioner's report and the parties' objections and decides whether to approve or reject the concordat. The main conditions for approval are:

• The proposed payment must be proportionate to the debtor's assets and likely income and must give creditors more than they could obtain in a bankruptcy liquidation,
• The majority required by law must have been reached,
• Full payment of priority claims and the necessary security for disputed claims must be ensured,
• The costs of the concordat process must be covered.

If any of these conditions is not met, the court rejects the concordat. The decision approving or rejecting the concordat can be appealed.

What happens after approval?

• As a rule, an approved concordat becomes binding with respect to all claims that arose before the moratorium, including for creditors who did not vote for the project.
• The debtor must make the payments promised in the project on time; the court may appoint a trustee or supervisor to oversee the implementation of the project.
• A creditor who is not paid in accordance with the project may request the annulment of the concordat with respect to its own claim. If the concordat fails as a whole, bankruptcy may follow.

If you are a creditor

• Follow the moratorium decision and announcements concerning your debtor, and file your claim with the commissioner, together with supporting documents, within the period stated in the announcement.
• State correctly whether your claim is secured or has priority; this affects both your voting rights and your ranking for payment.
• Assess the concordat project by comparing it with what you could receive in bankruptcy, and vote on that basis.
• If the debtor disputes your claim, use the remedies provided by law in good time.
• If payments after approval are not made in accordance with the project, do not miss the option of annulment and the related time limits.

If you are a debtor

• Do not wait until concordat is the last resort; applying while the business can still operate increases the chance of success.
• Base the concordat project on realistic cash-flow forecasts; exaggerated assumptions may lead to rejection during the review by the commissioner and the court.
• Keep complete and consistent financial records; every transaction will be scrutinised throughout the process.
• Do not carry out transactions that require court permission during the moratorium without that permission; otherwise the moratorium may be lifted.
• Communicate openly with your main creditors before and during the process; reaching the required majority depends largely on this.

Concordat is a technical process in which law, accounting and financial planning are intertwined. For the debtor, a well-prepared application can determine the future of the business; for the creditor, closely following time limits and rights is decisive in protecting the claim. For both sides, obtaining legal support from the outset is important.