Under Turkish law, the bankruptcy procedures can be categorized as direct bankruptcy method and bankruptcy with enforcement proceeding. In the direct bankruptcy, a creditor or a debtor directly applies to commercial court and claims bankruptcy of the debtor company. However, in the enforcement proceedings with bankruptcy claim, the creditor sends a payment order to the debtor and upon the payment order becomes final, bankruptcy of the debtor is requested from the commercial court by the creditor.
When a bankruptcy decision has been delivered, bankruptcy assets are founded and collection of the debts is undertaken.
Before finalization of opening a bankruptcy decision, the debtor can apply to the court and claim to adjournment of bankruptcy. What would happen in this case? Or if a creditor who is a holder of a binding negotiable instrument (bill or cheque) and the enforcement proceeding has been already started, how the adjournment of bankruptcy decision would affect on the enforcement proceeding?
With this article, we will examine the direct bankruptcy claim and the enforcement proceedings of the negotiable instruments with bankruptcy claim. Additionally, the adjournment of bankruptcy will be examined in the light of the Supreme Court’s decisions. The provisions on the adjournment of bankruptcy method were included to the Turkish Debt Enforcement and Bankruptcy Code (Icra ve Iflas Kanunu – hereinafter will be referred to as “IIK”) in 2003. Nowadays the adjourned of bankruptcy method has been frequently applied.
THE ENFORCEMENT PROCEEDING OF THE NEGOTIABLE INSTRUMENT WITH BANKRUPTCY CLAIM
When a creditor holds a binding negotiable instrument (cheque or bill), he may choose to follow bankruptcy procedure in the enforcement proceedings. Its conditions are as follows:
1. The creditor should have negotiable instruments in order to follow these enforcement proceedings (Article 167/1 of IIK). Even though the credit is pledged, the creditor does not have to choose foreclosure. Therefore, he can claim bankruptcy in the enforcement proceeding.
2. The debtor must be subject to bankruptcy.
According to Article 43 of IIK, individuals or legal entities, who are defined as “Trader” pursuant to the Turkish Commercial Code (Turk Ticaret Kanunu – referred as to “TTK”) or who are subject to provisions of trader and also who are defined to be subject to bankruptcy by the private regulations will be subject to bankruptcy even though they are not a trader.
In this enforcement proceedings, the origin of bill and if necessary to protest the bill, the protest should be enclosed to a claim form. The Enforcement Officer examines whether the bill is a negotiable instrument and matured. Then, the payment order is to be sent to the debtor by the Enforcement Officer. The payment order should contain these warnings: the debt and expenses of enforcement proceedings should be paid within 5 days; if there is any objections and complaints should be declared with its reasons to the enforcement office within 5 days with two more copies which one of them is send to the debtor; if there is no objection, the creditor has right to claim bankruptcy to the court (Article 171 of IIK).
After notification of the payment order, the following possibilities can be occurred:
1. If there is no objection or complaint has been raised, the payment order becomes final. According to Article 173 of IIK, the creditor should confirm this fact and then he may claim to bankruptcy of the debtor from court of commerce. The court of commerce has to declare that bankruptcy claim has become definite pursuant to determined procedure in Article 166/2 of IIK. According to this Article, the bankruptcy claim should be announced by one of top five newspapers which should be the most widely–circulated newspaper in Turkey; and in a newspaper which is published in the area of company’s registration office and in the Commercial Registry Gazette. Following the declaration of the bankruptcy claim, other creditors may raise an objection to the bankruptcy case within 15 days from the announcement because of non-existence of bankruptcy (for example, the bankruptcy claim was based on a fictitious transaction). Nevertheless, if the court is found that the claim is unjust and the debt has not been paid yet, the court is ordered to the credit to be totally paid (including the interest and the enforcement expenses) or the credit should be deposited at the court’s cashier within 7 days (Article 158 of IIK). It is called “order of deposit”, and before adjudging a bankruptcy, this time is given as the last additional time to the debtor. However, if the credit has not been paid or the amount has not been deposited, the court is adjudging the debtor a bankrupt.
2. If there is objection or complaint the enforcement proceedings is stopped. In which case, the creditor can file a bankruptcy case to court of commerce in order to cancel the objections or complaints and claim bankruptcy. The court is following the procedure which is regulated by Article 158 of IIK. If the objection or complaint has not been found, the court gives a deposit order or the credit to be paid. If the deposit order has not been paid or the credit has not been paid, the court is adjudging the debtor a bankrupt.
WHAT IS DIRECT BANKRUPTCY METHOD?
The purport of the term direct bankruptcy method is a creditor can file a bankruptcy suit against debtor to the court of commerce without applying any enforcement proceedings. The bankruptcy suit can be filed by a creditor or a debtor (Articles 177 and 178 of IIK). The bankruptcy case can be only claimed to the court of commerce. If a bankruptcy claim has been made by a debtor, a list of assets and liabilities, names and addresses of creditors and a declaration of property should be enclosed to the bankruptcy claim. The court does not adjudge the debtor a bankrupt unless these documents have been presented to the court. The claim of bankruptcy should be announced in accordance with the Article 166/2 of IIK. According to the mentioned Article, the bankruptcy claim should be announced by one of top five newspapers which should be the most widely –circulated newspaper in Turkey; and in a newspaper which is published in the area of company’s registration office and in the Commercial Registry Gazette.
The creditors are entitled to object the bankruptcy claim or intervention to the case within 15 days from the announcement of the claim. The creditors can demand to the court that the bankruptcy claim should be refused because the aim of debtor is to postpone the enforcement proceedings about him and to detain the payments (Article 178/2 of IIK).
In which case if the creditors have raised objections, the court of commerce is fixed a hearing and informed the creditors about the date of hearing. The creditors’ claims are assessed by the court. The commercial court should decide bankrupt the debtor, if the court has been rejected the objections or there were no objections or intervention to the case and in case of insolvency of the debtor or in case of compulsory bankruptcy has been occurred according to Article 178/3 of IIK has been proved by the debtor.
DIRECT BANKRUPTCY METHOD OF COMPANIES AND COOPERATIVES
The conditions of direct bankruptcy methods of limited companies, joint stock ventures and cooperatives are regulated in the IKK (Articles 179, 179/a, 179/b of IIK). When the liabilities exceed over the assets of company, the authorized representatives and managers are obliged to inform to the court of commerce about this fact. In this case, the court of commerce has authority to take necessary cautions.
Article 179 of IIK is regulating the direct method of companies’ (corporations, limited companies and limited partnerships) and cooperatives’ bankruptcy when the liabilities exceed the assets. The fact of excessive liabilities is a specific reason for bankruptcy only for the capital companies and cooperatives (hereinafter the mentioned companies and cooperatives will be referred as “company”). The reason of this fact is that the claim is limited by the capital of the company; therefore creditors cannot recourse the assets of the partners in order to obtain the credit. According to the Article 179 of IIK, without any enforcement proceedings, the court may determine the facts and grant an adjudication order if the liabilities exceed the assets of the company and this fact is informed by the authorized representative or manager who is in charge or in case of liquidation this fact is informed by liquidators or by creditors.
The creditor or debtor can also claim to adjournment of bankruptcy on base of the possibility to recover of company’s financial state.
The adjournment of bankruptcy was essentially regulated by the TTK and it has just been added to the IIK. According to the Article 324 of TTK, the meaning of adjournment of bankruptcy claim is a declaration of insolvency. The purpose of adjournment of bankruptcy is to postpone the bankruptcy of companies, which are enabling to conduct their commercial activities as long as it is possible; to stop the enforcement proceedings against the debtor companies; and to provide more possibilities to the creditors for the debt collection. The main aim is preservation of the assets and decrease of the liabilities of the company.
THE CONDITIONS OF ADJOURMENT OF A BANKRUPTCY
These conditions should be met in order to obtain an adjournment of bankruptcy decision:
1. The company should be insolvent;
2. The possibility to improve its financial situation should be promising.
According to the Article 324/2 of TTK, the insolvency is determined and established by an annual financial statement which is drawn in accordance with the sale value of the assets and aimed to reflect the actual assets of the company. The improvement projects should be presented by the company who claimed to adjournment of bankruptcy. The adjournment of bankruptcy is decided by the court when the project is found serious and persuasive; and also it is supported by relevant data and documentations (Article 179/1 of IIK). Whether it is possible to improve the company’s financial situation should be determined by considering the concrete facts. Uncertain indications would not be enough to decide adjournment of bankruptcy. Also, to determine the insolvency and possibility to improve the financial situation require the technical data and expertise. Therefore, opinions of experts should be taken into consideration.
Legal Remedies against the Claim of Adjournment of Bankruptcy
The last paragraph of Article 179/a regulates the announcement of a decree of adjournment of bankruptcy. Howsoever, Article 179 of IIK and also Article 324 of TTK state that the claim of adjournment should be announced and these stipulations should attend not only the company`s interests, who made an adjournment of bankruptcy claim, but also the creditors’ interests. The Supreme Court has determined in its decisions; the claim of adjournment of petition in a bankruptcy should be announced pursuant to the Article 166/2 of IIK. Reasons are, in order to prevent a transaction which the liabilities of a company exceed the assets of the company because the transaction was fictitious and made in bad faith; also on base of the abovementioned reasons to entitle a creditor to argue whether the company is insolvent and whether an improvement project is sufficient. Therefore, the objections to being insolvent and sufficiency of the improvement project should be determined taking into consideration the objections of the creditors.
According to the above-mentioned explanations, the creditors have an opportunity to challenge the adjournment a petition in bankruptcy upon the announcement. The reason of provision of this objection is to prevent a fictitious transaction which is being reason for the liabilities exceeding the assets.
Duration of Adjournment of a Bankruptcy
The court may adjourn a bankruptcy of the company at least one year for the first time. Then, extension of the duration will be depend on the court`s discretion and the court may extend the duration of adjournment of a bankruptcy maximum up to four years.
Impacts of an Adjournment of a Bankruptcy are as follows:
1. Upon the adjournment of bankruptcy decision has been granted, none of the enforcement proceedings cannot be executed even though they may be proceeded according to Act No. 6183 Public Claims. Also, the enforcement proceedings, which have been already started, are stopped and during the time of adjournment of bankruptcy the time limits and prescriptions do not apply to.
However, a joint guarantor cannot benefit the prohibition of the enforcement proceedings as a result of the adjournment of the bankruptcy decision. The Supreme Court has decided in the various decisions that, the release of blocking on the companies bank accounts to provide guarantee of obligations fulfillment in respect of the loan agreement or the commercial relationship should not be endured. The purport of the enforcement proceedings is staying in the same phase, not to release the records.
2. The enforcement proceeding of the foreclosure can be claimed and also the previous enforcement proceeding is continued, but the preservation and realization of confiscated assets cannot be proceeded. In addition, first ranged claims (labor wages, severance pay, alimony) mentioned in the Article 206 of IKK can be subject to enforcement proceedings by attachment claim (Articles 179b/2 and 179b/3 of IIK).
3. It is possible to withdraw a lawsuit in a bankruptcy before adjudication of a bankruptcy has been delivered by the court. However, the adjournment of a bankruptcy is also contain a compulsory notification to the court (compulsory notification means that the Board of Directors has to inform the court when the company’s assets are insufficient to cover its liabilities. Article 179 of IIK and Article 324 of TTK). Therefore, although withdrawal of the lawsuit in the bankruptcy case, the court may decide to adjudication of a bankruptcy if the company was insolvent.
4. If there is a pending adjournment of a bankruptcy case, it should be waited its result in an adjudication of a bankruptcy case.
5. In order to preserve the assets of the company, the court which decided to adjudication of a bankruptcy takes all sorts of cautions and appoints a trustee. The Supreme Court decided that, the necessary cautions should have not been involved because it creates consequences in the substantive law and both debtor’s and creditor’s interest should be considered. Therefore, in order to supply a cash requirement; barter, right of lien and assignments should not be stopped.
The court decides adjudication of a bankruptcy either the objections to the adjournment of a bankruptcy has been accepted or the extension of adjournment of a bankruptcy claim is not discrete by the court.
RESULTS OF ADJUDICATION OF A BANKRUPTCY
Following opening a bankruptcy, the bankrupt’s all assets; rights and credits compose a group and called bankruptcy assets. These could be movable and immovable properties, usufructuary rights, and financial rights of intellectual property, collective and participating ownership of deed etc. The movables are also included to the bankruptcy assets which the cautionary attachment has been applied on them and has not been subject to realization yet (Article 186/1 of IIK). However, if the attached goods have been already realized at the time of the adjudication of a bankruptcy has been decided, the sale value should be paid to its creditor and they would not be included to the bankruptcy assets.
After opening the bankruptcy, the bankrupt’ right of disposal will be inoperative against the creditors and none of the payments can be accepted by the bankrupt (Articles 191/1, 192 of IIK). Also, all assets which are possessed by the bankrupt will be included to the bankruptcy assets until the bankruptcy procedure has been closed (Article 184 of IIK).
Upon opening the bankruptcy, undue credits may be claimed from the bankruptcy assets on the base to provide equality between the creditors and to prevent any delay in the liquidation process (Article 195/1 of IIK). Moreover, the credits which were requested by the previous enforcement proceedings before adjudication of the bankruptcy and which was stopped and dropped upon opening the bankruptcy may also registered to the bankruptcy assets by the creditors.
The right of disposal of the assets is exercised by the trustee of bankruptcy. The trustee of bankruptcy is a legal representative of the bankruptcy assets (Article 226 of IIK). Upon opening the bankruptcy, the trustee of bankruptcy may also bring an action to set aside the transaction which was fictitious, fraudulent and aimed to hide assets from the creditors.
Time limit of registration to the bankruptcy assets in other words to request the credit from the bankruptcy assets is one (1) month from the announcement of liquidation if an usual liquidation method is executed. Even though the time is missed, a creditor will be able to register his claim to the bankruptcy assets until the bankruptcy assets are closed (Article 236 of IIK). It should be noted that, order of registration does not important. This is because; payment of preference is belonging to the privileged creditors. According to Article 206 of IIK, the privileged creditors are:
1. Pawned debts;
2. Expenses of the bankruptcy assets and public credits which are related to the real rights such as custom duty, property tax, succession duty, motor vehicles tax;
3. Privileged credits which are regulated by the private regulations;
4. The privileged credits which are ranged as first three in the Article 2006 of IIK.
After the privileged credits have been totally paid, non privileged credits should be paid. The credits which are regulated in the same range have equal rights among themselves.
1. Kuru, B. “Icra ve Iflas Hukuk El Kitabi”, Turkmen Kitabevi, 2.baski, Istanbul 2006, s. 992
2. Atalay, Oguz, “Iflasın Ertelenmesi”, Bankacilar Dergisi, sayi 47, 2003, s. 94. Downloaded from http://www.hukuki.net/hukuk/index.php?article=1012 on 25.11.2008.
3. The Supreme Court, 19th Civil Chamber, 2004/4635 E. 2004/13438 K. 30.12.2004 dated
4. The Supreme Court, 19th Civil Chamber, 2005/2033 E. 2005/3760 K. 7/4/2005 dated
5. The Supreme Court Assembly of Civil Chambers, 2007/19-824 E. 2007/839 K. 14.11.2007 dated
6. The Supreme Court, 19th Civil Chamber, 2004/11750 E. 2005/2789 K. ve 17/3/2005 dated, 19th Civil Chamber 2004/10326 E.2005/2788 K. 17/3/2005
7. The Supreme Court, 19th Civil Chamber, 2004/11750 E. 2005/2789 K. 17/3/2005 dated
8. The Supreme Court, 19th Civil Chamber, 2004/11763 E.2005/2432 K. 10.03.2005 dated
9. The Supreme Court, 19th Civil Chamber, 2004/11113 E. 2004/12672 K. 16.2.2004 dated
11. The Supreme Court, 19th Civil Chamber, 2006/4390 E. 2006/6210 K. 08.06.2006 dated
12. Kuru, B. “Icra ve Iflas Hukuk El Kitabi”, Turkmen Kitabevi, 2.basku, Istanbul 2006, s. 1007
13. Ibid., s. 1007, 1092