May 2008
IMPROVEMENT PROJECT IN DEFERRAL OF BANKRUPTCY
Deferral of bankruptcy in general
As many capital companies went in bankruptcy in the economic crisis of 2001 in Turkey, a need for a regulation to protect the economy of the country from bankruptcy in common of capital companies emerged. For this reason, in 2003 the article 179 of the Execution and Bankruptcy Law no. 2004 (Hereafter EBL) on the bankruptcy of capital companies is amended by means of the articles 49 and 50 of the code no. 4949 and articles 179/a and 179/b on deferral of bankruptcy are added to this article.
The scope of the institution of deferral of bankruptcy is to let a company which is in insolvency and whose bankruptcy is requested, to improve its situation where possible by taking necessary measures.
Legal quality of the improvement project
In order to order the deferral of bankruptcy, an improvement project shall be submitted according to the article 179 of the EBL. Improvement project is a financial project which is based on objective data and which aims to recover a company from insolvency when its bankruptcy is requested. According to the third paragraph of the same article “the court decides to the deferral of bankruptcy if it finds the project serious and persuasive.” For this reason, the improvement project is the main basis of the decision of deferral of bankruptcy. According to the first paragraph of the article 179/a of the EBL, the measures to be taken for the protection of the assets of the company will be decided in conformity with the improvement project.
According to the second phrase of the first paragraph of the article 179 of the EBL, the deferral of bankruptcy can be requested by one of the creditors as well as the management of the company. However, even in case if the deferral of bankruptcy is requested by a creditor, this project shall be prepared by the company itself, thus, the company shall be willing for the deferral of bankruptcy (ATALAY Borca Batýklýk ve Ýflasýn Ertelenmesi, Ýzmir 2007, p. 94-95).
As the institution of deferral of bankruptcy aims to protect not only the insolvent company but also its creditors, the request for the deferral of bankruptcy shall be announced so that creditors have the opportunity to challenge the improvement project (High Court 19. HD. 14.4.2005 T. 1324 E. 4049 K.).
Some of the measures which may be proposed in the improvement project are as follows:
• Increasing the capital of the company
• Transferring the company’s debts to shareholders or to third persons or warranting company’s debts
• Making modifications in the management of the company in order to improve productivity and save management costs
• Reaching agreement with creditors on the issues such as deferral of the payments and interest reduction or offering composition agreement
• Submitting documents to prove that some business or cases which are estimated to bring an important income to the company are about to be concluded. For example, in its decision 19. HD. 17.11.2005 T. 6312 E. 11314 K. the High Court found serious and persuasive an improvement project which included confirmed orders and offers by shareholders to donate their real estates to the company.
• Reconstruction of the debts to financial sector within the frame of the Law no. 4743 known as “Istanbul Approach – Istanbul Yaklaþýmý.” The High Court ruled in its decision 19. HD. 27.10.2005 T. 8456 E. 10717 K. that it was not appropriate to make the decision of bankruptcy without considering the outcome of the negotiation of the society with its bank for this purpose.
• Reconstruction of the company by agreeing with creditors according to the article 309 and seq. of the EBL.
The conditions that an improvement project shall satisfy
The third phrase of the first paragraph of the article 179 of the EBL requests the improvement project to be “serious and persuasive” to decide to the deferral of bankruptcy. According to the last phrase of the same paragraph “the documents to prove that the project is serious and persuasive shall also be submitted to the court.” Although no criterion is provided in the law for being “serious and persuasive”, the idea that no full prove but approximate prove is required prevails (ATALAY, s. 103).
However, this approximate prove shall also be based on concrete facts. A project which bases on provisions only is unlikely to be accepted by courts as they will be looking for a concrete fact. Hence, in its decision 19. HD. 14.7.2005 T. 4782 E. 7979 K. the High Court found an improvement project unpersuasive as it did not mention the financial resources of investments and activities indicated in the improvement project.
As the improvement project is a financial project by its nature, the matter whether it is “serious and persuasive” would better to be studied by an expert. In its decision 19. HD. de 10.3.2005 T. 13373 E. 2443 K. the High Court ruled that “An expert shall be consulted on this issue as the determination of the situation of insolvency and the hope of improvement requires technical and specific knowledge.”
Legal consequences of the deferral of bankruptcy
Legal consequences of deferral of bankruptcy are set forth in the articles 179/a and 179/b of the EBL. In the article 179/a, protective measures which will be taken with the decision of deferral of bankruptcy are regulated. According to the second paragraph of the article 179/a, the court which decides in the deferral of bankruptcy appoints a trustee to the company. The court may decide either to leave the management of the company to the trustee or rule that decisions of the management will depend of trustee’s approval. Trustee’s authorities and the extent to which the authority of the company on its own assets will be limited depend on the content of the improvement project.
According to the article 179/b, the main effect of the decision of deferral of bankruptcy is the suspension of execution and bankruptcy procedures (including also those within the scope of the Law of Collection of Public Debts no. 6183). There are two exception of this. According to the second paragraph of the article 179/b, “execution processes for credits guaranteed by pledge, mortgage or commercial enterprise pledge can be started or continued; however no protective measure can be taken for these processes or the pledged item cannot be sold.”
The second exception is execution process made for severance and termination pays of workers, debts to workers’ provident funds and associations and alimonies. These execution processes are not suspended by the decision of bankruptcy deferral.
Conclusion
Deferral of bankruptcy comes to an end either by success of the improvement project, salvation of the company from the situation of insolvency or by failure of the improvement project and bankruptcy of the company. According to the fourth paragraph of the article 179/b of the EBL, bankruptcy may be deferred for maximum one year and it can be extended for maximum four years. Within this period, the trustee must inform regularly the court of the situation of the company. However, if the court finds that improvement of the situation of the society is impossible, it can declare the bankruptcy of the company without waiting for the deferral period to expire.
The purpose of the improvement project is to save the company from insolvency and enable the creditors to collect their debts. To summarise, this project is the road map of salvation of the company from insolvency within the deferral period. For this reason it should be based on concrete evidence and feasible.
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