Composition is a legal process that aims to prevent the bankruptcy of a debtor company facing economic difficulties by reaching an agreement with its creditors before it goes bankrupt and restructuring/arranging its debts.

This regulation helps the debtor company to recover from the financial crisis while also providing a solution for the creditors to recover their receivables within a certain period of time. However, the application of composition may have various legal consequences for both the debtor companies and the creditors.

• According to Article 285 of the Execution and Bankruptcy Law;

“Any debtor who cannot pay their debts when they are due or who is in danger of not being able to pay them when they are due may request composition in order to pay their debts by granting a term or a reduction or to avoid a possible bankruptcy.”

Based on the relevant article of law, the debtor’s financial situation may have deteriorated for various reasons or the assets of his/her assets may not be sufficient to pay the liabilities. In such a case, a bankruptcy decision may be made against the debtor who intends to pay his/her debt or creditors who act quickly will be able to collect their receivables while other creditors will not be able to collect their receivables.

In order to prevent these outcomes, the debtor and the creditor may agree to pay the debt over time or at a certain rate. This agreement is called concordat.

Types of Concordat

Ordinary Concordat: This is the type of concordat that can be requested if the debtor has difficulty in paying or is likely to have difficulty in paying before going bankrupt.

Concordat in Bankruptcy: It is the request for concordat by a debtor who has been ruled bankrupt, with the consent of the creditors, through the bankruptcy estate.

Concordat by Abandonment of Assets: This is a type of concordat in which the debtor aims to liquidate his debts by leaving all of his assets to the liquidation of creditors. It is rarely encountered in practice.

Concordat Application Requirements

1. Debtor’s Situation

In order to apply for concordat, the debtor’s failure to pay their debts on time or the risk of being unable to pay must be based on concrete data. The law aims to provide legal protection to debtors in this situation without being dragged into bankruptcy.

2. Application to Court

The concordat request is made to the Commercial Court of First Instance in the debtor’s place of residence. The application can be made by the debtor or the creditor.

3. Submission of Required Documents

According to Article 286 of the EBL, the documents that must be submitted with the application are as follows:

– Documents showing the financial status of the debtor (balance sheet, income statement, cash flow statement),

– Preliminary project for concordat,

– List of creditors and receivables,

– Detailed list of assets and debts,

– Explanatory report on the debtor’s income-expense status and business activities.

4. Interim Respite Decision and Legal Consequences

If the application is formally appropriate and the documents are sufficient, the court will issue a 3-month interim respite decision on the debtor. During this period, no new enforcement proceedings can be initiated against the debtor, ongoing proceedings will be suspended, and the debtor’s dispositions on his/her assets may be restricted.

The concordat application is made to the court and the court will review the application and appoint a concordat commissioner. The commissioner will review the company’s financial situation, prepare a report, and mediate to reach an agreement with the creditors. When necessary, a commissioner will be appointed to supervise the debtor’s financial activities.

5. Definitive Deadline and Confirmation of Composition

If it is determined that the composition is likely to succeed during the temporary period, court grants a definitive deadline of 1 year. This period may be extended up to six months if necessary.

The composition project is submitted to the creditors’ vote under the supervision of the Commissioner. In order for the project to be accepted:

• The approval of more than half of the creditors or
• The approval of creditors representing at least two-thirds of the receivable amount is required.

If the composition project accepted as a result of the vote is deemed appropriate by the court, it is approved and becomes binding on the creditors.

Rejection of Composition Application and Results

If the court concludes that the composition project is not applicable or that there is fraud and irregularity in the documents, it rejects the request. In this case, a bankruptcy decision may be issued against the debtor, and criminal liability may also be brought to the agenda for the debtor who is determined to have acted in bad faith.

Instance of Composition Term Resulting in Bankruptcy

Although the composition term aims to prevent the bankruptcy of the debtor company, in some cases, the bankruptcy process may be initiated if the composition is not accepted or is unsuccessful. In this case, the assets of the debtor company are liquidated to be shared among creditors.

If the application for composition is rejected or the creditors do not accept the payment plan, the company may go bankrupt. During the bankruptcy process, creditors try to collect their receivables from the liquidated assets of the company.

Results and Evaluation

Concordat functions as a non-bankruptcy restructuring mechanism for debtors in financial distress and also offers a collective solution method that protects the interests of creditors. However, the effective operation of this institution is possible by conducting the application process in accordance with the law and the principle of honesty, ensuring the accuracy of the documents and ensuring financial transparency.

The concordat period is a process that must be managed carefully for both the debtor and the creditors, and creditors must be prepared for the possible outcomes of this process and defend their rights by resorting to legal means when necessary.

                                                                 Av. Şefik ZİROĞLU & Stj. Av. Ferda AĞIRMATLIOĞLU